New Tax Measures To Attract And Stimulate Investment In Canada

Overview

The federal Department of Finance (Finance) recently released draft legislation containing the so-called Productivity Mega Deduction, a measure that would allow taxpayers to immediately expense the costs of a broad range of depreciable property. The measure is “a central part of the Government’s plan to catalyse $1 trillion in additional investment” and closes the gap with U.S. domestic tax measures, first enacted in the 2017 Tax Cuts and Jobs Act, allowing for accelerated tax depreciation. 

The release of the draft legislation, on September 15, 2026, followed an announcement the previous day that the Canada Revenue Agency (CRA) will, effective immediately, prioritize Advance Income Tax Ruling (AITR) requests relating to investments of $1 billion or more in Canada. AITRs permit investors to obtain a binding ruling on the Canadian tax treatment of a proposed transaction before they invest. Although the AITR Program has long been available to taxpayers in Canada, this announcement signals the federal government’s intention to provide greater tax certainty to taxpayers who are making major investments in Canada. The announcement also builds on previous CRA announcements regarding increased flexibility in ruling practice, including in cases where determinations that are primarily factual are based on complete, detailed and credible supporting documentation provided by taxpayers.

However, Finance makes clear that it has not forgotten Canadian consumers. The Minister of Finance announced on September 21, 2026 the extension of the temporary suspension of the Federal Fuel Excise Tax until January 31, 2027, to make “life more affordable for Canadians.”

What Is the Productivity Mega Deduction?

Canadian tax rules allow taxpayers to deduct the cost of depreciable property through a prescribed “capital cost allowance” (CCA). CCA rates vary by asset class and reflect the asset’s expected wear and use over time. The Productivity Mega Deduction proposes to increase CCA with respect to qualifying depreciable property acquired on or after September 15, 2026, by allowing eligible taxpayers to deduct the full cost of such qualifying asset in the year it becomes available for use. According to Finance, the Productivity Mega Deduction will make Canada’s tax landscape for investments more competitive than the average country in the Organisation for Economic Co-operation and Development, including the United States.

Eligible Property

The Productivity Mega Deduction would apply to all depreciable property acquired on or after September 15, 2026, except the following:

• buildings or other structures, or parts thereof, including building components and additions;
• patents, franchises, concessions, licences;
• goodwill;
• regulated natural gas distribution pipelines;
• certain excluded vehicles;
• qualified liquefaction equipment;
• an industrial mineral mine or a right to remove industrial minerals from one; and
• a timber limit or a right to cut timber from one, other than a timber resource property.

Previously used property, or property previously acquired for use for any purpose, is not eligible unless (i) neither the taxpayer nor a non-arm’s-length person previously owned it; and (ii) it was not transferred to the taxpayer on a tax-deferred “rollover” basis. Property for which CCA has already been claimed is also ineligible.

Liquefied Natural Gas Facilities

The measure also provides immediate expensing for qualified liquefaction equipment and enhanced 10% CCA for eligible non-residential buildings used in liquefied natural gas (LNG) facilities. However, the allowance for liquefaction equipment may be claimed only against income attributable to the taxpayer’s eligible liquefaction activities in respect of the eligible liquefaction facility. These LNG-specific measures would apply to eligible assets acquired on or after November 4, 2025 and, in the case of buildings, only if acquired before 2035.

Canadian Development Expenses and Flow-Through Financing

Special rules govern the deduction of Canadian resource expenses. Canadian exploration expense (CEE) is fully deductible in the year it is incurred, and certain early-stage CEE costs may also be entitled to investment tax credits. Canadian development expenses (CDEs) – which include the cost to acquire Canadian resource properties – are generally deductible on a 30% per year declining balance basis. The Productivity Mega Deduction extends immediate expensing to CDE, allowing CDE incurred on or after September 15, 2026 to be fully deducted in the year incurred.

Corporations whose principal business is mining, oil and gas or renewable energy, may issue “flow-through shares” under which the corporation may renounce CEE or CDE incurred by the corporation to an investor as an additional incentive to acquiring the share. The investor is then deemed to have incurred the renounced CEE and CDE and may deduct it against their own income. Notably, the Productivity Mega Deduction also applies to CDE renounced under flow-through share agreements entered into on or after September 15, 2026, so investors can deduct the full amount in the year of renunciation rather than over several years.

This change narrows the gap between CDE and CEE, and should widen the range of projects that are able to access flow-through financing.

Limitations for Inpiduals

Inpiduals and partnerships that include inpiduals can claim the Productivity Mega Deduction only against the amount of income earned from the particular business or property in which the relevant immediate expensing property is used for the taxpayer’s taxation year. In other words, inpiduals and partnerships with inpiduals as members cannot generate or increase a loss using the Productivity Mega Deduction beyond the income generated by such asset. Corporations and “eligible partnerships,” meaning partnerships whose members are all corporations, eligible partnerships or a combination of both, are exempt from this limitation.

Claimed Benefits

Finance estimates that the Productivity Mega Deduction will cost C$36 billion over five years, beginning in fiscal 2026-2027. However, it describes private investment in new equipment, technology and infrastructure as “one of the most effective ways to increase productivity,” and estimates that over a 10-year horizon, the measure could generate an estimated increase in economic activity of 1.4 to 3 times its federal cost, increasing annual economic output by up to C$22 billion. Finance also estimates that the measure will support labour market gains, with long-term employment increases estimated at up to 80,000 jobs annually 10 years from now. 

Federal Fuel Excise Tax Relief

In addition to attracting capital investment, Finance is also seeking to provide immediate relief for Canadians by extending the suspension of the Federal Fuel Excise Tax, which applies to gasoline, diesel, and aviation fuel at rates of up to 11 cents per litre. In April 2026, the government temporarily suspended the tax. On September 21, 2026, citing rising fuel costs driven by global conflict and supply chain disruptions, Finance proposed an extension of the suspension through January 31, 2027, with rates reduced by 50% until March 31, 2027, before returning to full levels on April 1, 2027. Finance estimates that the extension will help Canadians save C$5 per 50 litre fill-up while helping farmers, truckers, builders, and businesses manage higher costs.

Our Observations

The Productivity Mega Deduction and the updated AITR Program exemplify Canada’s recent use of broad tax measures to attract capital investment in Canada. This is a welcome signal for capital-intensive businesses operating or planning to operate in Canada.

Key takeaways for taxpayers:

• The Productivity Mega Deduction will allow significant acceleration of the recovery of investment costs and improve internal rates of return particularly for capital-intensive projects.
• The Productivity Mega Deduction will free up early-stage capital for ongoing operational growth, and ideally, fuel further investment.
• Investors evaluating large-scale investments in Canada should consider the updated AITR Program, which aims to reduce tax uncertainty. However, the Program’s effectiveness will depend on how quickly the CRA can issue rulings.

It is expected that the Productivity Mega Deduction, coupled with other commitments announced at the Canada Investment Summit from the federal and provincial governments and industry, should increase business investment in Canada, particularly in capital intensive industries such as mining. However, these announcements do not address other significant concerns raised by economists and tax experts regarding Canada’s tax system. These concerns include growing compliance and disclosure requirements that add significant costs for investors and business, high non-income taxes, such as sales taxes, land transfer, payroll, property and resource taxes, and high personal tax rates. The Productivity Mega Deduction is also largely inapplicable to many Canadian businesses, particularly those in the services industries, which do not involve material capital expenditures that would benefit from the Productivity Mega Deduction. The federal government is expected to deliver the 2026 federal budget later this fall, and this is likely to be the next opportunity for the federal government to announce additional tax reform measures to address these remaining concerns.

The Productivity Mega Deduction remains subject to parliamentary approval. Given that the Liberal Party holds a majority in government, we expect this measure to advance, although its final form and timing remain to be confirmed. We will continue to monitor developments and provide updates on the Productivity Mega Deduction and other measures the federal government may announce in the coming weeks in connection with the 2026 budget.