Ottawa plans ‘mega deduction’ tax incentive to spur investment

Mark Carney unveiled a permanent tax deduction on Tuesday that will allow companies to immediately write off the full cost of acquiring or building a wide range of new business assets, a significant and costly change to the tax system intended to boost productivity and woo global investors.

Companies in Canada have traditionally been able to deduct the cost of certain new investments from their income gradually and over time.

Now, they would be able to subtract the full expense in the year that those investments become available for use. The eligible costs would include things such as new equipment, infrastructure and software.

The measure, which the Carney government has dubbed the “productivity mega deduction,” is significantly more ambitious than business investment tax incentives announced by Ottawa in recent memory, including Mr. Carney’s own “productivity super deduction” introduced in 2025. That deduction, which expanded on Trudeau-era policies, allows immediate writeoffs only for narrow categories of investments and for a limited time period.

The Prime Minister announced the measure at the Canada Investment Summit, a two-day event in Toronto where the government pitched global business executives on investing in major projects, including some of the ports, pipelines and mines that Ottawa has promoted as key to its push for greater economic sovereignty.

Those capital-intensive projects stand to gain directly from the deduction, as do countless smaller capital investments by businesses, which largely applauded the move Tuesday.

The new deduction would cost the government an estimated $36-billion in the first five years.

The measure would significantly widen the scope of investments that qualify for an immediate writeoff and would cut the marginal effective tax rate to 6.4 per cent from 13 per cent, the government said, less than half that of the United States.

“Put it simply, the incentive for companies to invest in Canada is twice as high as it is in the United States,” Mr. Carney said at the summit.

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Annette Mosman, CEO of Dutch Pension fund APG, said Tuesday that the tax changes Ottawa announced this week serve as examples of Mr. Carney’s message that Canada aims to make it “cheaper, faster, better” to invest in the country.

“I think that does move the needle,” she said in an interview with reporters. “We’re looking for investable assets, and then at that level you have to compete with assets of other countries.”

CPA Canada, which represents chartered professional accountants at the national level, said the new deduction is an important step to stimulate investment. But it added that Canada still needs broader tax reform to overcome its long-standing productivity and competitiveness challenges.

Manitoba Premier Wab Kinew said the new corporate tax deduction will be significant for his province, including for his pitch for a major expansion of the Port of Churchill.

Lisa Baiton, chief executive of the Canadian Association of Petroleum Producers, an oil lobby, said in a statement that the deduction, combined with recent amendments to the Impact Assessment Act, represents a “major step forward” for the oil and gas sector.

With the measure, about 65 per cent of new capital investments – including fibre-optic cables, software, research and development, as well as roads and bridges – would become eligible for a full and immediate writeoff, up from the current 15 per cent, according to government estimates.

“It’s really big,” said Trevor Tombe, a professor of economics at the University of Calgary, adding that it is “perhaps the largest one-time tax change federally in decades.”

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The fact that the deduction is meant to be a permanent new feature of Canada’s corporate tax system is one of the most significant changes, Prof. Tombe said. Temporary tax measures typically only incentivize investments that are ready to go, he said.

A permanent deduction also increases the appeal of long-term investments that may take years to undertake and complete, he said.

But Prof. Tombe added that Ottawa could have gone even further, by covering 100 per cent of business investment through the deduction, rather than two-thirds of it.

Looking at figures provided by the federal government, he said the estimates indicated the deduction would benefit businesses across the economy. However, wholesale and retail trade seemed to be poised for the smallest reduction in marginal effective tax rates. This is likely because the new measure broadly excludes buildings, which make up a large share of new investment costs in those two sectors, he said.

The Business Council of Canada, the Canadian Chamber of Commerce and the Toronto Region Board of Trade, three prominent business groups, separately said they had each advocated for a similar business-tax incentive.

Ottawa said it is proposing that immediate expensing for business investment property be made available starting on Sept. 15, the day of the announcement.

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Alexandre Laurin, vice-president and director of research at the C.D. Howe Institute, said Ottawa’s estimate that the measure will cost $36-billion over the first five years suggests that the deduction will reduce revenue from corporate taxes by around 7.5 per cent annually on average.

That’s a significant cost, Mr. Laurin said. But the overall impact of tax incentives on federal coffers will be more nuanced, he added.

The new deduction will effectively shift the fiscal cost of business investment writeoffs up front, instead of distributing it over time, he said. In general, companies will get to claim a big deduction in the first year but will no longer be able to claim smaller portions of that expense to reduce their income in following years, as they used to be able to do.

Ottawa said it expects the measure to unleash an “investment supercycle” that could generate up to $22-billion a year on average in additional economic output. A boost to gross domestic product, in turn, would generate new tax revenue that would help offset the fiscal cost of the deduction, Mr. Laurin said.

He added that while economic theory overwhelmingly suggests that such a tax incentive will lead to more business investment, it’s hard to predict just how big that boost will be.

Corporate taxes are only one of many factors that affect companies’ decisions about whether, how much and where to invest, Prof. Tombe said. And right now, uncertainty over the trade war with the U.S. is a powerful force that deters business investment, he added.

With reports from Laura Stone, Emma Graney, James Bradshaw, Stephanie Levitz and Sean Silcoff