Canada’s federal government has unveiled its most sweeping business tax change in decades, betting that a dramatically lower cost of capital investment can reverse years of weak productivity growth and stem an exodus of entrepreneurs and capital to the United States.
At the inaugural Canada Investment Summit in mid-September, Prime Minister Mark Carney announced the Productivity Mega Deduction, a tax incentive that expands immediate expensing — the ability of businesses to write off the full cost of an investment in its first year — from roughly 15 per cent of capital assets to more than 65 per cent. The expanded list includes machinery, software, research and development, fibre-optic cable, mining property, oil and gas pipelines, aircraft, vehicles, patents, rail track, bridges and roads. The government is also making immediate expensing, first introduced through the Productivity Super-Deduction in Budget 2025, a permanent feature of the tax code.
The combined effect, according to the Prime Minister’s Office, is that Canada’s marginal effective tax rate on new business investment will fall from about 13 per cent to 6.4 per cent — a level the government says is the lowest among major economies and less than half the comparable U.S. rate. “With the lowest marginal effective tax rate in the G7 by an order of magnitude, we are sending a clear message to the world: Canada is building big,” Carney said in announcing the measure.
Why Ottawa Is Moving Now
The deduction is central to Carney’s pledge to catalyse $1 trillion in new investment over five years, building on roughly $280 billion in federal capital commitments and incentives meant to draw in public, private and institutional capital. The summit was co-hosted with two of Canada’s largest pension managers, CPP Investments and PSP Investments.
Finance Minister François-Philippe Champagne called the change “one of the most significant changes to Canada’s business tax system in half a century,” arguing it sets the conditions for an “investment supercycle” that will let companies build, expand and hire in Canada. The Prime Minister’s Office says the incremental fiscal cost will run to $36 billion over five years starting in 2026-27, but projects the deduction could generate $22 billion in annual economic output and support up to 80,000 jobs a year within a decade.
The timing follows warnings from business groups about what Build Canada, a tech-and-business-backed policy platform, has called a “five-alarm fire”: a wave of entrepreneurs relocating outside Canada. Its CEO, Lucy Hargreaves, has pointed to figures showing that while roughly three-quarters of Canadian founders who raised more than $1 million in 2016 were based in Canada, only about a third remained by 2024, with nearly half having moved to the United States. Champagne’s office had solicited tax-reform ideas from Canadians ahead of the fall budget, telling contributors he saw himself as “a man of action” rather than someone inclined to study the issue further.
Reaction From Business and Economists
Candace Laing, CEO of the Canadian Chamber of Commerce, welcomed the announcement, calling it “a launchpad to make Canada globally tax competitive” and noting that making the deduction permanent should sustain investor interest “for longer than any summit could last.”
Francis Fong, an economist at TD Bank, said the measure builds on an earlier version of the super-deduction that targeted advanced manufacturing, clean technology and zero-emission vehicle production, and now extends support to critical minerals, mining and oil and gas — sectors overseen by the government’s Major Projects Office. “This does move the dial significantly for a lot of firms and their investment decisions,” Fong said, though he added that further changes to Canada’s broader tax and regulatory framework will likely be needed to unlock additional capital.
Walid Hejazi, a professor at the University of Toronto’s Rotman School of Management, said the policy should lift living standards broadly. “It will raise Canadian prosperity,” he said. “The average worker out there will be better off as a result of the policies that Carney’s putting forward.”
Environmental and Fiscal Pushback
Not all reaction was favourable. The inclusion of gas distribution pipelines and other fossil fuel infrastructure among eligible assets drew criticism from environmental groups. Keith Stewart, senior energy strategist at Greenpeace Canada, described the move as “an act of climate vandalism,” arguing that new investment in oil and gas carries long-term costs in wildfires, floods and extreme weather.
Broader tax-reform advocates have also cautioned that the mega deduction, while significant, addresses only part of the competitiveness problem. Commentary published ahead of the announcement argued that capital gains treatment — cited as a major driver of founders relocating to the U.S. — along with personal income and corporate tax structures, still require attention, and suggested that any further tax relief would need to be financed by trimming existing tax preferences or restraining spending given Canada’s ongoing deficits.
The government maintains that the changes reinforce advantages it says already exist, including Canada’s AAA credit rating, the lowest net debt-to-GDP ratio in the G7, and a top G7 ranking for banking stability, as it seeks to convert summit-stage pledges into sustained investment commitments in the months ahead.
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