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“I guess I should buy this truck now,” was a typical inquiry, “so I can write the whole thing off this year?” Subscribe now to read the latest news in your city and across Canada. Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others. Daily content from Financial Times, the world's leading global business publication.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Sign In or Create an Account or It is the right question to ask an accountant, just the wrong way around. Strip away the fancy branding and what the mega-deduction does is allow businesses to write off 100 per cent of most new investments immediately, instead of over years. Coverage expands from about 15 per cent of business assets to more than 65 per cent, taking in software, research, vehicles and computer equipment.
Also: immediate expensing becomes permanent, or as permanent as things get in Ottawa. The government says the effective tax rate on new investment drops to the lowest in the G7 and lower than the OECD average. Get the latest headlines, breaking news and columns.
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The next issue of Top Stories will soon be in your inbox. We encountered an issue signing you up. Please try again As policy, I find little to criticize here.
Canada needs investment and a permanent measure beats a temporary one precisely because it does not manufacture a year-end stampede. My concern is when owners of small businesses decide to make important capital decisions based solely on a new tax scheme. A deduction is not a gift.
You were always going to get to deduct the cost of these assets. The change is that you now get the whole deduction upfront, instead of drawing it down over the useful life of the asset. The benefit is timing: you get more cash in your pocket today as opposed to spread out over the years as you gradually depreciate the asset.
That has real value. Even without inflation, dollars today are worth more than future dollars. On the other hand, the deduction does nothing for a business that is losing money this year.
It has no income to shelter, so the benefit sits and waits until the business returns to profit. The deduction simply becomes a loss, one the business can carry forward against future income, or backward for up to three years against taxes it already paid. That is help eventually, not help now.
The companies under the most pressure right now, maybe because of the trade war, don’t get help from this measure. One of my clients in the medical industry once purchased a piece of equipment to take advantage of a temporary tax relief scheme even though his clinic wasn’t yet ready to onboard it. The machine sat idle in the storeroom for a year, tying up valuable cash the business could have used on other expenses.
As a result, the company had to delay launch of a new revenue stream. There’s also the accounting to consider. For many owner-managed businesses, whose books mirror their tax filings, a large immediate write-off lands straight on the financial statements.
Your EBITDA (“earnings before interest, taxes, depreciation and amortization”) doesn’t move. Since most business valuations run on EBITDA, I am not losing sleep over the potential impact on valuation in a sale. But because of the immediate write-off, your net income jumps.
And it will fall back down in Year Two. Banks and some investors focus on net income, so you will need to have an explanation ready for the big swings. The trap almost nobody is mentioning is that, depending on how your loan covenants are defined, ratios like debt service coverage or minimum net worth can get squeezed by a deduction you take in order to save tax.
Before any major purchase this fall, read the definitions in your loan agreement. Breaching a covenant in exchange for a tax deferral is a bad trade. None of this means you should ignore the new deduction.
If an investment was already in your plan, the mega-deduction makes it cheaper, and you should take every dollar of it. Run your numbers after tax, because the deduction genuinely changes the price of investing. A project that just missed your hurdle rate last year may clear it this year, and that is the policy doing its job.
Although the deduction can tip a close call it cannot rescue a purchase that fails without it: my client’s machine did not sit in the storeroom because the tax math was wrong; it sat there because the clinic was not ready. You need to be disciplined in your approach: the business case first, the tax treatment second. The moment you start making your capital decisions on the basis of your tax deductions, you have handed your strategy over to the tax code, and the tax code does not know your business.
The measure has been announced but not yet legislated. Details may shift with the budget bill. But the principle will not: a deduction changes when you pay tax, not whether the purchase makes sense for your business.
The mega-deduction can make a good purchase better. It cannot make a bad one good. Financial Post Daryl Ching is the founder of Vistance Accounting .
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Source: Financial Post