On September 15, 2026, the Canadian federal government announced the "Productivity Mega Deduction" at the first Canada Investment Summit, an incentive that will provide for immediate expensing for the majority of depreciable property, as well as Canadian development expenses (CDE), on a permanent basis. The Government of Canada stated that the purpose of the Productivity Mega Deduction is to boost business investment, enhance certainty and simplicity for businesses, and strengthen Canada's tax competitiveness.
Background
Currently, Canadian taxpayers are allowed to deduct the cost of depreciable capital property (such as machinery, equipment, pipelines, vehicles, computer hardware and systems, etc.) through the capital cost allowance (CCA) regime. These deductions are typically spread over many years, generally intended to mirror the life of the particular asset acquired. In recent years, the Canadian government has accelerated these deductions for certain asset classes. These expansions have typically been time limited and have been restricted to particular asset classes which the government sought to incentivize investment in (such as clean energy). In Budget 2025, the government introduced the "Productivity Super-Deduction", which provided for immediate expensing for certain equipment and buildings used for manufacturing and processing, clean energy generation and energy conservation equipment, zero emission vehicles, patents, data network infrastructure and computer equipment.
Similarly, taxpayers could traditionally deduct 30% annually of their CDE balance, consisting of certain costs incurred to develop oil, natural gas or mineral resource properties in Canada. CDE works alongside its counterparts, Canadian exploration expenses (CEE – 100% deduction), and Canadian oil and gas property expenses (COGPE – 10% deduction) in order to incentivize oil and gas and mining exploration and development in Canada. CDE was also incentivized through the Productivity Super-Deduction, however, also in a time-limited manner (scheduled to be phased out starting after 2030).
The Productivity Mega Deduction
The Productivity Mega Deduction builds on the Productivity Super-Deduction, and expands the depreciable property eligible for immediate expensing to include all capital property that is subject to the CCA regime, with certain exceptions, as discussed below. This incentive will also allow for immediate expensing (100% deduction) for CDE.
Permanent Deduction
The Productivity Mega Deduction is proposed to be permanent (with no sunset date), which signals a significant change to tax policy, and should provide additional certainty to investors projecting long-term returns for capital-intensive projects in Canada. This makes Canada more competitive with the United States, which has offered a 100% first-year tax write-off for qualifying assets since 2025.
Depreciable Property
The draft legislation released along with the announcement provides that the particular property to which immediate expensing applies is defined as "immediate expensing property", which generally includes any depreciable capital property other than "excluded property", that is acquired by the taxpayer on or after September 15, 2026. The property must also meet certain conditions generally aimed at ensuring that the property acquired represents a new investment by the particular taxpayer in Canada (including, in certain cases, an arm's length requirement).
"Excluded property" that is not eligible for immediate expensing includes:
- Certain buildings, and certain additions or alterations to buildings;
- Patents, franchises, concession or certain licenses for a limited period, goodwill and natural gas distribution pipelines;
- Certain vehicles, including passenger vehicles and certain other vehicles that were used for any purpose before being acquired by the taxpayer, or were assembled in a country other than Canada;
- Qualified liquefaction equipment;
- Industrial mineral mines or a right to remove industrial minerals from an industrial mineral mine; and
- Timber limits or rights to cut timber from a limit, other than a timber resource property.
As the exclusions are relatively narrow, most depreciable capital property acquired by taxpayers after September 15, 2026. should meet the requirements, and should be eligible for the Productivity Mega Deduction.
LNG Equipment
Qualified liquefaction equipment used in LNG projects does not qualify as "immediate expensing property" pursuant to its inclusion in the definition of "excluded property", however, an additional allowance applies to such equipment, which has the effect of bringing the total deduction available to 100%. This 100% deduction does not include the expected emissions intensity requirements that were proposed in the 2026 Spring Economic Update (which we discussed here). The draft legislation also confirms that the 10% accelerated CCA available for qualified liquefaction buildings used in eligible liquefaction facilities will continue to apply. Each additional deduction will only be available for income that is attributable to LNG at the facility.
Canadian Development Expenses
In addition to the enhanced deduction for depreciable capital property, the proposals also expand immediate expensing to CDE incurred on or after September 15, 2026, subject to certain conditions. This results in an effective increase in the deduction available for these expenditures from 30% to 100%.
Although the proposals do not amend the rules preventing the issuance of flow-through shares in respect of oil and gas development, the immediate expensing of CDE should be considered in the financing of mining projects through flow-through shares for flow-through share agreements entered into on or after September 15, 2026.
Availability
It should be noted that the draft legislation currently provides that the Productivity Mega Deduction is only available to taxpayers in the first taxation year in which a particular eligible property becomes available for use (or in which the particular CDE is incurred). If the taxpayer does not claim the deduction in the first taxation year, the taxpayer will not be able to claim the Productivity Mega Deduction in a future taxation year. Further, for depreciable property, where the taxpayer does not make a claim under the Productivity Mega Deduction in the first taxation year, but the deduction is available, the taxpayer cannot claim an ordinary CCA deduction for the property in that taxation year. The taxpayer could, however, claim ordinary CCA for the property in future taxation years.
Therefore, taxpayers should consider whether they should claim the Productivity Mega Deduction even if such claim generates a loss, in order to take advantage of the proposals.
Eligible Taxpayers
Any taxpayer can take advantage of the Productivity Mega Deduction, but it should be noted that individuals, and partnerships with a member who is an individual, will not be able to claim the Productivity Mega Deduction to create a loss. Partnerships that have First Nations participants should review, and if applicable, reorganize their structure as First Nations may not be investing in such partnerships through a corporation. In these cases, the Productivity Mega Deduction does not seem to be available. The Productivity Mega Deduction does not modify the application of the "specified energy property" rules (SEP rules) applicable to certain types of depreciable property (including LNG facilities). The SEP rules will generally limit the amount of CCA that can be claimed for certain types of depreciable property to the income of the taxpayer from the applicable depreciable property unless all the participants are principal business entities.
Conclusion
The proposed Productivity Mega Deduction is a significant step towards incentivizing new investment in Canada. The Department of Finance has estimated that the enhanced deductions will reduce Canada's marginal effective tax rate on new business investments from 13% to 6.4%—the lowest of any major economy in the world and less than half that of the United States. This incentive should therefore significantly increase the tax competitiveness of investment in Canada as compared to other jurisdictions.
The Productivity Mega Deduction also follows on the heels of Canada's announcement on September 14, 2026, that the Canada Revenue Agency will prioritize advance tax ruling requests for investments in Canada of C$1 billion or more, which was aimed at providing greater tax clarity and predictability for major investors.
Bennett Jones has experience in energy, construction, infrastructure, mining and manufacturing project development. To discuss the potential opportunities and implications of the Productivity Mega Deduction, please contact any member of the Bennett Jones Tax practice group.
