New Productivity Mega Deduction to allow 100 per cent expensing of expanded range of capital assets
The federal government yesterday announced a significant new measure that will allow the immediate expensing of a broader range of depreciable property. The Productivity Mega Deduction builds on Budget 2025’s Productivity Super-Deduction (PSD) and is proposed as a permanent measure. Draft legislative proposals were released alongside the announcement, but the measure has not yet been enacted.
The expanded deduction significantly broadens the categories of assets eligible for immediate expensing under the earlier PSD, and will include everything from machinery and equipment, to patents, computers and data network infrastructure. Taxpayers will be permitted to fully deduct the cost of eligible investments in the year they become available for use. Qualifying depreciable property acquired on or after September 15th, 2026, would be eligible for the expanded deduction. Ottawa estimates the incremental cost of the measure at $36 billion over five years, beginning in 2026-27.
As the government announcement notes, “Assets not eligible for immediate expensing will continue to receive an enhanced first-year deduction under the Accelerated Investment Incentive.” Some asset classes excluded under the new measure include buildings (and additions to buildings) included in Capital Cost Allowance classes 1 and 3 (which includes manufacturing and processing facilities); property such as franchises, licenses and goodwill; and class 51 property such as regulated natural gas distribution pipelines. Certain vehicles are also excluded from the deduction.
To qualify, eligible property “… that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer would be eligible for immediate expensing only if both of the following conditions are met:
- neither the taxpayer nor a non-arm’s-length person previously owned the property; and
- the property has not been transferred to the taxpayer on a tax-deferred ‘rollover’ basis”
Amid an increasingly acrimonious trade war with the U.S., and lacklustre productivity that has rendered Canada an economic laggard among many of its OECD peers, the Carney Liberals are aiming to boost long-term (foreign and domestic) investment and growth across the economy. Spurring capital expenditures in everything from technology to machinery is seen as a necessary first step. This policy shift is long overdue, but could fall short of producing the intended results.
As noted in a recent C.D. Howe report on Canada’s pressing need for domestic capital investment, “In total, non-residential business investment per worker [in Canada] is nearly a quarter below its 2014 peak. Over the past decade, investment in new capital has lagged the rate at which existing capital wears out and goes obsolete. That means our capital stock per worker is actually declining.”
Ottawa predicts that the new measure will reduce the marginal effective tax rate (METR) on business investment to 6.4 per cent from 13 per cent in 2025, when new accelerated capital cost allowance measures were introduced. While the projected METR reduction is significant, it is driven by enhanced capital cost recovery measures and assumes taxpayers can benefit from the available deductions. The underlying corporate income tax rates themselves have not changed. As a result, the government’s competitiveness claim is based largely on accelerated deductions rather than a broad-based reduction in business taxation. Ottawa’s optimistic prediction is for the Productivity Mega Deduction to generate average economic output of around $22 billion annually and as many as 80,000 new jobs in the next decade.
It comes on the heels of the announcement this week that the Canada Revenue Agency has been instructed to immediately prioritize advance income tax ruling requests on investments of $1 billion or more under the Advance Income Tax Rulings program. The move is intended to provide major investors with greater clarity around Canadian tax treatment of prospective investments.
Overall, the Productivity Mega Deduction is a potentially lucrative incentive for businesses undertaking significant capital investments, but the degree to which it will improve productivity is anything but certain. The practical benefit of the measure will depend on the nature and timing of a taxpayer’s capital expenditures and whether those investments qualify for immediate expensing. Businesses with limited capital expenditure requirements, or investments concentrated in excluded asset categories, may realize comparatively little benefit.
To boost our growth per capita, the government will need to embrace sweeping reforms to improve Canada’s tax competitiveness. A major review of the Income Tax Act to reduce the tax burden and simplify tax compliance would help position this country as a go-to option for overseas capital. As such, the Productivity Mega Deduction significantly expands the range of qualifying assets, but why aren’t all major capital investments included in the measure? If we want businesses to modernize and innovate with new investments in research and development, why is the government choosing which assets should qualify for preferred tax treatment?
Ottawa estimates the measure will cost $36 billion over five years. The government expects the resulting increase in business investment, productivity and economic growth to generate benefits that will substantially exceed the fiscal cost of the measure. Whether those projections ultimately materialize remains uncertain. At a time when federal deficits remain elevated and Canada’s fiscal position continues to deteriorate, questions remain regarding both the financing of the measure and whether it will generate the anticipated return on investment.
Armando Iannuzzi, Co-Managing Partner
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