Does exposure to possible capital cost allowance changes influence the choice of accounting depreciation policy? An empirical analysis of Canadian firms

Have income tax changes to the capital cost allowance (CCA) system encouraged Canadian firms to change accounting depreciation methods?; Since the Department of Finance focussed on the tax expenditures that result from CCA exceeding accounting depreciation, Canadian firms have an incentive to ensure that excess CCA will decrease. This can be accomplished by increasing accounting depreciation for having the taxation authorities impose CCA rate reductions. To deter the latter, this study hypothesizes that firms will change their depreciation policy so that accounting depreciation more closely approximates CCA, to reduce tax exposure to prospective CCA tax changes. In particular, firms with high tax exposure will select income decreasing depreciation methods.; Firm size (assets), shareholders' equity, leverage (total debt/equity) and deferred tax expense are very significant in differentiating between firms that select income increasing and income decreasing depreciation methods. Deferred tax expense is used to proxy for tax exposure. This study is significant for tax policy makers as it reveals the likelihood that CCA tax policy changes are an impetus to firms to change their depreciation methods. (Abstract shortened by UMI.)...