The federal government this week introduced the Productivity Mega Deduction, which would allow Canadian businesses to immediately expense a significantly broader range of capital investments.
The proposed measure extends the Productivity Super-Deduction announced in Budget 2025 and is intended to provide a permanent incentive for businesses to invest in new equipment, technology and other depreciable property. Under the proposal, businesses would be able to deduct the full cost of qualifying investments in the year those assets become available for use, rather than claiming capital cost allowance (CCA) deductions over multiple years.
The new measure would apply to most eligible depreciable property acquired on or after September 15th, 2026.
Under Canada’s existing tax system, businesses generally cannot deduct the full cost of a capital asset in the year it is purchased. Instead, the cost is allocated to a prescribed capital cost allowance (CCA) class, with deductions claimed over time according to the applicable CCA rate. The Productivity Mega Deduction would change the timing of those deductions for qualifying investments. Businesses would be permitted to claim the full capital cost of eligible property in the year it becomes available for use.
The government estimates that approximately two-thirds of investment in capital assets would qualify for immediate expensing under the new measure, compared with approximately 15 per cent under the Productivity Super-Deduction introduced in Budget 2025.
What property qualifies?
The proposed deduction would apply broadly to depreciable property that is subject to CCA rules. Eligible investments can include assets such as:
- Machinery and equipment
- Computers and data network infrastructure
- Patents and other qualifying capital property
- Certain energy and technology-related equipment
- Other depreciable property that falls within eligible CCA classes
The proposal would also provide immediate expensing for qualifying Canadian development expenses incurred on or after September 15th, 2026. Not all capital investments will qualify. The government has specifically excluded several categories of property from the new permanent measure. These include buildings and additions to buildings in CCA Classes 1 and 3, which include many commercial, industrial and manufacturing buildings. Property in Classes 14 and 14.1, including franchises, licences and goodwill, is also excluded, as is Class 51 property such as regulated natural gas distribution pipelines.
Certain vehicles in Classes 10 and 10.1, as well as property depreciated under Schedules V and VI of the Income Tax Regulations, are also excluded.
For investments that do not qualify for immediate expensing under the Productivity Mega Deduction, existing enhanced first-year deductions under the Accelerated Investment Incentive will continue to apply. Manufacturing and processing buildings, for example, will remain eligible for temporary immediate expensing as per measures introduced in Budget 2025.
Special rules will apply when a business acquires property that has previously been used. Previously used property can qualify for immediate expensing only where the taxpayer, and any non-arm’s-length person, did not previously own the property and where the property was not transferred to the taxpayer through a tax-deferred rollover. Additional restrictions will apply to individuals and partnerships with individual members where immediate expensing could otherwise create or increase a tax loss.
What does the government expect the measure to achieve?
The federal government estimates that the Productivity Mega Deduction will reduce Canada’s marginal effective tax rate on new business investment from 13 per cent to 6.4 per cent.
The government also estimates that the measure will provide approximately $8.5 billion in average annual investment support over 10 years and could generate as much as $22 billion in additional economic output annually over that period. It estimates that employment could increase by as much as 80,000 positions annually in the coming decade. These figures are government projections rather than guaranteed outcomes. The estimated incremental fiscal cost of the Productivity Mega Deduction is approximately $36 billion over five years, beginning in 2026–27.
The Productivity Mega Deduction is one of several recent federal measures aimed at encouraging business investment and improving Canada’s tax treatment of investment.
For businesses considering significant capital expenditures, the Productivity Mega Deduction introduces an important change in the timing of available tax deductions. Companies planning equipment purchases, technology investments or other capital expenditures should review the eligibility requirements, applicable CCA classes and acquisition dates with their tax advisors to determine how the new rules may affect their tax position and capital investment planning.
Separately, the Canada Revenue Agency announced earlier this week that it will prioritize requests for advance income tax rulings involving investments in Canada’s economy of $1 billion or more. The Advance Income Tax Rulings program allows investors to obtain a binding CRA determination of “… how Canadian income tax law will apply to a proposed transaction before committing capital.” The government says the change is intended to provide greater tax certainty for major investment projects.
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