Ottawa introduces ‘Mega Deduction’ for capital investments

Key Takeaways:

• The federal government has introduced the permanent Productivity Mega Deduction, allowing Canadian businesses to immediately write off 100 percent of the cost for nearly two-thirds of all depreciable capital investments.
• The $36-billion five-year measure reduces Canada’s marginal effective tax rate on new business investment to 6.4%, making it the lowest rate among G7 countries.
• Qualifying property acquired on or after September 15, 2026, encompasses machinery, software, clean tech, and transport infrastructure, while general commercial buildings and goodwill remain excluded.

The Whole Story:

The federal government has launched the Productivity Mega Deduction, a permanent tax policy allowing Canadian businesses to immediately write off 100% of the cost of new capital investments. Introduced to spur private sector investment and address long-standing national productivity challenges, the measure replaces traditional multi-year depreciation schedules with direct, first-year tax write-offs for qualifying property acquired on or after September 15, 2026.

The change could substantially change finances for construction businesses. For example, instead of writing off heavy machinery over 5 to 10 years through multi-year depreciation schedules, construction firms can now write off 100% of the cost in the first year for equipment acquired and put to use.

The policy represents a major expansion of the temporary Productivity Super-Deduction introduced in Budget 2025, increasing the proportion of eligible capital assets from 15% to approximately two-thirds of all business capital spending across Canada. Eligible property encompasses a broad range of operational assets, including manufacturing machinery, advanced computing hardware, software, telecommunications networks, zero-emission vehicles, research and development equipment, clean technology, rail track, bridges, and resource development expenses.

The Department of Finance estimates the incremental fiscal cost of the tax relief at $36 billion over five years. According to federal economic modeling, the policy will inject an average of $8.5 billion annually in tax savings into the economy, which is projected to generate up to $22 billion in additional annual GDP and support up to 80,000 long-term jobs over the next decade. Furthermore, the deduction lowers Canada’s overall Marginal Effective Tax Rate (METR) on new business investment from 13.0% down to 6.4%—cutting the rate in half and establishing the lowest tax burden on new investment among G7 nations, well below the U.S. rate of 16.9% and the OECD average of 19%.

The permanent deduction applies to newly acquired assets made available for use on or after the September 15, 2026 effective date. Certain asset classes remain excluded from the permanent write-off, including general commercial office buildings, franchises, licenses, goodwill, regulated natural gas distribution pipelines, and non-arm’s-length used property transfers. However, manufacturing and processing buildings will continue to qualify for temporary immediate expensing under earlier budget rules, while Class 47 natural gas liquefaction equipment qualifies for retroactive 100% write-offs dating back to assets acquired on or after November 4, 2025.