Issue
in Focus
Is the Capital Cost Allowance System
in Canada Unnecessarily Complex?
By Odette Pinto, PhD, MBA, CGA
Commissioned by Rock Lefebvre, MBA, CFE, FCIS, FCGA
About the Author
Odette Pinto, PhD, MBA, CGA is an Assistant Professor of Accounting and Strategic Measurement with
Grant MacEwan University.
About CGA-Canada
Founded in 1908, the Certified General Accountants Association of Canada (CGA-Canada) is a self-regulating,
professional association of 75,000 Certified General Accountants (CGAs) and students. CGA-Canada develops
the CGA Program of Professional Studies, sets certification requirements and professional standards, contributes
to national and international accounting standard setting, and serves as an advocate for accounting professional
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Reproduction in whole or in part without written permission is strictly prohibited.
2
Issue in Focus
Is the Capital Cost Allowance System
in Canada Unnecessarily Complex?
April 2013
Introduction.................................................................................................................................4
Evidence of Increased Complexity of the CCA System..............................................................7
Impact of Book-Tax Differences and CCA Rules.......................................................................9
Use of the CCA System for Economic Incentives.......................................................................10
Departure from the Principles of the Income Tax System in Canada.........................................12
Does the Complexity Result in Costs and Inefficiencies?...........................................................13
Effects on International Competitiveness...................................................................................14
Conclusion and Recommendations.............................................................................................16
References...................................................................................................................................18
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
3
Introduction
Recent tax literature and activism has called for tax reform that would lead to a more efficient
income tax system in Canada, including tax policy research inviting a reduction in tax preferences
to ensure that the system is fair and neutral (Bibbee, 2008; Mintz, 2007; Chen et al., 2007).
On numerous occasions, advice from CGA-Canada has explicitly posited for simplification of
the system.
The purpose of this paper is to consider the Capital Cost Allowance (CCA) system in Canada
in the spirit of investigating the extent to which it meets the principles of simplicity, equity
and neutrality, assessing the effectiveness of economic incentives introduced through changes
to the system, and to gauge how the CCA system affects the international competitiveness of
Canadian businesses. Tax policy literature has expressed concerns about recurrent changes to the
CCA system that have significantly increased its complexity while two important concerns are
frequently raised in the literature:
i) do CCA rates reflect economic reality, and
ii) are the recurrent changes in CCA classes and rates effective in achieving the federal
government’s policy objectives?
This study examines these concerns and also investigates whether frequent changes to the CCA
system result in unnecessary complexity that lead to incremental costs and inefficiencies for
Canadian businesses.
The CCA system was first introduced with the Income Tax Act of 1949, but substantially amended
in 1972 and again in 1987. The system establishes the basis for the depreciation of capital property
for tax purposes (Mida and Stewart, 1995), with an overall objective to ensure that all taxpayers
benefit from a fair and equitable system for the depreciation of capital property. Over the years,
the government has tailored the CCA system introducing changes in CCA classes, CCA rates,
descriptions of the classes, and related provisions. Admittedly, the government’s practice of relying
on the CCA system to achieve economic and other policy objectives has contributed to the
increasing complexity of the system, with the changes introduced often deemed as neither fair
nor neutral (Larter, 1988). For example, the government has introduced class and/or rate changes
with a view to stimulate certain industries or activities during economic downturn. These changes
are often seen as violating the principles of equity and neutrality as they are generally directed
to targeted industries instead of being applied to all commercial activity or taxpayers. It is also
uncertain whether these changes achieve the intended economic outcome or, instead, result in
4
Issue in Focus
unnecessary complexity, violating the principle of simplicity. Other changes made to the
CCA system to recognize the needs of specific industries and capital assets have often resulted
in additional classes and/or lengthy descriptions for classes. It is also debatable whether this
specificity is required.
There are several characteristics that demonstrate the increase in complexity since the CCA
system was first established:
i) a significant increase in the number of CCA classes;
ii) frequent changes to the CCA rates;
iii) lengthy descriptions for classes; and
iv) an introduction of CCA rules that many accounting professionals feel are unnecessary.
In 1949, when the CCA system was introduced, 12 classes of assets were established; in 1972,
the number of classes reached 28, in 1987 – 37, whereas currently, 56 classes exist. There have
also been several CCA rate changes, with frequent changes for manufacturing and processing
equipment and, more recently, changes to the classes and rates for computer hardware. The
applicable classes for manufacturing equipment and computer hardware have been changed
four times since 1972. Furthermore, the CCA rates have also changed with each of the class
changes for both manufacturing and processing equipment, and computer hardware. The length
of descriptions for several classes has grown substantially, as the government continues to refine
the descriptions to achieve desired outcome. Complexity has been further exacerbated through
the introduction of CCA provisions such as the ‘half-year’ and ‘available-for-use’ rules. For
example, the ‘half-year’ rule, which was introduced with the 1981 tax reform, restricts the CCA
that is allowed in the first year in which an asset is acquired. Many business representatives and
accounting professionals have expressed frustration with this rule, citing it unnecessarily burdens
the process and results in inefficiencies for Canadian businesses.
The data for this research study has been obtained from a review of the tax literature, the income
tax legislation and historical data on the CCA system. Views and evidence for this research
study were obtained through consultations with accounting professionals at small, medium and
large accounting firms, as well as representatives from various industries. Those consultations
comprised of 15 participants from public accounting firms, including national and regional firms,
and 14 participants from industry, including representatives from the manufacturing industry,
served greatly to inform this paper. Consultations included both very specific (e.g. comments on
the number of CCA classes) and broader questions (e.g. assessing the CCA system against the
principles of the Canadian income tax system) that assisted in gathering views of participants.
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
5
The findings of this research study provide evidence of the increased complexity of the CCA
system. Consultations with accounting professionals suggest that the CCA system does not respect
the key principles of a sound tax system such as simplicity, equity and neutrality. Furthermore,
the CCA system often does not represent economic reality and the economic life of the underlying
assets. However, a somewhat surprising result was that although accounting professionals perceive
the CCA system to be cumbersome, and in need of adjustments, they also indicate that the
increased complexity of the system does not appear to uniformly result in a disproportionate
increase in costs. The results also indicate that for large businesses, the key most important
characteristic of the CCA system is its international competitiveness; this is particularly important
for certain industries. For example, representatives from the manufacturing industry contend that
incentives like the accelerated capital cost allowance (ACCA) rates are essential in maintaining
the international competitiveness of Canadian manufacturing firms. Yet, such incentives do result
in increased complexity of the CCA system, leading to a conflict between the principles
of international competitiveness and simplicity.
CGA-Canada and other organizations have repeatedly called for simplification of the income
tax system. This paper contributes to this line of tax policy research by critically examining
the CCA system and including the perspective of accounting professionals working in public
accounting firms and industry.
6
Issue in Focus
Evidence of Increased Complexity
of the CCA System
Two factors that provide evidence of the increased complexity of the CCA system are the
significant increase in the number of CCA classes and the substantial increase in the length of
descriptions for many classes.
Increase in the number of CCA classes
The chart below illustrates the increase in the number of classes, from 12 classes in 1949 to
56 classes in 2012.
Figure 1: Number of CCA Classes
60
Number of Classes
50
40
30
20
10
0
1953
1963
1973
1983
1993
2003
2012
A number of reasons may exist for introducing a new CCA class. A separate class is sometimes
created to change or clarify the description (e.g. the type of buildings in Classes 3 and 6), or to
change the CCA rate (e.g. manufacturing equipment in Classes 29, 39 and 43). A review of the
class for Buildings illustrates the increase in the number of classes, as the designated class for
Buildings has changed from Class 6 (prior to 1979) to Class 3 (from 1979 to 1987) to Class 1
(from 1987 onwards). The tax authorities have also created CCA classes to meet the needs of
specific industries. For example, Class 42 was created especially to include fiber optic cables.
Other classes have been created to facilitate policy initiatives; for example Classes 43.1 and 43.2
relate to renewable energy and energy efficient equipment. The question may be posed whether
these classes are necessary.
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
7
Many accounting professionals that participated in the consultation indicated that the presence
of the large number of classes, including many redundant classes, makes the CCA system
cumbersome and complex, and adds to the time and effort required to identify the appropriate
class for an asset acquisition. However, public accounting firms serving small businesses do
point out that small businesses generally use more common CCA classes; as such, the excessive
variety of classes does not affect or impact businesses on a regular or uniform basis. Accounting
professionals also underscored that the overlap in classes makes it difficult to identify the class for
some asset acquisitions. For example, both accounting professionals and industry representatives
point to confusion in the descriptions for manufacturing equipment and the overlap between
Classes 29 and 39. Overall, the accountants recommend consolidation of redundant classes and
the elimination of overlap in some class descriptions, which would reduce inefficiencies and
work toward simplification of the CCA system.
Changes in CCA rates
The introduction of new CCA classes often goes hand in hand with a change in CCA rates. It
is unclear whether such changes are effective. For example, the general consensus among the
accountants consulted is that frequent changes to the CCA class and applicable CCA rates for
computer hardware introduced between 2009 and 2011 were not effective and did not meet the
apparent purpose of stimulating businesses to purchase computers. Furthermore, temporary
measures (e.g. the introduction of a 100% rate with no ‘half-year’ rule for computers purchased
after January 27, 2009 and before February 1, 2011) are generally not considered to be effective.
Descriptions of CCA classes
A review of the descriptions of the CCA classes provides further evidence of the increase
in complexity. The descriptions of the CCA classes are structured to address the needs of
specific industries and contribute to unnecessary complexity. For example, Class 12 includes
a description of china and tableware, which is specific to certain industries only. Some classes
also make reference to other classes, for example, Class 39 for manufacturing equipment refers
to the previous class, Class 29. Accounting professionals indicate that the underlying approach
to descriptions in the CCA system makes them cumbersome, which together with the overlap in
some class descriptions, results in inefficiencies and unnecessary allocation of time and effort.
The length of descriptions for some classes has increased substantially. Those consulted point
specifically to the descriptions of Classes 8, 10, 39, 43.1 and 43.2 as being too lengthy and
cumbersome. For example, Class 8 is the “catch-all” class for assets that do not belong in any
other class yet the description for this class is very long.
Overall, consultations with accounting professionals and industry representatives suggest that the
lengthy descriptions of classes often create challenges in identifying the correct class for asset
acquisitions. A few participants concede that the specific descriptions are needed, but most of
8
Issue in Focus
those consulted indicate that the lengthy descriptions for various classes are unnecessary and
do result in inefficiencies and allocation of additional time and effort including an increase in
chargeable time at public accounting firms.
Impact of Book-Tax Differences
and CCA Rules
Differences between the accounting and tax treatment of capital asset transactions result in
book-tax differences. There are four important examples of such differences:
i) differences in methods and rates between amortization (accounting) and CCA (tax);
ii) differences in the recording of dispositions of capital assets;
iii) the ‘half-year’ rule can be used for tax purposes but is not applicable for accounting purposes;
and
iv) the ‘available-for-use’ rule applies for tax purposes but not for accounting purposes.
Generally Accepted Accounting Principles (GAAP) requires that amortization is based on the
reasonable life of an asset, with appropriate matching in the allocation of capital costs against
revenues. Anecdotal evidence suggests that businesses generally use the straight-line method for
recording amortization for accounting purposes, but the amortization rates vary across businesses.
The income tax system, in turn, uses a common method across all taxpayers in order to achieve
fairness, and the declining balance method is the most common method used to calculate capital
cost allowance for tax purposes. The grouping of assets into classes with common tax CCA rates
is also essential in order to achieve consistency and comparability (which are attributes of fairness
and equity) across taxpayers.
Another difference between the accounting and tax systems occurs on the disposition of capital
assets. For accounting purposes, a gain or loss on the disposition of assets occurs when the
proceeds of disposition exceed (gain) or are inferior (loss) to the net book value of an asset,
while for income tax purposes, a disposition of an asset results in the lesser of the proceeds of
disposition or the original cost of the asset being deducted from the undepreciated capital cost
(UCC) of the applicable class.
The ‘half-year’ rule was introduced in 1981. Prior to 1981, full CCA was calculated for all
assets, including assets purchased later in a year. This was considered inadequate as it did not
represent a proper “matching” of capital cost allocations based on asset use. Although accounting
professionals indicate that the ‘half-year’ rule does not necessarily or uniformly result in a
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
9
substantial increase in preparers’ time or costs requirements, many expressed a frustration
with this rule, feeling that it adds an unnecessary layer of complexity to the CCA system that
is already complex.
The ‘available-for-use’ rule adds an additional layer of complexity to the CCA system as it
requires capital assets to be ready and available for use before they can be recorded as an addition
to a class. Those consulted point out that although this rule has been in place since 1990, Canada
Revenue Agency (CRA) auditors very seldom check for compliance. In the opinion of many
accounting professionals, this rule is unwarranted and unnecessary.
Overall, accounting professionals suggest that book-tax differences do result in extra costs
associated with additional time, effort and training. They recognize that some differences are
necessary to achieve fairness and equity across or amongst taxpayers, and that improvements in
technology have made the reconciliation processes easier while mitigating costs. Nevertheless, the
majority of those consulted suggest that book-tax differences should be minimized whereas both
the ‘half-year’ and ‘available-for-use’ rules are inadequate and add unnecessary complexity.
Use of the CCA System for
Economic Incentives
An underlying objective of the Canadian income tax system is to achieve economic prosperity
and growth. From time to time, the federal government uses the CCA system to foster economic
policy initiatives, including those that stimulate certain industries during economic downturns or
achieve other overall economic objectives. However, it remains ambiguous whether such changes
achieve the expected economic outcomes or whether they result in an unnecessary increase in
complexity in the already complex CCA system. Thus, the federal government is frequently faced
with an important trade-off between the principles of economic growth and simplicity, fairness
and neutrality in the income tax system.
A key example of an economic initiative introduced by the federal government is the increase in
CCA rates and introduction of accelerated CCA (ACCA) rates for manufacturing equipment. The
federal government introduces changes to CCA classes and rates for manufacturing equipment to
stimulate the manufacturing industry, for example during downturns in the Canadian economy.
ACCA was introduced to assist the manufacturing industry economically and to ensure
the international competitiveness of the industry. The ACCA has also been introduced for
other industries, for example the oil and gas industries.
10
Issue in Focus
Representatives from the manufacturing, oil and gas industries indicate that economic incentives,
like those propped up by ACCA, are effective and essential. They emphasize that the ACCA
makes major projects financially viable, as the projects undertaken are often costly and entail
a long-term commitment, which also emphasizes the need for a long-term commitment from
government authorities. Industry representatives also point to the industry’s effects on the Canadian
economy in general – for example the manufacturing industry contributes substantially to
employment in Canada.
Another recent government initiative was a change in the CCA rate for computers, together with
the waiving of the ‘half-year’ rule. This was a temporary incentive and was effective for a limited
time period. The majority of accounting professionals consulted suggest that this incentive
was not effective and, instead, it added a layer of complexity that resulted in additional time
and effort – for example the time and effort to identify the specific dates of computer purchases.
The majority of accounting professionals consulted feel that the introduction of accelerated CCA
rates for computer purchases was not effective and did little to achieve the underlying objective of
stimulating the purchase of computers and the information technology industry.
Overall, accounting professionals and industry representatives conclude that most changes to the
CCA system to stimulate a particular industry are ineffective as the purchase of capital assets
is driven by business necessity and not by tax treatment. Therefore, the introduction of ACCA
rates or other such initiatives may affect the timing of an asset acquisition but not the acquisition
decision itself. Furthermore, accounting professionals at public accounting firms indicate that
clients rarely have timely knowledge of such incentives. Thus, anecdotal evidence suggests that
the introduction of ACCA rates, particularly for short periods of time, is ineffective. That said,
certain industries (e.g. manufacturing, oil and gas) contend that the ACCA rates are essential
for Canadian businesses to be internationally competitive; particularly with the United States.
Yet, economic incentives favouring one industry at the exclusion of another can hardly be
viewed as fair and equitable. Notwithstanding, consultations with accounting professionals and
representatives of industries not affected by such incentives suggest that this inequity in the CCA
system is not perceived as being unfair. The general perception among accounting and business
representatives appears to be that such incentives are commonly accepted as being essential for
certain industries – for example the manufacturing industry, during an economic recession.
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
11
Departure from the Principles of the
Income Tax System in Canada
The fundamental principles outlined in the Carter Report (1966)1 continue to guide income
taxation in Canada – neutrality, equity (fairness), simplicity and international competitiveness
(Hogg et al., 2010). In this section, the CCA system is examined to assess how it measures up to
each of these principles.
Neutrality: The prescription of a specific method for CCA and specific rates for each prescribed
CCA class minimizes the range of amortization alternatives, and this is intended to be “neutral”
and “fair” to all taxpayers. However, as the CCA system does influence capital asset and
investment decisions it is not really “neutral”. Furthermore, as the CCA system is used, from time
to time, to provide economic incentives to stimulate certain industries (e.g. the manufacturing
industry during a recession) it does affect business decisions and therefore cannot be considered
perfectly “neutral”.
Equity (fairness): The CCA system is used to support economic initiatives and to achieve other
economic policy objectives. For example, accelerated CCA rates are provided to certain industries
to the exclusion of others, so this cannot be considered “fair” to all taxpayers. Another example
relates to the use of the asset. For example, the CCA system can be considered inequitable if one
business employs an asset 24 hours per day while another business uses the same asset for only
a few hours per day, yet the asset receives the same treatment in both businesses.
Simplicity: Most accounting professionals consulted agree that the CCA system is complex,
yet the majority of those consulted seem to have accepted the complexity, assenting that this
complexity is perhaps necessary to ensure fairness and equity. However, the accountants
consulted do suggest that the CCA system needs to be modernized and recommend a review
of the system, to eliminate redundancies, and to consolidate some classes in favour of moving
toward simplification.
International competitiveness: This appears to be the most important principle for certain
industries; for example the manufacturing, oil and gas industries. These industries emphasize
the need for long-term assurance and stability in the CCA rates to make costly and long-term
projects viable. These industries also point to the importance of comparability of CCA methods
and rates to those of other countries, particularly the United States, to maintain the international
competitiveness of Canadian businesses.
1 The Carter Report has not been published by the Canadian government (Hogg et al., Principles of Canadian Income Tax
Law, 2010).
12
Issue in Focus
It is widely accepted that there are conflicts and trade-offs between the principles. For example,
neutrality suggests that the income tax system should not drive business decisions but as the
government uses income taxation to achieve economic stabilization and growth, changes to the
tax legislation are occasionally introduced to affect business decisions (e.g. to stimulate a specific
industry). This violates the principle of neutrality and, furthermore, it also violates the principle
of fairness as it is not fair and equitable to all taxpayers. Concurrently, economic initiatives
implemented using the CCA system could be considered necessary for economic stabilization
and growth. The principle that is viewed as the most important and overarching may change and
evolve over time. For example, with globalization and global competition, the principle that is
currently of critical importance to certain industries is naturally international competitiveness.
The extant literature (Chen and Mintz, 2009) has called for a CCA system that represents
the economic reality of the underlying assets. However, accounting professionals and industry
representatives indicate that, in most cases, CCA does not reflect the economic life of an asset
and does not represent a matching of the capital cost of assets to its business use. Furthermore,
in most cases, CCA results in a quicker write-off of capital costs than the life and use of the
underlying assets in a business.
Overall, accounting professionals consulted indicate that the government should avoid unnecessary
complexity and maintain a system that is as simple as possible.
Does the Complexity Result in
Costs and Inefficiencies?
Tax policy research (Mintz, 2007) has emphasized the importance of simplicity, as complexity
that results in additional costs affects the profitability and international competitiveness of
Canadian businesses. Literature suggests that unnecessary complexity of the CCA system affects
business decision-making and could result in additional costs and inefficiencies, as the decision
makers must understand the CCA system in order to make appropriate decisions related to the
acquisition and disposition of capital assets; as such, complexity adds to the time and effort of
decision-making.
Accounting professionals and industry representatives concur that the level of complexity of
the CCA system has increased, pointing to the expansion in the number of classes, the lengthy
descriptions and rules like the ‘half-year’ rule as examples of such complexity. Consultations
with accounting professionals indicate that the CCA system needs to be thoroughly reviewed to
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
13
eliminate redundancies (e.g. in the CCA classes), to consolidate and shorten the length of
descriptions for many CCA classes and to critically assess the need in some of the rules that
add to the complexity (e.g. the ‘half-year’ and ‘available-for-use’ rules). In general, accounting
and industry representatives indicate that the CCA system should not be the vehicle used for
introducing economic incentives as most temporary incentives are ineffective and yet add
unnecessary complexity. Overall, accounting and business representatives agree that the CCA
system is in need of an overhaul to consolidate and simplify the system. Anecdotal evidence
obtained from representatives of accounting firms and industry suggests that although there has
been a definite increase in complexity in the CCA system over the past two decades and that
there is a need for consolidation and simplification to increase efficiency and fluidity, they have
in part been successful in offsetting substantial cost or fee increases, through automation and
improved practices.
Effects on International Competitiveness
Tax policy research has emphasized the importance of ensuring that the income tax system
supports international competitiveness of Canadian businesses (Mintz, 2007) and ensures Canada’s
attractiveness as a place to invest (Bibbee, 2008). The federal government’s Economic Action
Plan and recent budgets have also stressed the importance of competitiveness (Pankratz 2010;
Pankratz, 2011). The existing literature also indicates that the tax system should be simplified,
as complexity leads to inefficiencies that affect the competitiveness of Canadian businesses.
Accounting professionals and industry representatives are in agreement that the CCA system
is unnecessarily complex and needs an overhaul. Although accountants appear to accept the
CCA system as it is and have mitigated substantial cost increases, they do agree that a simplified
system would reduce inefficiencies and would benefit Canadian businesses.
International competitiveness is not a major factor for small and mid-size businesses, but it
is a key issue facing large businesses with global operations particularly in certain industries
such as manufacturing, oil, gas, and pipeline industries. For example, representatives from the
manufacturing industry point to competition from businesses in the United States and assert
that it is critically important that the Canadian CCA system provides incentives similar to
those of the United States in order to ensure a level playing field for Canadian manufacturing.
Maintaining comparability with the United States is a key reference point for tax initiatives
(Bibbee, 2008). Furthermore, other economic factors such as exchange rate fluctuations are
also a major factor in assessing the international competitiveness of Canadian manufacturing
businesses. Representatives from the manufacturing industry point to the effects of exchange
rates shocks on the industry and the need for tax initiatives to offset these effects.
14
Issue in Focus
In recent years, the federal government has moved toward the use of temporary ACCA rates.
Budget 2010 introduced ACCA for certain types of clean energy generation and conservation
equipment. Prior budgets have also introduced ACCA for manufacturing equipment and for
certain capital expenditures incurred by the oil sands industry. Furthermore, Budget 2011 and
Budget 2013 both extended the ACCA for machinery and equipment used in the manufacturing
industry; Budget 2011 also expanded the types of clean energy equipment eligible for ACCA
(Pankratz, 2010; Pankratz, 2011). Yet, economists have called for the elimination of the ACCA
and the tax advantages to oil sand projects as they do not work toward achieving sustainability
in the energy sector (Mourougane, 2008) and could result in overheating of the sector and the
surrounding economy. The long-term effectiveness of such incentives should also be considered
as such temporary measures may work in the short-term but could reduce capital investment
in the future (Chen and Mintz, 2009), affecting international competitiveness in the long-term.
Furthermore, such preferences depart from the principles of fairness and neutrality.
During the consultations, many accounting and industry representatives questioned whether
the use of the CCA system and ACCA rates are the appropriate methods for maintaining
international competitiveness in these industries. For example, some representatives from the
manufacturing industry suggest that the use of investment tax credits would be more appropriate
and more effective. Others suggest that the use of grants may be more adequate, as it would
make businesses more accountable for the government incentives received (Bibbee, 2008).
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
15
Conclusion and Recommendations
The purpose of this research study has been to critically examine the CCA system in Canada.
The research findings provide evidence of the increased complexity of the CCA system, with
significant increases in the number of CCA classes and the length of descriptions of several
CCA classes, as well as the introduction of rules like the ‘half-year’ rule and ‘available-foruse’ rules that add an additional layer of complexity to an already complex CCA system. An
assessment of the CCA system against the underlying principles of Canada’s income tax system
indicates that the system falls short on several principles and, in particular, the current system
conflicts with the principles of simplicity, equity and neutrality, and does not properly reflect
economic reality.
The federal government has tampered with the CCA system for economic stabilization; particularly
economic incentives during recessions or incentives to stimulate a particular industry. Views
gathered through consultations with accounting professionals and industry representatives
indicate that the use of the CCA system for economic incentives is generally not effective,
particularly as the purchase of capital assets is argued to be founded in business decisions
rather than in tax decisions; and that such incentives create unnecessary complexity. However,
representatives from certain industries (e.g. manufacturing, oil and gas) emphasize the importance
of such incentives for the industry to retain international competitiveness and to offset exchange
rate shocks. It is nonetheless questionable whether the use of the CCA system to achieve economic
stimulation is advisable, particularly as it results in increased complexity within a system
that instigates inefficiencies. Accountants and industry representatives suggest that alternative
methods may be more effective for these industries, for example the use of investment tax credits
or government grants. The costs and benefits of such alternate methods should be assessed. Future
research could compare the effectiveness of using ACCA or Investment Tax Credits, and could
also examine and reassess the Scientific Research and Experimental Development (SR&ED)
tax incentive program to determine if it could be more accessible, relevant, and advantageous
to Canadian businesses. Future research could also examine the effectiveness of using grants
during economic downturns or to stimulate a particular industry. Mourougane (2008) suggests
that grants would be a more accountable form of incentives to an industry.
International competitiveness is of critical importance in a global economy and particularly
important to Canadian businesses and resources. Future research could critically examine
the factors that affect the international competitiveness of Canadian businesses, particularly
industries that are in close competition with the United States. Consultations with accounting
16
Issue in Focus
professionals and representatives from certain industries (e.g. manufacturing, oil and gas) suggest
that this should be the most important principle of the income tax system, as international
competitiveness is of critical importance to the long-term success of Canadian businesses.
An important principle of the Canadian income tax system has long been simplicity. Future
research could extend this line of consideration by examining other areas of unnecessary
complexity that lead to inefficiencies in the income tax system that affects the profitability,
sustainability, and competitiveness of Canadian businesses. But in order to successfully do so,
we should probably agree from the outset that the tax regime is hardly simple…
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
17
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CGA-Canada. 2007. Paving the Way to Prosperity: It’s Time for Real Tax Reform, a submission
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CGA-Canada, Letter to the House of Commons Standing Committee on Finance on the
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CGA-Canada, Pre-Budget Submission to the House of Commons Standing Committee on
Finance. August 14, 2009. CGA-Canada.
Chen, D. and J. Mintz. 2009. The Path to Prosperity: Internationally Competitive Rates and
a Level Playing Field. C.D. Howe Institute, Commentary No. 295.
Chen, D., J. Mintz and A. Tarasov. 2007. Federal and Provincial Tax Reform: Let’s Get
Back on Track. C.D. Howe Institute, Backgrounder No. 102.
Hogg, P., J. Magee and J. Li. 2010. Principles of Canadian Income Tax Law, 7th edition.
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Larter, R. 1988. Capital Cost Allowance and Eligible Capital Property: Tax Reform
Implications. Canadian Tax Foundation, 1988 Conference Report.
Mida, I. and K. Stewart. 1995. The Capital Cost Allowance System. Canadian Tax Journal,
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Mintz, J. M. 2006. 2006 Tax Competitiveness Report: Proposals for Pro-Growth Tax Reform.
C.D. Howe Institute, Commentary No. 239.
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Mourougane, A. 2008. “Achieving Sustainability of the Energy Sector in Canada”. OECD
Economics Department Working Papers, No. 618, OECD Publishing, Paris.
18
Issue in Focus
Pankratz, A. 2010. 2010 Canadian Federal Budget. Journal of International Taxation,
July 2010, 52- 60.
Pankratz, A. 2011. 2011 Canadian Federal Budget. Journal of International Taxation,
June 2011, 51- 60.
Stikeman Income Tax Acts, Annotated. Carswell, Toronto
Is the Capital Cost Allowance System in Canada Unnecessarily Complex?
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