Federal budget provision could boost hardware spending

A provision in the recent federal budget allowing companies to write off 100 per cent of computer hardware and software for the next two years offers an opportunity for companies to look at replacing expensive-to-maintain legacy systems, according to Marc Perrella, vice-president of IDC Canada Ltd.’s technology research practice.

Many Canadian enterprises are running on heavily customized core business applications developed in COBOL, Perrella said. The workers who developed and maintain those applications are aging out of the workforce, making maintenance an expensive challenge. Meanwhile, packaged applications are becoming more vertically specific and customizable for business processes, making the two-year tax relief window a good time to look at migration, he said.

“You don’t just do that overnight,” he said.

Perrella called the tax relief package, which lets companies claim 100 per cent of the value of their hardware and software purchases against their taxable income instead of depreciating it over three years, “a good start.”

“We’d all like to see more,” Perrella said, but acknowledged that the government is facing what may be the biggest economic crisis in our history.

It’s especially welcome in a tightened credit environment, Perrella said. A year ago, capital for investment cost perhaps five to nine per cent in interest. “That’s now doubled,” he said, meaning that companies have to look for 20-plus-per cent return on their investment to justify it.

Diane Ablonczy, federal minister of state for small business, told ComputerWorld Canada that while the government estimates the measure will cost $340 million in tax revenue in 2009-2010, and another $355 million the following fiscal year, it’s not a limited pool of tax breaks. All companies will be able to take advantage.

“It isn’t, ‘Be first in line because it will run out in six months,'” Ablonczy said.

Bernard Courtois, president and CEO of the Information Technology Association of Canada, applauded the tax break, which mirrors recommendations ITAC made to the government in December regarding how an economic stimulus package should be structured for an ailing Canadian economy, he said.

“All in all, it’s a very good move from a public policy perspective,” Courtois said, noting that it addresses liquidity problems and directs spending toward enhanced productivity. And when the two years are up, tax revenues will actually increase, since the equipment has already been written off.

Before the tax breaks, computers depreciated at 55 per cent of their remaining value per year. However, in the first year, Canada Revenue Agency assumed that companies only had the equipment for half the year, Courtois said. At a 20 per cent tax rate, the dollar value of the write-off is only 5.5 per cent. The immediate 100 per cent write-off means companies get 20 per cent back in the first year.

“That’s going to influence buying decisions,” Courtois said.

But Grant Rowson, a certified general accountant and manager of accounting software consulting with BDO Dunwoody’s Thunder Bay, Ont., office, cautioned that unless a company can make the business case to spend the money, “all you’re doing is bankrupting yourself faster.”

The 100 per cent write-off is on taxable income, so savings will depend on the company’s tax rate. In a 20 per cent tax bracket, companies would only get 20 per cent payback in terms of cash flow. They’re still out of pocket the other 80 per cent, Rowson said.

The break might make businesses that are considering, but haven’t committed to, purchases think twice before closing their wallets. “It’s aimed at the fencesitter who’s not really sure they should do it,” Rowson said. “This tax break will sweeten the pot.”

But tax breaks alone – especially those with a limited window of time – won’t address the long-term viability of a business.

“I don’t think people will (buy computer equipment) just because of the tax savings,” Rowson said. “You’ve got to come up with something that improves your business value.”

Ablonczy said the break “really targets viable businesses with growth potential.” As for businesses struggling to make a profit, she noted that the government has put aside $200 million to help make sure they get the credit they need to compete. They, too, would benefit from being more high-tech, she said, “but you can’t give a deduction if there’s no income.”

Perrella recommended companies target technologies that will have an impact across the business, not just in IT – those that boost performance, reduce costs or transform business processes for better competitiveness. Mobile applications, fleet and fuel management and teleconferencing are among those technologies, he said.

If there’s a temptation for a business to look for more proven, risk-free areas to spend its money, it should look at the legacy architecture. “There’s actually a risk not to do it,” he said.