Prime Minister Mark Carney at the Canada Investment Summit in Toronto, on Tuesday, where announced a 'productivity mega deduction,' expanding on earlier efforts from the Liberals.Nathan Denette/The Canadian Press
On Tuesday, Prime Minister Mark Carney announced a “productivity mega deduction,” to allow (more but not all) businesses to immediately write off the cost of (more but not all) investments. It’s an important step in tackling Canada’s productivity crisis, but instead of being restricted to certain types of investments, the measure should be expanded to all business assets.
The announcement, which took place at the Canada Investment Summit in Toronto, expands on earlier efforts from the Liberals, such as the similarly named Productivity Super-Deduction introduced in the 2025 federal budget. The existing deduction allows businesses to immediately write-off 100 per cent of the cost of eligible new investments, such as machinery, equipment and technology, rather than deduct the expenses more slowly over a longer period.
The new measure expands the deduction to a wider range of assets, with 65 per cent of assets covered, up from 15 per cent. The deduction, which is available in the year the asset becomes available for use, covers items such as mining property, oil and gas pipelines, software, research and development, computer equipment and patents.
The government says the move will drop Canada’s effective marginal tax rate on new business investment from roughly 13 per cent to 6.4 per cent, half of the rate in the U.S. The new deduction is expected to cost $36-billion over five years. It’s a significant expansion from a similar measure introduced by the Trudeau government, which was pegged at $17.2-billion, and last year’s “super deduction,” which added $1.2-billion to that cost over five years.
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While it’s wise to woo foreign dollars for mega-projects, it’s good to see Mr. Carney also pay attention to the productivity woes of companies already operating in Canada. Business investment in non-residential capital is down since its 2014 peak, according to the C.D. Howe Institute. Canada’s businesses are investing less per worker in important categories, such as machinery and equipment and intellectual property.
There’s much debate about why Canadian businesses invest less than their OECD counterparts. Some frequently cited reasons include lenders’ preference for housing, onerous regulations for fossil fuel production, high tax rates, and a low small-business tax rate that encourages capital to go towards smaller, less efficient firms.
Low capital expenditure means that over time, the country’s businesses become less productive, reducing output per worker and lowering real wages. Essentially, it makes the economy weaker, and workers poorer. Low business investment has contributed to Canada’s slide in international rankings: in 1981 Canada was sixth among OECD countries in GDP per capita – now it’s 17th.
The mega deduction will encourage businesses to invest and will improve their cash flow, strengthening the country as it endures the gruelling trade war with the U.S. The government says the deduction is permanent, which is important, as it allows businesses to plan in a stable tax environment.
The government wasn’t clear why some assets are excluded from the new rules. Unfortunately, it’s a continuation of a pattern from the Liberal government, which likes to select some sectors and companies for expedited growth, while leaving others to languish. For example, the lottery-like structure of Ottawa’s major projects office picks winners for first-class treatment, creating a two-tier system for navigating regulatory hurdles. The previous Trudeau government also used this playbook, placing costly bets on buzzy tech “superclusters” and electric vehicles.
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Similarly, Finance Minister François-Philippe Champagne’s announcement earlier this week that the Canada Revenue Agency will prioritize advance income tax rulings to give certainty to companies investing $1-billion or more creates another two-tier system. Bigger projects get attention from the taxman, while smaller ones are pushed further down the queue. It’s better to fix the system for everyone.
Instead of adding complexity and carve outs to the tax code, Ottawa should shift to a simplified, competitive tax system that levels the playing field. This would allow businesses – not the federal government – to make their own decisions about which investments to make based on the best prospects for success.
The mega deduction tackles an important problem, but for Canada to reach its full economic potential, it needs a hands-off approach to taxation from Ottawa.