On September 15, 2026, the federal government announced the Productivity Mega Deduction, a permanent expansion of immediate expensing for capital investments. Here is what changed, who it affects, and what to consider before your next capital purchase.
What changed
Immediate expensing, previously available for roughly 15% of capital investment under the Budget 2025 Productivity Super-Deduction, now extends to about two-thirds of capital investment on a permanent basis.
Immediate expensing lets a business deduct the full cost of an eligible asset in the year it becomes available for use, rather than depreciating it over several years under the normal capital cost allowance (CCA) schedule.
The measure applies to eligible depreciable property acquired, and Canadian development expenses incurred, on or after September 15, 2026. Class 47 LNG liquefaction equipment is treated separately, effective November 4, 2025.
Finance Canada estimates the incremental fiscal cost at $36 billion over five years, beginning in 2026–27, and projects the change will cut Canada's marginal effective tax rate (METR) on new investment from 13.0% to 6.4%.
What is in and what is out
The deduction is broad, but several asset classes are specifically carved out. Reviewing planned capital purchases against this list is a useful first step.
Generally eligible (immediate expensing)
Machinery, equipment, and technology; fibre-optic cable
Mining property; oil and gas pipelines
Software; R&D and Canadian development expenses
Computer equipment; aircraft and vehicles (outside classes 10/10.1 restrictions)
Patents; rail track; bridges and roads
Excluded (immediate expensing not available)
Class 1 and 3 buildings, including manufacturing and processing buildings (temporary Budget 2025 treatment continues instead)
Classes 14 and 14.1 (franchises, licences, goodwill)
Class 51 (regulated natural gas distribution pipelines)
Certain class 10/10.1 vehicles
Schedule V and VI property
Manufacturing and processing buildings do not qualify for the Mega Deduction, but continue to receive the temporary immediate expensing treatment introduced in Budget 2025. Property that does not qualify for immediate expensing continues to receive the enhanced first-year deduction under the existing Accelerated Investment Incentive.
Restrictions to watch
Used property only qualifies if neither the taxpayer nor a non-arm's-length party owned it before, and it was not transferred on a tax-deferred rollover basis. This matters most for asset purchases that happen as part of a corporate reorganization or an acquisition.
Anti-loss creation rules will apply to individuals, and to partnerships with individual members, in line with the restrictions that applied to the 2021 temporary immediate expensing measure for small businesses.
These are draft proposals, released alongside a Finance Canada backgrounder. They have not been passed into law yet, so they still need to go through the usual legislative process before becoming final.
Practical considerations
Timing of capital purchases: eligibility depends on the September 15, 2026 acquisition date, so check where your planned near-term spending falls relative to that date.
CCA class review: map your planned or recent asset purchases to their CCA class to confirm eligibility, particularly for buildings, vehicles, and intangible property that may fall into the excluded classes.
Cash flow and tax provision modelling: full first-year expensing changes the timing of your deductions and your deferred tax position, so your capital budgets and tax provisions should be updated to reflect that.
Interaction with other incentives: consider how the Mega Deduction interacts with SR&ED, the Clean Economy investment tax credits, and the Accelerated Investment Incentive for property that remains outside the new rules.
Used-asset and M&A transactions: flag any acquisition of previously owned property early on, given the arm's-length and rollover restrictions described above.
Provincial conformity: confirm how each province where your business operates plans to align its own capital cost allowance rules with the federal change.
What this looks like in practice
A few simplified examples of how the change plays out for a typical business:
New equipment purchase
A manufacturer buys $500,000 of new production equipment in October 2026. Under the old CCA rules, only a portion of that cost could be deducted in the first year, with the rest spread out over several years. Under the Mega Deduction, the full $500,000 can be deducted against income in that same tax year, which frees up cash sooner rather than later.
Software and technology investment
A business spends $80,000 upgrading its operating systems and software. That full amount can now be expensed immediately, rather than amortized over the useful life of the asset.
Used equipment purchase
A company buys a piece of used equipment for $150,000 from an unrelated supplier. Because it was bought from an arm's-length party and wasn't part of a related-party rollover, it still qualifies for immediate expensing. The used property restriction only applies when the asset came from a non-arm's-length party or a tax-deferred transfer.
New building, a case where it does not apply
A business constructs a new $2 million manufacturing building. Buildings fall into the excluded classes, so this investment does not qualify for the Mega Deduction. It continues to be governed by the separate, temporary treatment introduced in Budget 2025.
This summary is intended as a general update rather than advice tailored to your specific circumstances. The proposals remain subject to the legislative process and could change before enactment.
Have questions about how this affects you?
Reach out to your Baker Tilly engagement team to discuss how the Productivity Mega Deduction applies to your planned capital investments and current tax provision.
Baker Tilly periodically publishes Tax Alert to its clients and associates. It is designed to highlight and summarize the continually changing tax and business scene across Canada. While Tax Alert may suggest general planning ideas, we recommend professional advice always be sought before taking specific planning steps.
Related content
