Canada Proposes Permanent 'Productivity Mega Deduction' to Boost Business Investment
The Government of Canada has introduced the Productivity Mega Deduction, a permanent tax measure allowing immediate expensing for two-thirds of capital asset investments. The initiative aims to lower Canada's marginal effective tax rate to 6.4%, surpassing U.S. competitiveness, with projected costs of $36 billion over five years.
The Government of Canada has proposed the implementation of the Productivity Mega Deduction, a new permanent tax measure designed to provide immediate expensing for a broad range of depreciable property. This initiative represents a significant shift in fiscal policy, aiming to enhance business investment and improve Canada’s standing as a competitive jurisdiction for new business ventures.
Under the new deduction, immediate expensing will apply to approximately two-thirds of investment in capital assets acquired on or after September 15, 2026. This is a substantial increase from the previous Productivity Super-Deduction, which covered only about 15% of such investments. The measure builds upon announcements made in Budget 2025 and the Spring Economic Update 2026.
Tax Competitiveness and Economic Impact
A primary objective of the Productivity Mega Deduction is to reduce Canada's marginal effective tax rate (METR) for businesses. The government projects that this measure will lower the METR from 13.0% to 6.4%. As of 2026, the United States reports an METR of 16.9%, while the OECD average stands at 19.0%. By achieving a 6.4% rate, Canada positions itself as more tax-competitive than the U.S. across major sectors.
The estimated incremental fiscal cost of the deduction is $36 billion over five years, beginning in the 2026-27 fiscal year. However, the government anticipates that the measure will stimulate economic activity, potentially generating up to $22 billion in additional annual economic output over a ten-year horizon. Furthermore, it is expected to support long-term employment increases of up to 80,000 jobs annually.
Eligibility and Exclusions
Eligible property under the Productivity Mega Deduction includes most depreciable property acquired on or after September 15, 2026. However, several categories are excluded from this permanent immediate expensing. These exclusions include:
- Buildings in Capital Cost Allowance (CCA) classes 1 and 3.
- Property in classes 14, 14.1, and 51.
- Certain vehicles.
- Property depreciated under Schedule V and VI.
Notably, manufacturing and processing buildings are not eligible for the Productivity Mega Deduction due to their classification under Class 1. Despite this exclusion, these buildings remain eligible for temporary immediate expensing measures announced in Budget 2025.
Specific Treatment for LNG Facilities
The proposal includes specific provisions for Liquefied Natural Gas (LNG) facilities. Class 47 liquefaction equipment will receive immediate expensing via an additional allowance for assets acquired on or after November 4, 2025. Importantly, this treatment does not require the assets to satisfy emissions intensity requirements.
By making expensing permanent, the government aims to provide greater certainty for long-term investment decisions, lower the cost of capital for businesses, and encourage investment in modern machinery and technology. The ultimate goal is to catalyze an additional $1 trillion in investment.