Budget change boosts capital cost allowances on IT

A provision in Tuesday’s federal budget will help companies defray the cost of IT equipment more quickly, but whether that translates into increased PC sales is open for debate.

According to the new rules laid out by Minister of Finance Ralph Goodale, capital cost allowance rates on computer

equipment have increased from 30 per cent to 40 per cent a year. For broadband, Internet and network equipment the rate has moved from 20 to 30 per cent.

“”It means that you save tax more quickly on your depreciation than you would have before,”” explained Karen Wensley, a corporate tax specialist in the Toronto offices of Ernst & Young. “”The total tax savings from buying a new piece of equipment are the same, but they’ve pushed forward the timing.””

Companies may not be saving more in the long-run, but having cash in hand sooner could potentially affect purchasing decisions.

“”Businesses always make investment decisions on a time-value of money basis as opposed to an absolute dollar basis,”” said Wensley. “”Certainly at the margin, it may cause people to buy more equipment or replace their old equipment more quickly.””

But there is more to the cost of computer equipment that just the sticker price and potential tax savings, argued IDC Canada analyst Eddie Chan. Companies also have to consider what they will spend in training and support when they replace PCs.

The IT industry at large has observed the growth of a phenomenon called “”good-enough computing”” in recent years. IT users are extending the life of their PCs because they don’t require or can’t justify the cost of an upgrade. According to IDC Canada statistics, in Q3 2002, Canadian enterprises replaced their PCs every 3.6 years. By Q2 2003, that number had increased slightly to 3.8 years.

“”It’s not as straight-forward as, ‘Oh, OK, we can just write it off,’ but it doesn’t hurt. It’s a good stimulus,”” said Chan of the revised tax structure. But, “”to actually establish a correlation between that and actual decision-making, that’s open to debate.””

John Reid, president of the Canadian Advanced Technology Alliance, said he’s heartened by the change. CATA had released several public statements prior to the budget urging the government to eliminate capital taxes.

“”Anything that can be done to accelerate the rate at which companies procure IT goods and services is very beneficial for the industry,”” he said.

Reid added that CATA is generally enthusiastic about the Goodale budget, more so than the 2003 budget, which fell short of the organization’s expectations. This year, for example, some of the restrictions that prevented small businesses from fully accessing the 35 per cent Scientific Research & Experimental (SR&ED) tax credit program have been removed.

“”By getting our fiscal house in order, we can accelerate the speed at which we reduce tax burden, remove unnecessary red tape. It’s more (an issue) of speed,”” said Reid.

Reid also lauded improvements to the Canada Student Loans program and a government commitment of $200 million to Sustainable Development Technology Canada, which could help Canadian companies commercialize environmental technologies.

Comment: info@itbusiness.ca

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