Prime Minister Mark Carney used the first-ever Canada Investment Summit in Toronto last week to unveil a major tax change aimed at boosting business investment, according to an analysis published by the C.D. Howe Institute. The policy, dubbed the “productivity mega deduction,” will let businesses immediately write off new investments in most capital assets rather than depreciating them over time.
According to calculations from the Department of Finance cited in the analysis, the measure will roughly cut in half the economy-wide marginal effective tax rate on new capital investment, bringing it down to 6.4 percent. That compares with 16.9 percent in the United States and an average of 19 percent across other OECD countries. The federal government estimates the fiscal cost of the deduction at $36 billion over the next five years.
Why Ottawa Is Targeting Capital Investment
The C.D. Howe Institute authors, William B.P. Robson and Mawakina Bafale, describe the move as a significant shift after what they call a decade of indifference toward capital formation in federal economic policy. They note that business investment in non-residential capital has been weak since 2015, to the point that the average Canadian worker today has roughly 9 percent less capital to work with than a decade ago.
The authors point out that Canadian investment per worker has historically lagged the United States and other OECD countries, but that the gap had been narrowing between the mid-1990s and mid-2010s. By 2014, the average Canadian worker was backed by about 98 cents of new capital for every dollar received by the average OECD worker, and about 89 cents for every dollar received by the average American worker. However, OECD projections from this past spring suggested that by 2026, Canadian workers would see only 64 cents of new capital for every OECD-worker dollar, and just 50 cents per American-worker dollar.
Broad Reach, but Uneven Effects Across Industries
The C.D. Howe analysis credits the new deduction with applying broadly across most capital assets, rather than targeting specific sectors as the accelerated depreciation rules it replaces did. The authors suggest this makes it function more like a general investment incentive than a form of industrial policy favouring particular activities, and argue it gives businesses reconsidering North American production locations — in the context of trade tensions with the United States — added reason to invest in Canada.
However, the effective tax rate cut is not uniform. Department of Finance figures referenced in the analysis show the 6.4 percent economy-wide average masks wide variation: the effective rate remains close to 20 percent in retail and wholesale trade, while it is actually negative in sectors such as agriculture and fishing, manufacturing and processing, and transportation and storage.
Gaps the Deduction Doesn’t Close
The C.D. Howe authors argue that immediate expensing does not address several other issues weighing on Canada’s investment climate. They point to the widening gap between tax rates for small and large businesses, which they say locks capital into smaller, less productive companies. They also warn that high general corporate income-tax rates discourage companies from reporting income in Canada and may push firms to finance new investments prompted by the deduction with more debt rather than equity.
Additionally, the authors note that the policy does nothing to address Canada’s relatively high personal income tax rates, which they say encourage skilled workers — and the investment that tends to follow them — to relocate to the United States or other jurisdictions perceived as more welcoming.
The C.D. Howe Institute analysis concludes that while the productivity mega deduction is a substantial step, further changes — including simpler and lower taxes on both businesses and individuals — would be needed to convince domestic and foreign investors that Canada offers strong long-term returns beyond the immediate benefit of faster write-offs.
This article is for informational purposes only and does not constitute financial, investment, or legal advice. Consult a licensed financial advisor before making investment decisions.
This article references reporting from:
