Productivity Mega Deduction: Key tax measures announced at the Canada Investment Summit

Key takeaways

• Canada has proposed a permanent Productivity Mega Deduction that would allow eligible taxpayers to deduct up to 100% of the cost of eligible depreciable capital property acquired on or after September 15, 2026.
• Eligible Canadian development expenses (“CDE”) would also qualify for immediate expensing.
• The measure would increase the share of capital investment eligible for immediate expensing from roughly 15% to approximately two-thirds.
• Most buildings, goodwill and certain other assets are excluded from the Productivity Mega Deduction.
• The Canada Revenue Agency (“CRA”) will prioritize advance income tax ruling requests relating to investments of $1 billion or more in Canada.

On September 15, 2026, at the first-ever Canada Investment Summit, the Government of Canada announced a new permanent “Productivity Mega Deduction” that would allow the cost of a broad range of depreciable properties and Canadian development expenses to be deducted immediately. Since Canada already has a “productivity super-deduction”, the new deduction is a “mega deduction”. An accompanying backgrounder (“Backgrounder”) and draft legislative proposals to amend the Income Tax Act (“ITA”) and regulations thereunder (“Regulations”) were released on the same date.^[1] The CRA will also prioritize advance income tax ruling requests relating to investments of $1 billion or more in Canada.

As proposed, the Productivity Mega Deduction would allow taxpayers to deduct 100% of the cost of eligible depreciable capital property acquired on or after September 15, 2026 in the year the property becomes available for use in accordance with the “available for use” rules in the ITA, and 100% of eligible CDE incurred on or after September 15, 2026. Currently, capital cost allowance (“CCA”) is claimed on the undepreciated capital cost (“UCC”) of depreciable property of a prescribed class at a rate set out in the Regulations, generally on a declining balance basis. CDE is ordinarily added to a taxpayer’s cumulative CDE and amortized at a 30% rate on a declining balance basis, subject to an additional deduction for re-accelerated CDE.

According to the Backgrounder, the new measures build on the Productivity Super-Deduction announced in the 2025 federal budget (“Budget 2025”) and are expected to increase the percentage of capital investments eligible for immediate expensing from approximately 15% to approximately two-thirds.

Unlike other enhanced CCA measures enacted in recent years that are scheduled to phase out over time, the Productivity Mega Deduction is intended to be permanent to boost business investment, enhance certainty and simplicity for businesses, and strengthen Canada’s tax competitiveness.

In short, the Productivity Mega Deduction is an immediate expensing measure that accelerates the timing of deductions for eligible capital property and certain CDE; it does not operate as a refundable tax credit, grant, or standalone investment tax credit and does not otherwise change the character of the underlying expenditure.

Our observations: What does the Productivity Mega Deduction mean for investment?

The Backgrounder describes the effect of the Productivity Mega Deduction on the marginal effective tax rate (“METR”). METR is the tax imposed on an additional dollar of business investment and provides a comparable indicator of tax competitiveness across countries by accounting for national and subnational corporate tax rates, investment tax credits, capital cost allowances, and sales and capital taxes.

After taking into account accelerated CCA measures announced in Budget 2025 and the Productivity Mega Deduction, the Backgrounder states that Canada’s METR will be 6.4% as compared to 16.9% for the United States.

While this reduction in Canada’s METR is significant, taxpayers benefit from enhanced tax deductions only to the extent they are paying cash taxes. For many large infrastructure projects, taxable income may not arise for many years. Accelerated deductions for CCA may not have much effect in raising the capital needed for these projects.

Except for flow-through shares in the mining sector, the Government appears to have little appetite for allowing investors to benefit from deductions that another taxpayer cannot use. This is reflected in the restrictions applicable to taxpayers that are not corporations or eligible partnerships; they cannot use the Productivity Mega Deduction to create a loss that can be deducted against income from other sources.

In our view, if the Government wishes to increase the pool of capital available for productivity-enhancing investment, it should also consider a mechanism like the flow-through share regime to permit deductions that would not be immediately used to be flowed out to investors. The mechanism could be of general application or made more targeted to “approved projects” that are of national importance.

What property qualifies for the Productivity Mega Deduction?

For the cost of a property to be eligible for immediate expensing, the property must be “immediate expensing property.” A property will be an immediate expensing property if:

• It is a depreciable property;
• It is not “excluded property”;
• It is acquired by the taxpayer on or after September 15, 2026; and
• One of the following conditions is met:
• The property is “new” (i.e., has not been used for any purpose before it was acquired by the taxpayer) and no amount has been deducted as CCA or a terminal loss in respect of the property by any person or partnership for a taxation year ending before the time the property was acquired by the taxpayer; or
• The property was neither: 
• acquired in circumstances where: 
  • (i) the taxpayer was deemed to have been allowed or deducted CCA in respect of the property in computing income for previous taxation years, or
  • (ii) the UCC of depreciable property of a prescribed class of the taxpayer was reduced by an amount determined by reference to the amount by which the capital cost of the property to the taxpayer exceeds its cost amount, nor
• previously owned or acquired by the taxpayer or by a person or partnership with which the taxpayer did not deal at arm’s length at any time when the property was owned or acquired by the person or partnership.  

Effectively, if the property is not “new” property, the taxpayer cannot have acquired it from a person with whom the taxpayer did not deal at arm’s length or on a tax-deferred rollover basis.

In general, the cost of “new” property does not include amounts incurred by any person or partnership before September 15, 2026.An exception is made where, generally, the property is acquired from a “transferor” with whom the taxpayer or partnership was dealing at arm’s length and the property was inventory of the transferor.

For example, a taxpayer who purchased a property on October 1, 2026, from an arm’s length vendor who held it as inventory may include the cost in determining UCC of immediate expensing property even though that vendor may have acquired the property before September 15, 2026. It is not clear how this rule applies to a long-term construction project that straddles September 15, 2026.

Excluded property is not eligible for immediate expensing. Excluded property includes:

• buildings (including additions and alterations to buildings) included in paragraph (q) of Class 1 or paragraph (k) of Class 3;
• property included in Class 14 which, subject to certain exceptions, includes a franchise, concession or licence for a limited period in respect of property;
• property included in Class 14.1 which includes goodwill;
• property included in Class 51, including certain natural gas distribution pipelines;
• an “excluded vehicle” which includes certain vehicles in Class 10 and Class 10.1; however, new passenger vehicles that are assembled in Canada are not excluded property;
• a passenger vehicle in Class 10.1 (i.e., a vehicle that, in 2026, has a cost over $39,000) that would otherwise not be excluded property if the taxpayer elects to treat it as excluded property;
• property that is qualified liquefaction equipment (see discussion below);
• an industrial mineral mine or right to remove industrial minerals from an industrial mineral mine; and
• a timber limit or a right to cut timber from a limit, other than a timber resource property.

Although most buildings are excluded property for the purposes of the Productivity Mega Deduction, “eligible manufacturing buildings” continue to qualify for the temporary immediate expensing announced in Budget 2025.  The measure provides a 100% deduction rate on the cost of eligible manufacturing buildings and additions acquired on or after November 4, 2025 that are first used for manufacturing before 2030. This incentive is phased out over a four-year period between 2030 and 2033. If the property is first used for manufacturing in 2030 or 2031, the rate drops to 75%. The rate drops to 55% if the property is first used for manufacturing in 2032 or 2033. Thereafter, the rate is 6%.

Property that does not qualify for the Productivity Mega Deduction may still qualify for the Productivity Super-Deduction, including the reinstated Accelerated Investment Incentive announced in Budget 2025.

Who can claim the Productivity Mega Deduction?

A corporation or “eligible partnership” can deduct an amount up to the UCC of immediate expensing property that became available for use in the year. The deduction can create a loss that can be deducted from income from other sources.

An eligible partnership is a partnership of which all the members are corporations, other eligible partnerships or a combination of corporations and eligible partnerships.  A partnership that has an individual or trust as a partner (directly or through one or more other partnerships) will not be an eligible partnership.

For other taxpayers, including trusts and individuals, the deduction cannot exceed the income for the taxation year (before claiming any CCA) in which the immediate expensing property became available for use from the business or property in which the property is used. Thus, other taxpayers can’t use the Productivity Mega Deduction to create a loss that can be deducted against income from other sources.

When can the Productivity Mega Deduction be claimed?

The 100% deduction is only available in the year in which the immediate expensing property becomes available for use.

A taxpayer may choose to deduct less than 100% of the cost of an immediate expensing property in the year that such property becomes available for use. In that case, regular CCA rates will apply in future years.

For example, if a taxpayer deducts only 80% of the cost of immediate expensing property in the year such property becomes available for use, the taxpayer is not entitled to claim the remaining 20% in the next year. Instead, the unclaimed amount should be added to the UCC of the relevant class and may be deducted in subsequent years under the regular CCA regime, subject to the restrictions set out in the ITA.

If a deduction under the Productivity Mega Deduction is available in respect of an immediate expensing property, the taxpayer may not deduct any other amount otherwise permitted under CCA Regulations in respect of the property for the year. This prevents taxpayers from claiming multiple incentives on the same property and, in the case of taxpayers that are not corporations or eligible partnerships, from circumventing the restriction that CCA claimed in respect of immediate expensing property cannot be claimed to create a loss.

Which Canadian development expenses qualify?

CDE includes the costs of drilling, converting or completing an oil or gas well in Canada, the costs of developing a mine in Canada before production, the costs of sinking or excavating a mine shaft, main haulage way or similar underground work after the mine comes into production and the cost of certain “Canadian resource property.”

A taxpayer does not deduct CDE directly but adds it to the taxpayer’s “cumulative CDE” account. In general, a taxpayer may deduct in a taxation year an amount equal to 30% of the taxpayer’s “cumulative CDE” account at the end of the year. However, most CDE incurred after 2024 and before 2035 would constitute “re-accelerated CDE”, and an additional 15% could be claimed for taxation years through 2029 and 7.5% from 2030.

The Productivity Mega Deduction would increase the deduction for “immediate Canadian development expense” (“immediate CDE”) up to 100%. To be an immediate CDE, the cost or expense incurred by the taxpayer:

• must be incurred on or after September 15, 2026;
• must be a CDE at the time it is incurred;
• cannot be a cost in respect of a Canadian resource property acquired by the taxpayer, or a partnership in which the taxpayer is a member, from a person or partnership with which the taxpayer does not deal at arm's length; and
• cannot be an expense in respect of which the taxpayer is a successor under the successor corporation rules.

Immediate CDE also includes an amount that is deemed to be CDE of a taxpayer because it is renounced to the taxpayer under a flow-through share agreement if the agreement is entered into on or after September 15, 2026.

Expenses incurred on or after September 15, 2026 that would otherwise have been treated as “re-accelerated CDE” would instead qualify as “immediate CDE”.

How does the Productivity Mega Deduction affect liquefied natural gas facilities?

Before the Productivity Mega Deduction

Accelerated CCA for liquefied natural gas (“LNG”) equipment and related buildings originally expired at the end of 2024. Those measures increased the CCA rate for liquefaction equipment from 8% to 30% and for non-residential buildings used in LNG facilities from 6% to 10%.

The equipment or buildings had to be used in an “eligible liquefaction facility”, defined as a self-contained system located in Canada (including buildings, structures and equipment) that is used or intended to be used for the purpose of liquefying natural gas.

Budget 2025 proposed reinstating accelerated CCA for LNG equipment and related buildings. It proposed that two levels of support would be available, depending on the emissions performance of the facility:

• A facility in the top 25% in terms of emissions performance would be eligible for accelerated CCA with the same rates under the previous measures (30% for liquefaction equipment and 10% for non-residential buildings used in LNG facilities); and
• A facility in the top 10% in terms of emissions performance would be eligible for accelerated CCA of 50% for liquefaction equipment and 10% for non-residential buildings used in LNG facilities.

The Budget 2025 measures would apply to property acquired on or after November 4, 2025 and before 2035.

Subsequently, the Spring Economic Update 2026 proposed that for an LNG facility to be eligible for accelerated CCA, the expected emissions intensity of the facility’s on-site liquefaction activities, measured in tonnes of carbon dioxide equivalent per tonne of LNG produced annually (“tCO₂e/tLNG”), would have to be less than or equal to 0.20 tCO₂e/tLNG. The accelerated CCA would be 50% for liquefaction equipment and 10% for non-residential buildings used in a “certified” LNG facility (i.e., one in which the Minister of Energy and Natural Resources (“NR Can”) had certified that the facility met the expected emissions intensity requirement).

To be certified, it was contemplated that a LNG facility owner would submit to NR Can a one-time report prepared by a qualified third-party Canadian engineering firm, including a front-end engineering design study and setting out the expected emissions intensity of the LNG facility. Based on the expected emissions intensity of the facility, as determined from the report, NR Can would certify whether the facility qualified.

The additional CCA could only be claimed against income of the taxpayer that was attributable to the liquefaction of natural gas at that facility.

The Spring Economic Update 2026 proposals were reflected in draft legislation released on July 23, 2026.

Productivity Mega Deduction

Under the Productivity Mega Deduction, additional CCA can be claimed in respect of Class 47 liquefaction equipment used in an “eligible liquefaction facility”, bringing the effective CCA rate to 100% (up from the 50% rate proposed in the Spring Economic Update 2026). This allowance may only be claimed against income attributable to natural gas liquefaction activities carried out at that facility.

As immediate expensing for Class 47 liquefaction equipment used in LNG facilities is a modification of the Productivity Super-Deduction proposed in Budget 2025, it is available for eligible assets acquired on or after November 4, 2025.

The 10% accelerated CCA rate announced in the Spring Economic Update 2026 for Class 1 non-residential buildings used in LNG facilities would continue to apply. The accelerated CCA may only be claimed against income attributable to natural gas liquefaction activities carried out at that facility.

The Backgrounder states that LNG facilities would not be required to satisfy the expected emissions intensity requirement proposed in Spring Economic Update 2026 to qualify for either immediate expensing for Class 47 liquefaction equipment or the accelerated CCA for eligible Class 1 non-residential buildings. This is reflected in the draft Regulations, which refer to an “eligible liquefaction facility” rather than a “certified liquefaction facility”.

These changes should expand eligibility for the enhanced deduction by removing the specified emissions-intensity requirements that previously applied to LNG facilities. The elimination of the certification process should also provide LNG facility owners with greater certainty and reduce the administrative burden associated with claiming the enhanced deduction.

Advance tax rulings

On September 14, 2026, the Minister of Finance and National Revenue announced that the CRA will prioritize advance income tax ruling requests relating to investments of $1 billion or more in Canada.

The certainty provided by such rulings is expected to reduce risks, inform financing decisions, and give investors the confidence they need to move major projects forward in Canada. This initiative builds on the measure announced in the Spring Economic Update 2026 to prioritize requests for advance income tax rulings related to large-scale, nation-building projects and other investments that advance Canada's economic priorities, including productivity-enhancing investments and clean economy initiatives.

The Productivity Mega Deduction would significantly expand immediate expensing in Canada and could improve the economics of major capital investments. Businesses considering significant investments should assess whether planned expenditures qualify for immediate expensing and how the proposed measure interacts with existing accelerated depreciation incentives. Members of our Tax Group are available to help businesses evaluate the opportunities and implications arising from these proposals.

^[1] There is, however, no assurance that the legislative proposals will be enacted as proposed or at all.