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: Client Update - Federal Budget Makes Changes to the Atlantic Investment Tax Credit

April 3, 2012

Federal Budget Makes Changes to the Atlantic Investment Tax Credit

Last Thursday's federal budget made two changes to the Atlantic Investment Tax Credit. The more important change is to phase out the credit for the oil, gas and mining industries. As these industries were the main recipients of the Atlantic Investment Tax Credit in recent years, this change is significant. Of less importance is a change to make certain new categories of electricity generating equipment eligible for the credit.

For more than 20 years, Canada's investment tax credit for new buildings and some machinery and equipment has been limited to purchases used in Atlantic Canada or the Gaspe Peninsula. This has been a significant federal incentive to encourage investment in the Atlantic region. The credit is limited to buildings or equipment used in certain industries, such as manufacturing, farming, fishing, logging, operating an oil or gas well, mining, processing ore, producing industrial minerals, processing oil and natural gas, and exploring for petroleum or mineral resources.

The budget proposes to phase out the Atlantic Investment Tax Credit for oil, gas and mining activities. While the tax credit for manufacturing, farming, fishing, logging, grain storing and peat harvesting will remain at 10 per cent, for those investments related to oil, gas and mining the rate will be reduced for assets acquired after 2013. For those investments acquired during 2014 or 2015, the rate will be reduced to 5 per cent. The Atlantic Investment Tax Credit will be eliminated altogether for the oil, gas and mining sectors for investments after 2015.

The government's rationale for this phase-out is that the oil and gas and mining sectors have generally been performing well, and investment by these industries in the Atlantic region is robust and growing. In the government's view, the change will promote neutrality of the tax system for the oil and gas and mining sectors across Canada. The government projects that it will save $130 million over five years as a result of the phase-out of the credit for the oil and gas and mining sectors.

The second change in the budget is to expand slightly the categories of electricity generating equipment that qualify for the Atlantic Investment Tax Credit, and to expand the industry categories that qualify for the credit. Under existing rules, certain categories of electricity generating equipment qualify for the 10 per cent Atlantic Investment Tax Credit. The budget extends the credit to electricity generating equipment that falls into depreciation classes 17(a.1)(i), 43.1, 43.2 or 48. This will include expanded qualification for "clean energy" electricity generating equipment (i.e. wind, solar, etc.). The budget does not change the important limitations on the Atlantic Investment Tax Credit as it relates to electricity generating equipment: the equipment must be used in a qualifying industry (i.e. manufacturing, farming, fishing, logging, etc.) and the equipment cannot generate electricity that is sold to third parties (i.e. power utilities). The credit is only available for equipment that generates power for a business' own use.

The government's rationale for expanding the credit for electricity generating equipment is to improve the neutrality of the Atlantic Investment Tax Credit (i.e. by eliminating artificial distinctions between categories of electricity generating equipment). The impact of this change is projected to be minor – costing the federal government only $4 million over a five year period.

For further information on these federal budget changes, please contact Michael McGonnell at 902.629.4561.
 

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