Canada halves its tax rate on new business investment
Ottawa will let businesses write off most new equipment and software in the year they start using it, permanently. Here is what Finance announced on September 15 and which assets it leaves out, with the steps still ahead before the rules become law.
On September 15, 2026 Ottawa proposed the Productivity Mega Deduction, permanent immediate expensing for most depreciable property acquired from that day. Finance Canada says it cuts the marginal effective tax rate on new business investment from 13.0 to 6.4 percent, against 16.9 in the United States. Buildings, goodwill and franchises are excluded, and the rules are still draft legislation.
What was announced
Prime Minister Mark Carney announced the Productivity Mega Deduction at the first Canada Investment Summit in Toronto on September 15, 2026. The Department of Finance released draft legislation the same day.
The measure lets a business deduct the full cost of most depreciable property in the year the property becomes available for use. Depreciable property is the equipment, vehicles, software and other assets a business writes off over time, and until now that write off was spread over many years.
The measure is permanent and applies to property acquired on or after September 15, 2026. Finance puts its cost at $36 billion over five years, beginning in 2026-27.
Finance says about two thirds of investment in capital assets would qualify. The Productivity Super-Deduction in Budget 2025 reached about 15 percent.
The rate, before and after
The headline figure is the marginal effective tax rate, or METR. It measures the tax on the return from one more dollar of new business investment, after the corporate rate and the deductions and credits that come with the investment. Economists use it to compare how heavily countries tax new investment.
| Jurisdiction | METR |
|---|---|
| Canada, before Budget 2025 | 15.4 percent |
| Canada, after the Spring Economic Update 2026 | 13.0 percent |
| Canada, with the Productivity Mega Deduction | 6.4 percent |
| United States, 2026 | 16.9 percent |
| OECD average, excluding Canada | 19.0 percent |
| G7 average, excluding Canada | 26.0 percent |
The Prime Minister’s release calls the new rate the lowest of any major economy and less than half the American one. The figures are Finance’s own estimates for 2026.
Finance also published the rate industry by industry. The sector figures for the Productivity Mega Deduction show the largest falls in transportation and storage and in agriculture and fishing.
What qualifies
Almost all capital property that falls under the capital cost allowance rules qualifies. Capital cost allowance, or CCA, is the tax schedule for writing off an asset over its life, and it sorts assets into numbered classes.
The announcement names machinery and equipment, computers, software, patents, aircraft and vehicles. It also covers infrastructure, among it fibre optic cable, pipelines, rail track, bridges and roads.
Canadian development expenses, the costs of developing oil, gas and mining properties, also qualify when incurred on or after September 15, 2026.
What is left out
- Buildings in capital cost allowance classes 1 and 3, including additions to them. Manufacturing and processing buildings keep the temporary immediate expensing announced in Budget 2025.
- Goodwill, franchises and licences, in classes 14 and 14.1.
- Passenger vehicles and taxis in classes 10 and 10.1, where they were used before purchase or assembled outside Canada.
- Regulated natural gas distribution pipelines, in class 51.
- Timber limits and industrial mineral mines, which are depreciated under separate schedules of the regulations.
Excluded property keeps the Accelerated Investment Incentive, which already gives a larger first year deduction than the normal rules.
Two restrictions
Used property qualifies when the buyer, and anyone the buyer deals with at less than arm’s length, is owning it for the first time. Arm’s length describes parties who are unrelated and bargain independently. The property must also arrive by an ordinary purchase, and a transfer by tax deferred rollover is excluded.
Equipment bought second hand from an unrelated seller can therefore qualify, while equipment moved between related companies is excluded. That rule decides what a buyer gains from the Productivity Mega Deduction in an asset sale.
Individuals, and partnerships with individual members, will be limited in using the deduction to create or increase a loss, on the same basis as the temporary small business expensing measure announced in 2021. The draft caps their first year deduction at the income the business earns. Corporations are outside the restriction.
How it relates to Budget 2025
Budget 2025 introduced the Productivity Super-Deduction, a set of mostly temporary measures. It gave immediate expensing to manufacturing and processing machinery and buildings, clean energy equipment, zero emission vehicles, patents, computers and data network infrastructure. It also restored the Accelerated Investment Incentive.
The Mega Deduction extends immediate expensing to most other depreciable property and makes it permanent. Manufacturing and processing buildings stay on the temporary Budget 2025 track, because class 1 is excluded.
The reaction
Business groups welcomed it. The Canadian Chamber of Commerce presented it as a step towards making Canada globally tax competitive. The Business Council of Canada and the Canadian Association of Petroleum Producers both pointed to the gap it closes with the United States.
Brian Ernewein, a senior adviser at KPMG Canada, was quoted describing the measure as a timing difference. The total deduction over an asset’s life stays the same and the business gets it sooner, which amounts to an interest free loan of the tax from the government.
Corporate income tax rates are unchanged, including the small business rate. The earnings a buyer values a business on, SDE or EBITDA, are measured before depreciation and tax, so they stay where they were.
What happens next
Finance released its backgrounder and the draft legislative proposals for comment. The rules become law once Parliament passes them, and the details can change on the way.
As drafted, they reach back to September 15, 2026. Property a business acquires while the bill is before Parliament is covered if the rules pass in this form.
Questions owners ask
- What is the Productivity Mega Deduction?
- It is a federal tax measure, proposed on September 15, 2026, that lets businesses deduct the full cost of most depreciable property in the year it becomes available for use. The measure is permanent and reaches about two thirds of investment in capital assets. Buildings in classes 1 and 3 are excluded, along with goodwill, franchises and licences.
- When does the Productivity Mega Deduction take effect?
- It applies to eligible property acquired on or after September 15, 2026. It was released as draft legislation, so it becomes law once Parliament passes it, and the details may change before then.
- Does the Productivity Mega Deduction lower the small business tax rate?
- Corporate income tax rates stay where they were, including the small business rate. The measure changes when the cost of an investment is deducted. That lowers the tax on new investment while the rate applied to profit stays the same.