Canada Hopes to Attract Energy Investments With $36-Billion “Productivity Mega Deduction”

The federal government is proposing a major rewrite of the tax treatment of business investment, allowing companies to immediately expense roughly two-thirds of capital investment in an effort to lift Canada’s chronically weak productivity. The Productivity Mega Deduction expands measures introduced in Budget 2025 and would permanently allow immediate expensing for a much broader range of depreciable assets.

Finance Canada estimates the incremental fiscal cost to the federal government at $36 billion over five years beginning in 2026-27.

A Much Lower Tax Rate On New Investment

Immediate expensing lets a business deduct the full cost of an eligible investment in the year the asset becomes available for use rather than depreciating it over many years.

The government says the policy would reduce Canada’s marginal effective tax rate on new business investment from 13 per cent to 6.4 per cent. Its calculations put the comparable 2026 U.S. rate at 16.9 per cent and the OECD average excluding Canada at 19 per cent.

Those figures are modelled tax measures rather than forecasts of how much companies will actually invest.

The government estimates average annual support from the deduction at about $8.5 billion. Over a decade, Finance Canada models additional economic activity worth between 1.4 and three times the federal cost, with output gains potentially reaching about $22 billion annually and long-term employment gains of up to 80,000 jobs.

Whether those gains materialize will depend on how businesses respond to the lower cost of capital.

Energy Investment Is Included

The measure has important implications for Energi Media’s energy and industrial-policy coverage.

Eligible investments include a broad range of machinery and equipment, clean-energy assets, technology and other depreciable property. Canadian development expenses incurred after Sept. 15, 2026 would also qualify.

The proposal includes special treatment for liquefied natural gas. Eligible Class 47 LNG liquefaction equipment would receive an additional allowance bringing its capital cost allowance rate to 100 per cent. LNG facilities would not have to satisfy the emissions-intensity requirement previously proposed in the Spring Economic Update to qualify for that immediate expensing or an accelerated allowance for eligible buildings.

Some assets remain excluded, including most Class 1 and Class 3 buildings, goodwill and certain regulated natural gas distribution pipelines.

The policy is part of the Carney government’s broader effort to stimulate what it calls a Canadian “investment supercycle” and catalyse $1 trillion in additional investment.

The important test will be investment rather than tax competitiveness on paper. Canada has struggled for years with weak business investment and productivity growth. The Mega Deduction substantially changes the tax incentive. The coming years will show whether companies respond by putting substantially more capital to work in Canada.