The federal government has introduced a proposed Productivity Mega Deduction that would let Canadian businesses immediately deduct the full cost of a much wider range of capital investments.
The measure, announced October 1, 2026, is designed to encourage companies to purchase equipment, adopt technology, expand facilities and build infrastructure in Canada.
The Department of Finance says the proposal would make immediate expensing permanent for most eligible depreciable property acquired on or after September 15, 2026, subject to the legislative process and detailed eligibility rules.
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What the Productivity Mega Deduction would change
The Productivity Mega Deduction would expand the share of capital assets eligible for immediate expensing from roughly 15 per cent to more than 65 per cent.
Under immediate expensing, a business can deduct the full cost of an eligible investment in the year the asset becomes available for use instead of claiming deductions over several years.
The government says the change would apply to a broad range of assets, including fibre-optic cable, greenhouses, mining property, oil and gas pipelines, software, research and development, computer equipment, aircraft, vehicles, patents, rail track, bridges and roads.
Assets that do not qualify would continue to receive the existing enhanced first-year deduction available under the Accelerated Investment Incentive.
How the tax treatment could affect businesses
The proposed deduction would reduce the time businesses wait to recover investment costs through the tax system.
That could improve cash flow for companies making large purchases, particularly businesses investing in machinery, digital systems, transportation equipment, energy infrastructure or resource projects.
The Department of Finance estimates that the measure would lower Canada’s marginal effective tax rate on new business investment from 13 per cent to 6.4 per cent.
The department compares that proposed rate with a 16.9 per cent rate in the United States and a 19 per cent average across the Organisation for Economic Co-operation and Development.
Those comparisons measure the tax burden on an additional dollar of investment after accounting for corporate tax rates, deductions, tax credits and other investment-related measures.
| Measure | Proposed result |
|---|---|
| Assets eligible for immediate expensing | More than 65 per cent of capital assets |
| Canada’s marginal effective tax rate | 6.4 per cent |
| Estimated fiscal cost | $36 billion over five years beginning in 2026-27 |
| Estimated annual output increase over the long term | Up to about $22 billion |
Cost and expected economic impact
The government estimates the Productivity Mega Deduction would have an incremental fiscal cost of $36 billion over five years beginning in the 2026-27 fiscal year.
Finance officials estimate that the measure could provide an average of $8.5 billion in annual investment support over a 10-year period.
Based on the government’s modelling, the additional investment could generate between 1.4 and three times the federal fiscal cost in economic activity.
The department says the proposal could eventually support an increase of up to 80,000 jobs annually, although that estimate depends on businesses responding to the incentive and on broader economic conditions.
The measure forms part of the federal government’s wider effort to attract investment, raise productivity and support domestic capacity in sectors such as energy, critical minerals, manufacturing, transportation, artificial intelligence and defence.
Important exclusions and restrictions
The proposal would not provide immediate expensing for every type of business property.
Buildings and additions to buildings in specified capital cost allowance classes would be excluded from the permanent measure.
Franchises, licences, goodwill, certain vehicles and property depreciated under specified regulatory schedules would also remain outside the main immediate-expensing provision.
Manufacturing and processing buildings would continue to rely on temporary immediate-expensing treatment announced through Budget 2025 rather than the new permanent deduction.
Special rules would apply to previously used property, transfers involving related parties and certain arrangements involving individuals or partnerships.
The backgrounder also outlines a separate treatment for liquefaction equipment used in liquefied natural gas facilities, including an allowance that could raise the capital cost allowance rate for eligible equipment to 100 per cent.
What happens next
The federal government has released draft legislative proposals and related technical information, but the tax changes still require implementation through the legislative process.
Businesses considering major purchases will need to review the final legislation, the effective-date rules and the Canada Revenue Agency’s administrative guidance before relying on the proposed treatment.
The government says the measure builds on the temporary Productivity Super-Deduction announced in Budget 2025.
It also follows the September 2026 Canada Investment Summit, where federal officials said investors and financial institutions had announced nearly $500 billion in new investment commitments involving Canadian businesses and infrastructure.
The final impact will depend on how quickly companies make new investment decisions, whether projects proceed as planned and how the deduction interacts with provincial tax rules and other federal credits.
Frequently Asked Questions
What is the Productivity Mega Deduction?
It is a proposed federal tax measure that would allow businesses to immediately deduct the full cost of a much wider range of eligible capital investments in the year those assets become available for use.
When would the Productivity Mega Deduction apply?
The government proposes that the permanent immediate-expensing rules apply to most eligible depreciable property acquired on or after September 15, 2026, subject to legislation and final rules.
Which investments could qualify?
Potentially eligible investments include software, computer equipment, research and development, fibre-optic cable, mining property, pipelines, aircraft, vehicles, patents, rail track, bridges and roads.
Would every building qualify for immediate expensing?
No. Certain buildings and additions to buildings would be excluded, while some manufacturing and processing buildings would continue under temporary treatment announced in Budget 2025.
How much would the measure cost the federal government?
The Department of Finance estimates an incremental fiscal cost of $36 billion over five years beginning in 2026-27.
Fact-Checked: Key dates, eligibility details, fiscal estimates and economic projections were checked against Department of Finance Canada and Prime Minister of Canada information.
Disclaimer: The Productivity Mega Deduction is a proposed tax measure, and businesses should confirm the final legislation and professional tax guidance before making investment decisions.