Canada

CA-4:Accelerated capital cost allowances (ACCA)

Policy Description

An accelerated capital cost allowance (ACCA) is a CCA rate that is greater than the rate, which would reflect the useful life of the asset class. Since 1994, the government has provided ACCA tax incentives under which companies in the industrial sector can invest in energy efficient systems and self-generate electricity.
 

Description

Capital cost allowances (CCA) are deductions on capital expenditures that normally allocate the cost of the asset over the asset’s useful life. The CCA system is based on the principle that depreciable capital is not consumed in the year it is purchased and also contributes to earnings over several years. For tax purposes, firms in Canada calculate their deductions for depreciable capital assets under the rules set out in the Income Tax Act and Regulations. [1] The allowable deduction rates for most tangible capital assets are set out in the CCA system (*1).

 

An accelerated capital cost allowance (ACCA) is a CCA rate that is greater than the rate, which would reflect the useful life of the asset class. Since 1994, the government has provided ACCA tax incentives under which companies in the industrial sector can invest in energy efficient systems and self-generate electricity.

 

In 1994 the Canadian government introduced CCA Class 43.1, which has been amended several times since. For assets acquired before February 23, 2005, CCA is provided under Class 43.1 at a rate of 30% [2], [3], [4]. The types of systems that qualify for Class 43.1 include systems that would enable industrial operations to self-generate electricity through, for example, certain cogeneration and specified-waste fuelled systems, systems using gas that would otherwise be flared during the production of crude oil and renewable energy applications. Certain thermal energy systems also qualify if their primary purpose is to produce thermal energy for use directly in an industrial process; for instance, groundsource heat pumps, heat recovery systems and specified-waste fuelled heat production equipment [5]. The Canadian government’s budget 2005 extended Class 43.1 to include the distribution assets of district energy systems and certain equipment used to produce biogas [3].

 

CCA Class 43.2 was introduced in 2005 and provides an ACCA rate of 50% per year. In general terms, Class 43.2 applies to property described in Class 43.1 if the property is acquired on or after February, 2005 and before 2020. The eligibility criteria for 43.2 also require that cogeneration systems that use fossil fuels must meet a higher efficiency standard.

 

Without Classes 43.1 or 43.2, many of these assets would be depreciated at annual rates of between 4% to 20% [2]. The benefit of the ACCA is that it enables the deferral of income taxes, which, in turn, provide the taxpayer with higher cash flows in the early years of the investment. The ACCA deductions reduce the tax payable by the corporation over the life of the investment in discounted present-value terms compared with the CCA deductions that would otherwise be available.

 

Budget 2007 extended the eligibility for class 43.2 to assets acquired before 2020.

 

Budget 2007 extended the eligibility for class 43.2 to assets acquired before 2020.

Natural Resources Canada expands upon the list of eligible energy systems as new technology is reviewed and approved by NRCan.

Policy Information Expand this section for information on the key features of the policy, such as its date of introduction, categorization, main objective(s) and linkages with other policies.

Policy Categorisation

Policy Instrument Type: Economic, Incentives & Subsidies

Position in the Pyramid

About Us

Participation: Voluntary

Period

Start Date: 1994

End Date: 2020

Policy Linkages

Supports Canadian Industry Programme for Energy Conservation (CIPEC) Effort Defining
Supports ISO 50001 implementation Support Supporting Measure

Agencies Responsible

Natural Resources Canada (NRCan)
Canada Revenue Agency
Department of Finance Canada

Primary Objective: Other (environmental)

Objective

­To encourage investments in energy efficiency, renewable energy and combined heat and power projects.

Target Group

Manufacturing, energy intensive industry, renewable energy developers and electric power producers

Driver of energy consumption or emissions affected by policy: Total energy use / Total emissions / Specific energy consumption / Carbon intensity / Relative efficiency / Fuel mix / Feedstock use / Technology implementation rate

Implementation Information Expand this section for information on targets, monitoring, verification and enforcement regimes, and implementation requirements and tools.

Coverage

all of the industrial sector

Quantitative Target? no

Progress Monitored? no

Verification Required? yes

Enforced? yes

Sanctions: Only to the extent that the Canada Revenue Agency conducts its normal due diligence of tax returns.

Requirements on the Target Group

Natural Resources Canada provides a free guide Class 43.1 Technical Guide.

Support by Government

Implementation Toolbox

Natural Resources Canada provides a free guide Class 43.1 Technical Guide

Complexity of Implementation

Government

Once the ACCA level has been established, it’s a relatively low maintenance instrument.

Impacts, Costs & Benefits Expand this section to find information on policy effectiveness and efficiency.

Impact Quantitative Estimate Qualitative Estimate
Estimated effect on energy consumption or emissions ­No information available. ­The ACCA is a tax instrument to promote investments in a specific sector or activity. Without Classes 43.1 or 43.2, many of these assets would be depreciated at annual rates of 4% to 20% [2]. The benefit of the ACCA is that it enables the deferral of income taxes which, in turn, provide the taxpayer with higher cash flows in the early years of the investment. The ACCA deductions reduce the tax payable by the corporation over the life of the investment in discounted present-value terms compared with the CCA deductions that would otherwise be available.
Estimated costs/benefits for industry Not available-confidential.
Estimated cost for government Not available-confidential.

References & Footnotes

References

[1] Department of Finance Canada, Notes to the Tax Expenditures: Notes to the Estimates/Projections 2010

[2] Natural Resources Canada web site. http://oee.nrcan.gc.ca//industrial/financial-assistance/1965

[3] International Energy Agency Energy Efficiency Policies and Measures Database http://www.iea.org/textbase/pm/?mode=pm&action=detail&id=3831

[4] ICF Marbek internal files

[5] Revenue Canada’s Income Tax Information Circular 70-6R3 December 30, 1996

Footnotes

(*1) There are about 40 CCA classes in the Canadian Income Tax Act.

(*2) The Industrial Innovation Group (IIG) - a Group within CanmetENERGY at Natural Resources Canada - is the Technical Authority for Class 43.1 and Class 43.2.