Is Carney’s ‘mega deduction’ the beginning or end of his corporate tax ambitions?

In front of an audience of hundreds of hand-picked global financial executives gathered in Toronto last month, Prime Minister Mark Carney unveiled the biggest swing Ottawa has taken in two decades to make Canada’s business tax regime more competitive.

In his keynote speech at the Canada Investment Summit, Mr. Carney outlined what he called the “productivity mega deduction,” which will allow companies to immediately write off the cost of a wide range of new capital investments.

The proposal has corporate Canada buzzing. Business groups have applauded the change, economists have generally given it a thumbs up (with caveats), and accountants are talking to clients about investment opportunities that were previously off the table.

Still, there’s a belief among tax experts that Ottawa needs to go further if it’s going to reverse decades of underinvestment by Canadian companies and turn the country into a magnet for global capital at a time when access to the U.S. market is no longer guaranteed.

The Liberals were re-elected in 2025 promising an “expert review of the corporate tax system.” Almost eighteen months on, the country is still waiting.

The mega deduction is a significant boost to tax competitiveness. But it stops short of the deeper reforms undertaken by federal governments of various stripes in the 1980s and 2000s, which significantly lowered Canada’s corporate tax burden. And it leaves in place a thicket of tax distortions that create headaches for businesses, prioritize certain industries and types of investments over others and ultimately weigh on economic growth.

With Canadians appearing to rally around Ottawa’s pro-growth agenda in the face of economic threats from U.S. President Donald Trump, Mr. Carney and Finance Minister François-Philippe Champagne have a rare window of opportunity to push further.

There’s no shortage of ideas. For the first time in years, business leaders have a sense that major tax changes could be possible, and don’t want to let the opportunity slip away. Few Canadian CEOs are speaking up in public in the run-up to a fall federal budget. But in private, many are optimistic that Ottawa is looking hard at Canada’s tax competitiveness.

Think tanks and business leaders often advocate a broad overhaul that would simplify the tax system. To do that, they suggest lowering the statutory tax rate, doing away with special preferences such as deductions and credits, and making it easier and less costly for companies to comply.

But there’s plenty of disagreement about the best path forward. The right tax lever to pull depends on what type of behaviour you’re trying to incentivize. And tax reform always involves winners and losers, while tax cuts need to be paid for by raising revenue elsewhere, cutting government spending or growing the deficit at a moment when borrowing costs are rising.

In 2025, Ottawa pulled in some $97-billion from corporate income taxes, accounting for 19 per cent of total federal revenues.

“The challenge with tax policy is that it is not just a theoretical economic consideration. There’s politics involved,” said Rob Jeffery, national tax policy partner with Deloitte Canada. “Doing it piecemeal introduces the risk that you actually can’t do the effective changes because there are going to be some taxpayers that pay more and some taxpayers that pay less.”

The key question, heading into the fall budget, is how much political capital Mr. Carney and Mr. Champagne are willing to spend wrangling with an unwieldy tax system, and whether the mega deduction is the start of broader corporate tax reform or the finish line.

The case for reform starts from the idea that corporate taxes are an economically expensive way for governments to raise revenue.

If you raise consumption taxes to increase government revenue, people might grumble, but they won’t necessarily change their buying habits all that much. But if you change corporate income taxes, businesses do react. Tax increases tend to curb investment and encourage companies to shift profits to other jurisdictions; tax cuts tend to boost investment in capital assets.

“Economists can disagree on lots of things, but I think it’s reasonably well accepted that corporate taxes do generate more distortions and are more costly” than other types of taxes, University of Calgary economics professor Kenneth McKenzie said.

That doesn’t mean corporate tax cuts pay for themselves, or that they’re a slam dunk when it comes to increasing investment. Other factors – consumer demand, commodity prices, the regulatory environment and interest rates – can be equally or more decisive. The corporate tax cuts of the early 2000s, for example, did correspond to an investment boom in Canada, but that was driven more by the commodity supercycle. Investment fizzled after oil prices collapsed in 2014.

What it does mean is that countries need to be aware of how they compare with their peers, particularly when they’re disadvantaged in other ways.

“We face burdens that other countries don’t,” said Francis Fong, managing director and senior economist at Toronto-Dominion Bank in an interview.

The trade war with the U.S. is eroding one of Canada’s key selling points: proximity and access to the world’s biggest market. And the country has a burdensome regulatory environment, fragmented internal market and underdeveloped trade infrastructure.

“With all these headwinds against us, we can’t just go along with the rest of the pack. We really do have to set ourselves apart and be better and be more competitive,” Mr. Fong said.

A decade ago, Canada had a clear corporate tax advantage over the United States.

Progressive Conservative Finance Minister Michael Wilson’s tax reforms in the 1980s cut the federal corporate income tax rate from 36 per cent to 28 per cent and simplified the business tax environment. A subsequent push by successive Liberal and Conservative governments in the 2000s lowered the headline federal rate in stages to 15 per cent by 2012, while several provinces followed suit with cuts to their own corporate tax rates.

This Canadian tax advantage, however, evaporated in 2017 when U.S. President Donald Trump slashed the federal corporate tax rate from 35 per cent to 21 per cent and introduced full expensing for a range of business investments. In his second term, Mr. Trump expanded these measures and made them permanent with the One Big Beautiful Bill Act.

This left Canada and the U.S. with similar average combined federal-provincial and federal-state corporate tax rates of roughly 26 per cent.

Ottawa initially responded by introducing immediate expensing for manufacturing and processing equipment, and accelerated depreciation for other assets in 2018. It followed up with a range of tax measures aimed at incentivizing investment in low-carbon industries to match then-president Joe Biden’s subsidies for green technology.

But the first federal budget under Mr. Carney’s Liberal government underwhelmed many business leaders who were looking for Ottawa to reassert Canada’s corporate tax advantage.

It wasn’t until last month’s mega deduction announcement that the federal government made a big move.

The mega deduction is essentially a juiced-up version of earlier immediate expensing policies – and got its name, Mr. Carney joked at September’s investment summit, “in part because we used ‘super deduction’ in the last budget” to describe a narrower tax measure.

That he chose to announce the expanded incentive to a room of global investors, front-running a federal budget that is expected as soon as November, shows it is intended as much as a signal to stewards of foreign capital as to Canadian businesses.

Canada slashes taxes for new investments

Marginal effective tax rate (METR), by country

After spring Economic Update 2026

After Productivity Mega Deduction

*The One Big Beautiful Bill Act (OBBBA)

THE GLOBE AND MAIL, source: government of canada

Canada slashes taxes for new investments

Marginal effective tax rate (METR), by country

After spring Economic Update 2026

After Productivity Mega Deduction

*The One Big Beautiful Bill Act (OBBBA)

THE GLOBE AND MAIL, source: government of canada

Canada slashes taxes for new investments

Marginal effective tax rate (METR), by country

After spring Economic Update 2026

After Productivity Mega Deduction

*The One Big Beautiful Bill Act (OBBBA)

THE GLOBE AND MAIL, source: government of canada

With the mega deduction, Mr. Carney claimed, a new investment dollar “will go a lot further in Canada than anywhere else in the advanced world.”

Under the rule, which will apply to assets aquired as of Sept. 15, 2026, companies can deduct the cost of a new capital asset from their taxable income immediately, rather than writing it off incrementally over years under the usual capital cost allowance (CCA) system.

This doesn’t change the total amount of money a company can deduct. But a dollar today is worth more than a dollar tomorrow – what economists call the time value of money – and an upfront tax break frees up cash in the near term, ultimately lowering the cost of the investment.

Where the mega deduction differs from its predecessors is in its scope. The new rule applies to around 65 per cent of asset classes, compared to around 15 per cent under the suite of measures introduced last year as the “productivity super deduction.” It’s also permanent rather than time-limited.

The Department of Finance says this will lower Canada’s average Marginal Effective Tax Rate (METR) – a measure of how various tax policies influence a company’s decision to invest their next dollar in a capital asset – from 13 per cent to 6.4 per cent. All told, this will cost the federal government an estimated $36-billion in forgone tax revenue over the next five years.

“Pound for pound the mega deduction will lower the hurdle rate for all sorts of capital investments and make ones that might not have been viable now viable,” said Mr. Fong.

The government’s estimate that it will generate up to $22-billion in additional annual economic output, however, is “quite optimistic,” he said.

Business groups have been effusive. Theo Argitis, senior vice president of policy at the Business Council of Canada, said members are “extremely happy with the announcement…[and] are telling us it’s going to make a huge difference.”

Pierre Gratton, president and CEO of the Mining Association of Canada, said the policy will make the country “one of, if not the most, competitive mining tax jurisdiction in the world.”

There are, however, limitations and drawbacks to the path Ottawa is taking.

The broader set of investments captured under the mega deduction still excludes important assets, such as buildings, licenses, patents and franchises. That means capital-intensive manufacturing or natural resource businesses will tend to benefit much more than service-sector companies, such as banks, retailers and software developers.

Likewise, startups with lower revenues may not benefit much because they don’t have income tax liabilities to deduct from.

On the flipside, the mega deduction appears overly generous for certain types of investments. A company that borrows money to buy equipment can write off the full cost of the purchase right away, and then deduct the interest on the loan over time. That can produce a negative METR, transforming tax relief into an outright subsidy.

Tax advantage for new investment

differs by industry

Marginal effective tax rate (METR), by sector

After Productivity

Mega Deduction

After Spring Economic

Update 2026

U.S. marginal

effective tax rate

2026

NOTE: When the immediate expensing is combined with other favourable tax policies, such as interest expense deduction, the METR can go negative. This implies tax relief has become an outright subsidy.

THE GLOBE AND MAIL, source:government of CANADA

Tax advantage for new investment

differs by industry

Marginal effective tax rate (METR), by sector

After Productivity

Mega Deduction

After Spring Economic

Update 2026

U.S. marginal

effective tax rate

2026

NOTE: When the immediate expensing is combined with other favourable tax policies, such as interest expense deduction, the METR can go negative. This implies tax relief has become an outright subsidy.

THE GLOBE AND MAIL, source:government of CANADA

Tax advantage for new investment differs by industry

Marginal effective tax rate (METR), by sector

After Productivity

Mega Deduction

After Spring Economic

Update 2026

U.S. marginal effective

tax rate 2026

NOTE: When the immediate expensing is combined with other favourable tax policies, such as interest expense deduction, the METR can go negative. This implies tax relief has become an outright subsidy.

THE GLOBE AND MAIL, source:government of CANADA

These kinds of distortions in the tax system can end up being a drag on economic activity, C.D. Howe Institute vice-president and director of research Alexandre Laurin said.

“If you’re subsidizing an activity over another, people will invest in that activity more than they would otherwise,” he said in an interview. “But what if, in fact, it was the other activity that had the greater return on investment and the greater benefit to the economy?”

He said an across-the-board cut to the federal corporate income tax rate – say from 15 per cent to 10 per cent – would be a more potent and neutral approach.

Yet some economists argue that cuts to the statutory corporate tax rate are a costly way for a government to encourage investment.

Immediate expensing only provides a tax break if a company actually puts money to work, said University of Toronto economics professor Michael Smart. A cut to the headline rate lowers taxes on all corporate profits, even if they’re generated from capital that was installed years ago.

“You’re not just giving a tax break to new investors; you’re giving a tax break for all the investment that has already been done in the past and is already sitting in the Canadian economy,” Prof. Smart said.

To some extent, the right policy move depends on the type of investment you’re trying to encourage, said Prof. McKenzie of the University of Calgary. Policies that lower the METR tend to encourage companies to make incremental investments in things like machinery and equipment, while cuts to the statutory rate may matter more for large discrete investments, such as the decision by a foreign multinational to build a factory in Canada.

If Ottawa wanted to think even bigger, there are alternative models on offer.

Estonia, for example, uses a “distributed profits” system, where corporate profits are only taxed when they’re paid out as dividends or deemed to have been distributed in other ways. Profits that are retained by the company are not taxed, with the hope they’ll be reinvested.

Countries such as Poland, Portugal, and Turkey use an Allowance for Corporate Equity system, which attempts to level the playing field between debt- and equity-financed investments – although the system has had mixed success. Belgium and Italy both had ACE systems but subsequently abandoned them because of a combination of lost revenue and tax avoidance problems.

There are also cash-flow systems, where companies can immediately deduct the cost of investments, but deductions of interest payments are eliminated. Canada started moving towards the first part of this system with the mega deduction, but didn’t do the second part, said Prof. McKenzie.

“One hundred per cent deductibility coupled with the deductibility of debt interest is not a coherent tax system,” he said.

A deeper dive into the tax system would be worthwhile, he said. But in practice, efforts such as Canada’s Royal Commission on Taxation in the 1960s, the Technical Committee on Business Taxation in the 1990s, or the Mirrlees Review of the British tax system in the 2000s – which recommended introducing an ACE system – can take years.

“I think [Carney] is in a bigger hurry,” Prof. McKenzie said. “I can see why he would lean towards this mega deduction, because it’s quick, it’s dirty. Even the legislation behind it will be reasonably straightforward.”

Faced with the layer upon layer of perks, incentives and anti-avoidance rules that have piled up in Canada’s Income Tax Act over decades – which devotes hundreds of pages of dense text to corporate taxation alone – the appeal of a simpler system is obvious.

Nearly nine out of 10 respondents to a KPMG survey released this week said they want Ottawa to undertake a comprehensive review, and 85 per cent want a simpler tax system.

Actually getting there is a challenge, said John Tobin, a partner and tax lawyer at Torys LLP.

The Tax Act is a series of choices and rules built up to prevent businesses from changing their behaviour to lower the amount of tax they pay. As a result, reforming the act is “an examination of unintended consequences,” he said.

You make changes to one part, and it’s “a bit like squeezing Jell-O. It just keeps squirting out all over the place.”

There are, nonetheless, many things Ottawa could do to reduce nuisances for businesses and improve how the Canada Revenue Agency applies the rules.

Mr. Tobin suggested streamlining and speeding up the system for claiming investment tax credits available on clean energy equipment or technology, for example. Mr. Jeffery of Deloitte said Ottawa should consider allowing companies to transfer losses between their subsidiaries for tax purposes.

The list of ideas from business groups and tax experts goes on: Treat capital gains on investments in startups more favourably; rethink the thresholds for interest deductibility that were introduced as part of a global push to counter tax-base erosion; ease up eligible dividend-notification rules.

Perhaps unsurprisingly, most suggestions revolve around lowering the tax and regulatory burden for companies, with less attention paid to how Ottawa could make up lost revenue or deal with legitimate tax enforcement concerns.

“There’s so many very informed voices pulling in different directions, it’s tough to be a minister of finance,” Prof. Smart said. “If you want to address any of these issues, you have to go to Bay Street and say, ‘Is this a good idea?’ But the answers you get are not always going to be in the national interest.”

“We want a system that’s good for all Canadians; but all Canadians rely on business and they rely on foreign investment coming in,” he added. “And that’s just a very tough nut to crack.”

Other suggestions are more politically fraught. Chartered Professional Accountants Canada and the Canadian Bar Association recommended in a joint pre-budget submission scrapping the small business deduction, which lowers the federal rate that small businesses pay to 9 per cent from 15 per cent for the first $500,000 of income. They suggest replacing it with a single across-the-board rate set somewhere between these two levels, arguing this would “substantially simplify” the corporate tax regime.

The idea is popular among economists, who argue that the deduction leads to a disproportionate number of small companies, distorts small business investment behavior, and encourages individuals to reclassify their personal income as business income, with implications for income inequality.

However, ending the deduction could be a political third rail.

Former Finance Minister Bill Morneau’s attempts to overhaul parts of the small-business tax regime in 2017 largely foundered on opposition from influential interest groups, and Ottawa ended up scaling back the plan and cutting the small business tax rate to 9 per cent.

Heading into the fall budget, calls for change are getting louder. A number of business groups are pushing for a major tax system review, or even a new Royal Commission on Taxation.

But Mr. Champagne has suggested that the government is working on a faster timeline as it juggles major economic initiatives such as an overhaul of the country’s environmental regulations and a push to build new trade infrastructure.

“Come to me with practical examples” and specific proposals, the finance minister said in an interview with the Globe in June, when asked about reviewing the corporate tax regime. “I know what the issues are. I’m a man of action.”

For now, the mega deduction appears to be Ottawa’s big bet for the fall budget. It is in many ways the path of least resistance, with broad support in the business community and few obvious losers – aside from the federal treasury, which will have to make up the estimated $36-billion hit over five years with some combination of spending cuts, tax increases elsewhere and issuing more debt.

A push toward broader corporate tax reform, by contrast, could invite political battles. Corporate tax cuts are routinely unpopular with the broader electorate, and business leaders are rarely happy when politicians take away incentives they rely on.

Once again, Mr. Carney’s government faces high expectations and tough political realities as it builds its latest fiscal plan. But there is also rare agreement that bold changes are needed to make Canada more investable, and that the payoff could be worth the cost.

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