TEMPORARY INCENTIVE FOR MANUFACTURING AND PROCESSING MACHINERY AND EQUIPMENT

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TEMPORARY INCENTIVE FOR MANUFACTURING AND
PROCESSINGMACHINERY AND EQUIPMENT

• Accelerated Capital Cost Allowance Intro

September 2007
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Alberta Industry Review

• Significant market opportunities
• Solid economic infrastructure
• Smart staff
• - Labour shortages
• - Expanding global competition
• - Efficiency and productivity concerns

A business environment that calls for
productivity improvements as a strategy to
address challenges.
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Accelerated Capital Cost Allowance (CCA)

• Capital Cost Allowance (CCA) is a Federal tax
  incentive that was announced in the March 2007
  Budget which allows companies to accelerate the
  depreciation of new machinery purchased between
  April 1, 2007 and March 31, 2009. 
• This means that you can write off 100 of the
  new machinery over the next two years and as a
  result, use part or all of the corporate income
  tax that you would have to pay towards the
  purchase of the new production machinery.  The
  CCA applies to all kinds of small and large
  machinery that is directly used in the
  manufacturing process.

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Accelerated Capital Cost Allowance

• If your company is profitable, the CCA change
  means that the government is loaning you money
  for a few years, at no charge, so that you can
  modernize and grow your business (or repay debt
  sooner).

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Accelerated Capital Cost Allowance

• Technology adoption pays off. Labour costs are
  not an issue for me because my machines are
  automated, so it doesnt matter where the
  competitor is. There is no way someone could
  make my products in China. I have zero labour
  costs in some of my machines how can they
  compete with that?

Mike HatzinikolasPresident, Fero Corp.
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Accelerated Capital Cost Allowance

• In 1995 we bought two Fanuc robotic arms to
  reduce manufacturing costs we did not foresee
  the labour shortage. We look at whats happening
  now and consider ourselves lucky.

Doug Schindel, President Weldco-Beales
Manufacturing
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Accelerated Capital Cost Allowance

• New Rates - 50 straight line basis
• - ½ year rules applies
• - Class 43 Assets
• Old Rate - 30 declining balance with ½
• year rule
• Effective - Eligible Assets acquired on
• or after March 19, 2007
  and
• before January 1, 2009
• Eligible Assets (Class 43) explained next page

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What is Manufacturing or Processing

• Manufacturing of goods normally involves the
  creation of something (e.g. making or assembling
  machines, clothing, soup) or the shaping,
  stamping or forming of an object out of something
  (e.g. making steel rails, wire nails, wood
  mouldings, etc.).
• Processing of goods usually refers to a
  technique of preparation, handling or other
  activity designed to effect a physical or
  chemical change in an article or substance, other
  than natural growth. E.g. galvanizing iron,
  creosoting fence posts, dyeing cloth, dehydrating
  foods and homogenizing and pasteurizing dairy
  products, kitchens in hotels, etc.
• What is NOT manufacturing or processing?
• Construction
• Farming, Fishing
• Industrial Minerals
• Logging cutting and bringing of logs to
  the mills
• Petroleum and Natural Gas Activities
• Electrical Energy and Steam

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Accelerated Capital Cost Allowance

• Eligible Assets (Class 43)
• Machinery and equipment used in Canadian
  manufacturing and processing (MP)
• used directly or indirectly in Canada primarily
  in the MP of goods for sale or lease or
• to be leased to lessee that meets above criteria
  in certain circumstances
• Primarily generally means more than 50
• Acquired from March 19, 2007 to December 31, 2008

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Accelerated Capital Cost Allowance

• Example 1
• Facts
• Taxable income before CCA on new assets
  2,000,000
• Not eligible for small business deduction
• Alberta MP company with December 31 year-end
• Eligible asset acquired October 1, 2007 for
  3,000,000
• Effective tax rates 2007 32.12
• 2008 30.5
• 2009 30.0

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Accelerated Capital Cost Allowance

• Example 1 Year 1
• New Rules Old Rules
• Dec 31, 2007
• Taxable income
• before new CCA 2,000,000 2,000,000
• CCA on new asset ( 750,000) (
  450,000)
• Taxable Income 1,250,000 1,550,000
• Combined Federal /
• Alberta Tax 401,500 497,860
• Net Tax difference Yr 1
  96,360

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Accelerated Capital Cost Allowance

• Example 1 Year 2
• New Rules Old Rules
• Dec 31, 2008
• Taxable income
• before new CCA 2,000,000 2,000,000
• CCA on new asset (1,500,000) (
  765,000)
• Taxable Income 500,000 1,235,000
• Combined Federal /
• Alberta Tax 152,500 376,765
• Net Tax difference Yr 2
  224,175

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Accelerated Capital Cost Allowance
Example 1 Year 3 New Rules Old
Rules Dec 31, 2009 Taxable income before new
CCA 2,000,000 2,000,000 CCA on new
asset (1,500,000) (
535,000) Taxable Income 1,250,000
1,464,500 Combined Federal / Alberta Tax
375,000 439,350 Net Tax
difference Yr 3 64,350 Total
Net Tax difference Yrs 1-3 384,885
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Accelerated Capital Cost Allowance

• Example 2
• Facts
• Alberta MP Company with December 31 year end
• Taxable income before CCA on new assets
  400,000
• Eligible for full small business deduction
• Eligible asset acquired October 1, 2007 for
  600,000
• Effective tax rates 2007 16.12
• 2008 14.5
• 2009 14.0

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Accelerated Capital Cost Allowance

• Example 2 Year 1
• New Rules Old Rules
• Dec 31, 2007
• Taxable income
• before new CCA 400,000
  400,000
• CCA on new asset ( 150,000) (
  90,000)
• Taxable Income 250,000 310,000
• Combined Federal /
• Alberta Tax 40,300
  49,972
• Net Tax difference Yr 1
  9,672

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Accelerated Capital Cost Allowance

• Example 2 Year 2
• New Rules Old Rules
• Dec 31, 2008
• Taxable income
• before new CCA 400,000
  400,000
• CCA on new asset ( 300,000) (
  153,000)
• Taxable Income 100,000
  247,000
• Combined Federal /
• Alberta Tax 14,500
  35,815
• Net Tax difference Yr 2
  21,315

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Accelerated Capital Cost Allowance
Example 2 Year 3 New Rules
Old Rules Dec 31, 2009 Taxable income before
new CCA 400,000 400,000 CCA
on new asset (150,000) (
107,100) Taxable Income 250,000
292,900 Combined Federal / Alberta Tax
35,000 41,006 Net Tax
difference Yr 3
6,006 Total Net Tax difference Yrs 1-3
36,993
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Accelerated Capital Cost Allowance

• Example 3
• Facts
• Alberta MP Company with December 31 year end
• Taxable income before CCA on new assets
  240,000
• Eligible for full small business deduction
• Eligible asset acquired October 1, 2007 for
  150,000
• Effective tax rates 2007 16.12
• 2008 14.5
• 2009 14.0

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Accelerated Capital Cost Allowance

• Example 3 Year 1
• New Rules Old Rules
• Dec 31, 2007
• Taxable income
• before new CCA 240,000
  240,000
• CCA on new asset ( 37,500) (
  22,500)
• Taxable Income 202,500 217,500
• Combined Federal /
• Alberta Tax 32,643
  35,061
• Net Tax difference Yr 1
  2,418

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Accelerated Capital Cost Allowance

• Example 3 Year 2
• New Rules Old Rules
• Dec 31, 2008
• Taxable income
• before new CCA 240,000
  240,000
• CCA on new asset ( 75,000) (
  38,250)
• Taxable Income 165,000
  201,750
• Combined Federal /
• Alberta Tax 23,925
  29,254
• Net Tax difference Yr 2
  5,329

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Accelerated Capital Cost Allowance

• Example 3 Year 3
• New Rules Old Rules
• Dec 31, 2009
• Taxable income
• before new CCA 240,000
  240,000
• CCA on new asset ( 37,500) (
  26,775)
• Taxable Income 202,500
  213,225
• Combined Federal /
• Alberta Tax 28,350
  29,851
• Net Tax difference Yr 3
  1,501
• Total Net Tax difference Yrs 1-3
  9,248

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Conclusions

• Accelerated CCA claims for qualifying MP assets
  will result in lower overall taxes due to the
  declining tax rates
• Accelerated CCA claims for qualifying MP assets
  will defer corporate taxes significantly
• Reduced taxes in the next three years will allow
  you to pay down associated debt faster which will
  in turn reduce carrying charges
• Combined with increased CCA rates for MP
  buildings (from 4 to 10) and computers (from
  45 to 55) acquired on or after March 19, 2007
  makes now the time to invest in modernization.

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Contact your business/financial advisor.