CRA’s illustration shows recapture being realized with no disposition

An elaborate CRA example illustrates how lush tax credits and CCA can result in recapture of depreciation, even where there is no disposition.

A non-CCPC Canadian corporation acquires solar equipment for $10,000,000 in 2024 for immediate use in generating electricity as an input in its manufacturing operation in Nova Scotia. In its 2024 federal and provincial returns:

• It accesses the accelerated investment incentive property (“AIIP”) rules (based on satisfying Reg. 1104(4)) to claim CCA of $7,500,000 (i.e., the actual capital cost grossed-up to $15,000,000 and multiplied by the 50% Class 43.2 rate);
• It claims and receives the Nova Scotia Capital Investment Tax Credit (“NS CITC”) of 25% of the $10,000,000 capital cost, or $2,500,000;
• It claims and receives the Clean Technology Investment Tax Credit (“Clean Tech ITC”) pursuant to s. 127.45, which is calculated as 30% of the capital cost, as reduced by the NS CITC, viewed as government assistance that it can “reasonably be expected to receive” (albeit, not until it has filed for and received an entitlement certificate by the filing-due date);
• It claims an Atlantic Investment Tax Credit (“AITC”) pursuant to s. 127(9) of $750,000, being 10% of the capital cost, again reduced to $7,500,000 by the NS CITC “government assistance”.

In 2025, the capital cost of the property will have been reduced (pursuant to s. 13(7.1)(e)) by the two federal tax credits claimed and (pursuant to s. 13(7)(f)) by the NS CITC “assistance” claimed, i.e., to $4,500.000. Pursuant to s. 13(1), if the CCA previously claimed ($7,500,000) exceeds the capital cost ($4,500,000), the difference is recognized as recapture of depreciation (of $3,000,000).

Neal Armstrong. Summary of 21 October 2024 External T.I. 2024-1027501E5 under Reg. 1100(2)(A), s. 127(9) – government assistance and s. 13(1).