There are plenty of great reasons for considering “Manufactured Construction” for your next interior building project — price certainty, a shorter, more efficient schedule and superior fit and finish, to name a few.
But wait just a minute. All that good stuff comes at a premium.
Drywall is both a known commodity and sinfully cheap. Heck, when you want to make a change, you just order a dumpster, bring in a night crew and presto! All your problems magically disappear.
So why bother, especially if you’ve heard conflicting numbers. I’ve heard numbers anywhere from a 0% premium for “Manufactured Construction” to 200%. I’ve done my own math as well. All said and done, I believe that, when comparing apples to apples, the real premium for a quality “Custom Manufactured Interior” in today’s market is between 10 – 25%.
Now, if we could get someone else to pick up the tab for this premium, wouldn’t that make it a more appealing proposition?
Let’s say you’re erecting a new building or making significant renovations to an existing building that you own: building out the interior conventionally, with drywall and such, is considered by CRA (Canada Revenue Agency) to be a Class 1 asset; that means it depreciates at 4% per year.
Translated, this means it would take 25 years to write off a Class 1 asset and realize the tax savings on that business expense.
On the other hand, if you build out the interior using a “Manufactured Construction” solution — considered by CRA to be a Class 8 asset – it would depreciate at 20% per year.
A Class 8 asset can be written off in 5 years.
How’s that for tax savings.
Full disclosure: I’m not an accountant.
What I’ve told you so far will not tell you how much money CRA is going to let you save on taxes to pay for the premium. That’s because to know that number you must compare how the differences in depreciation rates apply to the cost of the building project as well as the marginal tax rate the business is being taxed at.
Remember back in grade school when the math teacher would assign homework questions that looked easy until you went home and tried to solve them?
Questions like: If Johnny has 12 apples and gives 4 to Mary, and 1 to his friend Sam, then gets 3 apples from Jane, what percentage of apples does Johnny have left?
Oh, and you weren’t allowed to use a calculator.
Well, this building example is a bit like that, except that we’re using dollars instead of apples and we’re playing for keeps.
Happy Flapjack Corp. with net earnings of more than $500,000 annually is considering an interior construction project that is estimated to cost $1,000,000 to build conventionally, treated as a Class 1 asset, depreciated at 4% annually. Alternately, there is a firm proposal of $1,200,000 on the table to build the same interior using a “Manufactured Construction” solution that will be treated as a Class 8 asset and that will depreciate at 20% annually. That’s a difference of 200,000 flapjacks.
How much would the “Manufactured Construction” solution cost in comparison to conventional construction at the two levels (4% and 20%) of depreciation after 5 years, given that corporations with earnings in excess of $500,000 are taxed at a marginal tax rate of 26.5%?
See for yourself:
A savings of $65,000 or almost 7%.
Misty Eyed Corp. with net earnings of less than $500,000 annually is considering an interior construction project that is estimated to cost $200,000 build out conventionally using drywall, etc., treated as a Class 1 asset, depreciated at 4% annually. Alternately, there is a firm proposal of $230,000 on the table to build the same interior using a “Manufactured Construction” solution that will be treated as a Class 8 asset, depreciated at 20% annually. That’s a premium of 15% and a difference of 30,000 misty-eyed dollars.
How much would the “Manufactured Construction” solution cost compared to conventional construction at the two levels (4% and 20%) of depreciation after 5 years, given that corporations with earnings of less than $500,000 are taxed at a marginal tax rate of 15.5%?
We didn’t make out quite as well in this scenario. Even so, that premium just about disappeared.
Think of it as a government subsidy for choosing a better, more sustainable way to build.
One last thing. Remember kids, never try these tricks at home — only under the care and supervision of a trained and certified accountant.