Productivity Mega Deduction announced: Immediate expensing as the new default for capital investment

On September 15, 2026, the federal government announced the Productivity Mega Deduction (the “Mega Deduction”) at the first Canada Investment Summit (see the Prime Minister’s release). The Department of Finance (“Finance”) issued a news release describing the measure and published draft legislative proposals (the “Proposals”) amending the Income Tax Act (the “Act”) and the Income Tax Regulations (the “Regulations”) the same day.

If enacted, the Mega Deduction would allow a taxpayer to deduct the full cost of most depreciable properties in the year the property becomes available for use, instead of claiming capital cost allowance (“CCA”) over a period of years. The Mega Deduction would be permanent, and it would not be confined to particular categories of assets or taxpayers as earlier measures were. Finance estimates that about two-thirds of capital asset investments would qualify, compared with about 15% under the Productivity Super-Deduction announced in Budget 2025, at an incremental fiscal cost of $36 billion over five years beginning in 2026-27. The release does not provide a breakdown of this figure, and much of it likely reflects timing rather than a permanent loss of revenue, because immediate expensing reduces CCA claims in later years and increases recapture (the Parliamentary Budget Officer described the Productivity Super-Deduction measures as “best characterized as a revenue deferral rather than a permanent reduction in revenue”).

This post summarizes the proposed rules and highlights the points that matter most when planning capital expenditures.

Background: From Super-Deduction to Mega Deduction

The Productivity Super-Deduction in Budget 2025 reinstated the Accelerated Investment Incentive and provided immediate expensing for specific categories of property: manufacturing or processing machinery and equipment, clean energy generation and energy conservation equipment, zero-emission vehicles, patents, data network infrastructure, computers, and capital expenditures for scientific research and experimental development. It also introduced temporary immediate expensing for manufacturing and processing buildings.

The Mega Deduction reverses the approach. Rather than focusing on which properties qualify, the Mega Deduction makes immediate expensing the default and instead lists properties which do not qualify.

How the Mega Deduction would work

Proposed subsection 1100(0.1) of the Regulations would allow a deduction for a taxation year of up to the undepreciated capital cost (“UCC”) at the end of the year (before any CCA for the year) of “immediate expensing property” that became available for use in the year. The property must be acquired on or after “Announcement Day”, a placeholder in the Proposals that Finance’s release fixes as September 15, 2026; the deduction itself, however, is tied to the year the property becomes available for use. Where the deduction is available for a property, proposed subsection 1100(0.2) would prevent any other CCA claim on that property for that year.

The deduction is a ceiling, not a requirement. A taxpayer could claim less than the maximum, and any UCC left in the class would appear to remain deductible under the ordinary CCA rules in later years, although the immediate expensing entitlement itself would not carry forward. Thus, the Mega Deduction can be described as a “use it or lose it” deduction.

There is no dollar cap. The temporary measure announced in Budget 2021 was limited to $1.5 million per year, shared among an associated group (see Finance’s 2022 explanatory notes). The Proposals would eliminate this limit. However, the deduction for non-corporate taxpayers would remain subject to an income cap, preventing those taxpayers from using the Mega Deduction to create a loss, discussed below.

What property qualifies

According to Finance, all capital property subject to the CCA rules – other than “excluded property” – would qualify if acquired on or after September 15, 2026. The Prime Minister’s release gives examples of assets that would be covered, including fibre-optic cable, mining property, oil and gas pipelines, software, assets acquired for research and development, computer equipment, aircraft and vehicles, patents, rail track, bridges and roads.

Under the Proposals, “excluded property” comprises:

• buildings and other structures, including component parts, and certain additions or alterations to older buildings (Class 1(q) and Class 3(k) of Schedule II to the Regulations);
• franchises, licences, goodwill and certain other intangible property (Classes 14 and 14.1);
• regulated natural gas distribution pipelines (Class 51);
• passenger vehicles and certain other motor vehicles that were either previously used or were assembled outside Canada (Classes 10 and 10.1);
• certain high-cost vehicles that the taxpayer elects to exclude (discussed below);
• liquefaction equipment at liquefied natural gas (“LNG”) facilities (“qualified liquefaction equipment”), which has its own regime (discussed below);
• industrial mineral mines and rights to remove industrial minerals; and
• timber limits and rights to cut timber, other than a timber resource property.

Finance has stated that property not eligible for the Mega Deduction would continue to be eligible for the existing Accelerated Investment Incentive.

Buildings and vehicles

The building exclusion is narrower than it sounds. Only buildings, structures and additions in Classes 1(q) and 3(k) are excluded, not everything in Classes 1 and 3, which is why the Prime Minister’s release lists rail track, bridges and roads as eligible. Manufacturing and processing buildings that are excluded may still qualify for the temporary immediate expensing measure in Budget 2025, which has its own conditions.

The vehicle exclusion is also targeted. A passenger vehicle (or a taxi or similar vehicle) is excluded only if it was used before the taxpayer acquired it or was assembled outside Canada, so a new, Canadian-assembled passenger vehicle qualifies, subject to the usual cap for high-cost vehicles in Class 10.1 ($39,000 for 2026, plus applicable sales tax).

Taxpayers can also elect to keep a high-cost Class 10.1 vehicle out of the regime, and may want to. Although subsection 13(2) of the Act usually shields a Class 10.1 vehicle from recapture on disposition, the exemption would not apply to vehicles that ever qualified for the Mega Deduction, whether or not the deduction was actually claimed. Electing out would preserve the shield.

New and used property

The Mega Deduction is aimed at new investment, and property can qualify under either of two branches.

The first branch covers new property: property that had not been used for any purpose before the taxpayer acquired it and on which no one had claimed CCA or a terminal loss for a prior year. Property that qualifies only under the first branch is subject to proposed subsection 1100(0.3). Amounts incurred in respect of such property before Announcement Day, by any person or partnership, are excluded from the UCC eligible for immediate expensing. The rule does not apply where the property was acquired on or after Announcement Day, by the taxpayer or a non-arm’s-length person or partnership, from an arm’s-length transferor that held it as inventory. This rule appears to target unused property that a taxpayer or its group already owned before September 15, 2026, such as an asset under construction or equipment held by an affiliate.

The second branch covers property that is new to the taxpayer’s group: property, whether or not previously used, that was not previously owned or acquired by the taxpayer or a non-arm’s-length person or partnership and was not acquired on a tax-deferred rollover basis. Finance’s release describes the second branch as the route by which used property can qualify. A routine arm’s-length purchase of new equipment satisfies this branch on its own and is unaffected by the restriction on pre-announcement costs in proposed subsection 1100(0.3). However, moving unused property around within the group after September 15, 2026, or reacquiring property the taxpayer previously owned, would not make the earlier costs eligible.

Individuals, trusts and partnerships

For taxpayers other than corporations and partnerships with only corporate members, the deduction cannot be used to create or increase a loss from the business or property in which the asset is used. Proposed paragraph 1100(0.1)(b) ensures this by capping the deduction at the taxpayer’s income from that source, computed before CCA and disregarding income from other sources. Finance describes this as consistent with the 2021 measure.

Where first-year income from the relevant source is insufficient, the balance of the cost would generally remain deductible under the ordinary CCA rules in later years.

Canadian development expenses

Immediate expensing would also apply to Canadian development expenses (“CDE”) incurred on or after September 15, 2026, through a new definition of “immediate Canadian development expense” in subsection 66.2(5) of the Act. The definition excludes expenses in respect of which the taxpayer is a successor under subsection 66.7(4), and the cost of Canadian resource property acquired by the taxpayer, or a partnership of which it is a member, from a non-arm’s-length person or partnership. CDE deemed to be incurred by an investor under paragraph 66(12.63)(a), such as CDE renounced under a flow-through share agreement, qualifies only where the agreement was entered into on or after Announcement Day. For mining and oil and gas issuers, both the date the expense is incurred and the date of the flow-through agreement will be relevant.

LNG facilities

Qualified liquefaction equipment in Class 47 is excluded from the general rule. Instead, proposed paragraph 1100(1)(yc) would provide an additional allowance that Finance describes as bringing the CCA rate for such equipment up to 100%. The allowance is computed on a separate class for each eligible liquefaction facility and cannot exceed the lesser of the UCC of that class and the taxpayer’s income from eligible liquefaction activities at the facility, after certain other allowances. No other CCA may be claimed on the equipment in a year in which the allowance is available (proposed subsection 1100(1.03)).

Because this is a modification of the Budget 2025 LNG measures, it would apply to equipment acquired on or after November 4, 2025. Finance has also confirmed that LNG facilities need not meet the expected emissions intensity requirement proposed in the Spring Economic Update 2026 to qualify for this allowance, or for the 10% accelerated CCA rate for non-residential buildings used in LNG facilities, which Finance says would continue to apply.

Key takeaways

• Timing: Two dates matter. Property must be acquired on or after September 15, 2026, and the deduction arises in the year the property becomes available for use.
• Eligibility: Confirm the property’s CCA classification and applicable conditions. The building exclusion covers specified parts of Classes 1 and 3; the vehicle exclusion depends on class, prior use and place of assembly.
• Class 10.1 vehicles: Decide whether to elect out. A vehicle that was an immediate expensing property would lose the recapture shield in subsection 13(2), so the benefit of the first-year deduction should be weighed against any potential recapture.
• Earlier costs and transfers: Property previously owned by the taxpayer or a non-arm’s-length person, or acquired on a rollover basis, does not qualify unless it is unused and no one has claimed CCA or a terminal loss on it. Even then, costs incurred before September 15, 2026 are generally excluded.
• Non-corporate taxpayers: Individuals, trusts and partnerships with non-corporate members cannot use the deduction to create or increase a loss from the relevant source.
• Resource issuers: Renounced CDE may qualify for the Mega Deduction, but only for flow-through agreements entered into on or after September 15, 2026.
• Dispositions: A full first-year deduction makes recapture on a later sale more likely.

The Proposals may change before enactment. Taxpayers considering significant capital investments, or transactions involving depreciable property, should seek advice on how the Mega Deduction would apply in their circumstances.