Cost Estimate of Full Expensing for Depreciable Property

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Cost Estimate of Full Expensing for Depreciable Property.pdf

Summary

A member of Parliament requested that the Parliamentary Budget Officer (PBO) estimate the fiscal cost of 100% expensing for assets purchased by a corporation to match the recent U.S. tax change in the Tax Cuts and Jobs Act (TCJA). 

Depreciable property is defined as property that wears out or becomes obsolete over time. In 2015, corporations in Canada spent over $200 billion on new acquisitions of depreciable property. The largest components of depreciable property include buildings, intellectual property and machinery and equipment. Eligible property prescribed by the TCJA in the United States is mostly tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Nearly all assets in the MACRS have recovery periods of 20 years or less. The major exception to this is buildings. Therefore, we have excluded CCA classes 1, 3 and 6 which are mostly composed of buildings.

Our analysis suggests that by 2023, the net cost of full expensing over five-years is approximately $36.7 billion for corporations and partnerships. The cost estimate is based on 100% expensing for eligible property from 2019 to 2023, which is then phased-out and reduced by 20% per year beginning in 2024.
Additionally, the report estimates that replicating full expensing in Canada would generate a future liability of $164 billion in the form of unused losses. Under the current Canadian tax system these losses can be used at any point over the next 20 years to reduce tax payable. 

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