Canada’s Productivity Mega Deduction: what businesses need to know

The proposed measure could materially accelerate tax deductions and improve near-term cash flow for businesses investing in eligible property in Canada.

On September 15, 2026, the federal government released draft legislation for a proposed measure consisting of two principal components. First, taxpayers would be permitted to deduct the full cost of a significantly broader range of capital investments in the year the property becomes available for use, rather than claiming deductions over time under Canada’s capital cost allowance (CCA) regime. Second, taxpayers would be permitted to immediately deduct qualifying Canadian development expenses (which are expenses relating to oil & gas and mineral resource extraction) incurred on or after September 15, 2026. Together, these measures are referred to by the government as the “Productivity Mega Deduction”.

The Productivity Mega Deduction builds on accelerated depreciation measures previously announced by the federal government, including the Productivity Super Deduction introduced in Budget 2025. The new proposal would significantly broaden the scope of assets eligible for immediate expensing and make those benefits permanent.

Why does this matter?

Accelerating CCA deductions does not change the total amount taxpayers may deduct over the life of an asset, but it allows those deductions to be claimed earlier. This can reduce tax payable in the initial years of an investment, improve cash flow and lower the after-tax cost of eligible projects.

The federal government estimates that the proportion of depreciable assets eligible for immediate expensing would increase from approximately 15% to 65%.

What investments may qualify?

The proposed rules would provide immediate expensing for a significantly expanded range of depreciable property acquired on or after September 15, 2026. Examples identified by the government include:

• software and computer equipment;
• telecommunications and fibre-optic infrastructure;
• research and development assets;
• mining property;
• ·oil and gas pipelines;
• aircraft and certain transportation assets;
• patents; and
• ·various other productivity-enhancing investments.

Qualifying Canadian development expenses incurred in the oil & gas and mineral resource extraction industries would also be immediately deductible, rather than added to the taxpayer’s cumulative Canadian development expense pool and deducted over time.

Can “used property” qualify?

One notable feature of the draft legislation is that immediate expensing is not limited to newly manufactured assets.

In certain circumstances, previously used property acquired from an arm’s-length party may also qualify for immediate expensing. However, various restrictions are intended to prevent the benefit from applying to property that has been recycled within a related group or transferred on a tax-deferred basis.

This aspect of the proposal may be particularly relevant in acquisition, infrastructure and expansion transactions involving existing operating assets.

What property is excluded?

The draft legislation excludes several categories of property, including:

• certain buildings in Classes 1(q) and 3(k);
• goodwill and other Class 14 and 14.1 property;
• certain natural gas distribution pipelines (Class 51);
• certain mining and timber-related properties; and
• many passenger vehicles and other specified vehicles that do not satisfy particular conditions.

Certain excluded assets may continue to benefit from existing accelerated depreciation measures introduced under the Productivity Super Deduction and other previously announced incentives.

Special rules apply to vehicles included in Classes 10 and 10.1. Certain passenger vehicles, taxis, vans and pick-up trucks would generally qualify only if they were assembled in Canada and had not previously been used. A taxpayer may also elect to exclude Class 10.1 property from immediate expensing.

Canadian development expenses

The proposal would permit taxpayers to deduct 100% of qualifying Canadian development expenses incurred on or after September 15, 2026. Generally, this is a category of expenses incurred to develop a Canadian resource property after the exploration stage has largely been completed. This proposal should broaden the scope of projects that can be financed with flow-through shares, as investors will be able to claim a deduction equal to 100% of their investment in the year rather than 30% under the current rules.

The immediate deduction would generally not be available for expenses acquired through the successor rules or for costs relating to Canadian resource property acquired from a non-arm’s- length person or partnership. For expenses renounced under a flow-through share arrangement, the relevant agreement must have been entered into on or after September 15, 2026.

Other notable limitations

The deduction would be available to corporations, individuals and partnerships. However, where the taxpayer is an individual or a partnership with one or more individual members, the deduction would be limited to income from the business or property in which the asset is used. It could not be used to create or increase a loss from that source.

Eligible corporate partnerships would not be subject to that income limitation.

Practical considerations for businesses

Businesses planning capital expenditures or asset acquisitions in Canada should consider:

• whether proposed investments fall within an eligible CCA class;
• whether the acquisition date and available-for-use timing satisfy the proposed rules;
• whether used property meets the arm’s-length ownership requirements;
• whether any property will be acquired through a tax-deferred transaction;
• how immediate expensing would affect projected taxable income and cash taxes; and
• how the deduction would interact with investment tax credits and other available incentives.

Transaction documents and asset registers may also need to separately identify eligible and excluded property, particularly in acquisitions involving multiple asset classes.

The proposals remain in draft form and may change before enactment. Businesses considering significant Canadian investments should assess the potential application of the rules as part of their tax modelling, transaction structuring and capital expenditure planning.

Looking ahead

While a number of technical and implementation questions remain, the Productivity Mega Deduction has the potential to materially improve the tax economics of many Canadian capital projects.

Businesses planning significant investments in Canada should consider whether anticipated expenditures may qualify and whether any changes to project timing or transaction structures may be beneficial in light of the proposed rules.