On September 15, 2026 (“Announcement Day”), the Department of Finance released draft legislative proposals to implement the “Productivity Mega Deduction,” permanent 100% first-year (“immediate”) expensing for a wide range of new or used depreciable property and for Canadian development expenses (“CDE”), together with immediate expensing and accelerated capital cost allowance (“CCA”) for liquefied natural gas (“LNG”) facilities.[1] If enacted, the Department of Finance anticipates that Canada’s marginal effective tax rate on new business investment would drop from 13.0% to 6.4% — well below the U.S. rate of 16.9% and the OECD average of 19.0%.

1. What is the Productivity Mega Deduction?

According to the Finance Backgrounder, the Budget 2025 “Productivity Super-Deduction” provides immediate expensing for roughly 15% of investment in capital assets; the Productivity Mega Deduction would permanently extend immediate expensing to about two-thirds of such investment.[2]

The draft legislation includes two separate measures:

  • Measure 1 (immediate expensing) applies to eligible capital property acquired, and CDE incurred, on or after Announcement Day. It amends Income Tax Act (Canada) (“ITA”) ss. 13 and 66.2 and Regulations 1100, 1103, 1104 and Schedules III and IV.[3]
  • Measure 2 (LNG) provides immediate expensing for Class 47 liquefaction equipment and confirms the continued application of accelerated CCA for Class 1 liquefaction buildings, acquired on or after November 4, 2025.[4]

2. How will the Productivity Mega Deduction support the Canadian economy?

The Productivity Mega Deduction was announced by the Prime Minister and the Minister of Finance and National Revenue at the Canada Investment Summit in Toronto on September 15, 2026.[5] The Minister of Finance and National Revenue described it as “one of the most significant changes to Canada’s business tax system in half a century, and a game changer for investment in this country.”[6]

The Department of Finance predicts that the measure would reduce Canada’s marginal effective tax rate (“METR”) on new business investment from 13.0% to 6.4%, compared with a projected U.S. METR of 16.9% and an OECD average (excluding Canada) of 19.0%.[7]

3. Measure 1 — How will immediate expensing work?

3.1 The new deduction: Regulations 1100(0.1)–(0.3)

The Draft Legislative Proposals replace the existing temporary immediate-expensing rules in Reg. 1100(0.1)–(0.3) with new rulesto permit, for the purposes of ITA para. 20(1)(a), a deduction not exceeding the lesser of:

  • the undepreciated capital cost (“UCC”) at year-end of “immediate expensing property” that became available for use in the year; and
  • if the taxpayer is neither a corporation nor an eligible partnership, the taxpayer’s income from the business or property in which the asset is used (computed without this deduction).

New Reg. 1100(0.2) will prevent double counting by denying any other CCA on the same property for the year. New Reg. 1100(0.3) is a timing/anti-avoidance rule that will exclude certain amounts incurred before Announcement Day, with a carve-out for arm’s-length inventory transfers on or after that date.

For these purposes “taxpayer” includes a partnership.

The Draft Legislative Proposals also repeal regulations relating to the previous immediate expensing incentive to wind down the former $1.5 million annual-limit regime.

3.2 Who can claim the deduction?

Corporations and partnerships consisting solely of corporate partners will be able to deduct the full cost of eligible capital expenditures, with no income limit.

Individuals and partnerships with individual members will not be able to use immediate expensing to create or increase a loss. Any unused amount will remain in the UCC pool for future years.

3.3 What qualifies: “immediate expensing property” — Regulation 1104(3.1)

Property of a prescribed class (other than excluded property) will qualify if it is acquired on or after Announcement Day and: (i) it has not been used for any purpose before it was acquired by the taxpayer (e.g., an acquisition of new property); or (ii) if used property, the taxpayer was not deemed to have previously claimed CCA or deemed to have a reduction to the UCC of the property (e.g., previously leased or rented property) or acquired it from a non-arm’s length person.

3.4 What does not qualify: “excluded property”

The following will be excluded from the Productivity Mega Deduction:

  • Buildings and building additions in Classes 1 and 3;
  • Class 14 (limited-life intangibles such as patents, franchises, and licences), Class 14.1 (goodwill and similar property) and Class 51 (e.g., natural gas distribution pipelines);
  • “Excluded vehicles” — Class 10 and 10.1 passenger vehicles, taxis and certain other automobiles that were used before acquisition or assembled outside Canada;
  • Class 10.1 property (passenger vehicles exceeding $39,000) for which the opt-out election in proposed Reg. 1103(2k) is made;
  • Qualified liquefaction equipment (which has its own regime, see discussion below in Part 4); and
  • Industrial mineral mines and rights, timber limits, and rights to cut timber (other than timber resource property).

3.5 Election to opt out for passenger vehicles — Regulation 1103(2k) 

A taxpayer may elect, in its return for the year the Class 10.1 vehicle is acquired (filed on or before the filing-due date), to treat that vehicle as excluded property.The draft legislation does not identify a prescribed form; the election appears to be made in the return. A taxpayer might elect out to preserve declining-balance CCA in later years or to manage recapture on disposition. 

3.6 Passenger-vehicle recapture — ITA ss. 13(2) and 13(7)(i) 

Subsection 13(2) ordinarily prevents recapture on a Class 10.1 vehicle. The draft legislation switches this relief off where the vehicle was at any time immediate expensing property; the excess instead reduces UCC under element B of the UCC definition in s. 13(21). Paragraph 13(7)(i) extends the deemed cost/proceeds rules (tied to the prescribed ceiling) to such vehicles. Both amendments apply to property acquired on or after Announcement Day.

3.7 How will the Productivity Mega Deduction apply to leasehold interests and timber limits — Schedules III and IV?

Regulation 1100(1)(b) permits a deduction for the capital cost of property that constitutes a leasehold interest and is included in Class 13 of Schedule II. Schedule III of the Regulations sets out the method for determining the amount that may be deducted annually in respect of a taxpayer’s leasehold interest, with the allowance calculated separately for each unit of leasehold capital cost.

Regulation 1100(1)(f) provides a deduction in respect of the capital cost of property included in Class 15. Class 15 generally comprises property (other than a timber resource property) acquired for the purpose of cutting and removing merchantable timber from a timber limit. Schedule IV sets out the method for calculating the amount that may be deducted under paragraph 1100(1)(f).

Schedules III and IV are to be amended so that the new Reg. 1100(0.1) Productivity Mega Deduction is properly reflected in the UCC base used for those special allowances. The 1.5× factor for accelerated investment incentive (the “Accelerated Investment Incentive”)[8] property in Schedule IV is preserved. This will apply to property acquired on or after Announcement Day. “For more information about the Accelerated Investment Incentive, see our previous report: Full speed ahead: What Canada’s new immediate expensing means for manufacturers.

3.8 Immediate expensing of Canadian development expenses — ITA s. 66.2

This is the key change for mining and oil and gas clients and businesses. By way of background, there are three categories of Canadian resource expenses: Canadian exploration expenses (“CEEs”) (ss.66.1), Canadian development expenses (“CDEs”) (ss. 66.2) and Canadian oil and gas property expenses (“COGPEs”) (ss. 66.4). Currently, all taxpayers may generally deduct up to 30% of their cumulative CDEs at the end of a taxation year.

The proposed changes for CDE deductions are:

  • New definition — “immediate Canadian development expense” in s. 66.2(5): a CDE incurred on or after Announcement Day, excluding (i) successor amounts under s. 66.7(4) and (ii) the cost of a Canadian resource property acquired from a non-arm’s-length person or partnership. A special rule addresses flow-through renunciations under agreements entered into on or after Announcement Day.
  • Para 66.2(2)(e)(A) – this variable is changed to 15%.
  • New para. 66.2(2)(f) — an additional deduction (an A − B formula) that effectively tops the deduction for qualifying CDE up to 100%.
  • Reaccelerated CDE — the existing definition is amended so it covers expenses incurred after 2024 and before Announcement Day, dovetailing the existing enhanced regime with the new one. Expenses incurred before Announcement Day because of the flow-through share look-back rule are excluded.

4. Measure 2 — Are LNG facilities eligible for immediate expensing?

The proposed amendments relating to LNG facilities (in Regulations 1100, 1101 and 1104) are a modification to the previously announced Productivity Super-Deduction and will apply to property acquired on or after November 4, 2025, not Announcement Day.[9] Immediate expensing for liquefication equipment used in LNG facilities would be structured as an additional allowance that would bring the CCA rate for such property up to 100%. The 10% accelerated CCA rate for eligible Class 1 buildings used in LNG facilities announced in the Spring Economic Update 2026 would continue to apply.

The proposed amendments are:

  • Separate classes —The proposed amendments would create separate CCA classes for qualified liquefaction equipment (Reg. 1101(4j)) and qualified liquefaction buildings (1101(5b.3)).
  • Additional allowances — The proposed amendments would allow for immediate expensing for Class 47 liquefaction equipment (Reg. 1100(1)(yc)) and add a deduction of up to 6% of UCC for Class 1 liquefaction buildings, (for a total of 10%) consistent with the Spring Economic Update 2026 announcement (Reg. 1100(1)(a.31).
  • New definitions —The proposed amendments would define a “qualified liquefaction building” as a non-residential Class 1 property acquired after November 3, 2025 and before 2035 that primarily supports the facility and would define “qualified liquefaction equipment” as a new Class 47 property acquired after November 3, 2025 that primarily supports the facility (Reg. 1104(2)).
  • No emissions test — LNG facilities would not be required to meet an emissions intensity test in order to qualify for the immediate expensing for Class 47 liquefaction equipment or the accelerated CCA for eligible Class 1 non-residential buildings.

5. Related measures previously announced

Manufacturing or processing (“M&P”) buildings are excluded from the Productivity Mega Deduction (as Class 1 property) but remain eligible for the separate temporary Budget 2025 measure: 100% first-year expensing for eligible M&P buildings acquired on or after November 4, 2025 and first used for M&P before 2030, where at least 90% of floor space is so used, phasing down to 75% (2030–2031) and 55% (2032–2033), with no enhancement after 2033.

Property not eligible for immediate expensing may still benefit from the existing Accelerated Investment Incentive.

6. When is the Productivity Mega Deduction available?

Currently the package is draft legislation for consultation. It is not a tabled bill and is not law; it must be introduced, passed by Parliament, and receive Royal Assent before it takes effect, and it may change in the interim. The timeline for this process is uncertain as, to date, no consultation deadline and no explanatory notes have been provided.

7. How we can help

Miller Thomson’s Tax lawyers can assist with reviewing existing structures against the proposed new rules, confirming whether particular arrangements can benefit from the Productivity Mega Deduction and planning to enable eligibility. Please contact any member of the Tax Group to discuss how these proposed rules apply to your circumstances.

[1]Department of Finance Canada, Draft Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations (released September 15, 2026), online: https://www.canada.ca/content/dam/fin/corporate/dr-leg/2026/09-itaitr-lirrir-eng.pdf  [“Draft Legislative Proposals”]. Prime Minister of Canada, News Release, “Prime Minister Carney introduces new Productivity Mega Deduction” (September 15, 2026), online: https://www.pm.gc.ca/en/news/news-releases/2026/09/15/prime-minister-carney-introduces-new-productivity-mega-deduction [“PMO News Release”].

[2] Department of Finance Canada, Backgrounder, “Government of Canada introduces new Productivity Mega Deduction to boost Canada’s advantage as the most competitive G7 country for new business investment” (September 15, 2026), online: https://www.canada.ca/en/department-finance/news/2026/09/government-of-canada-introduces-new-productivity-mega-deduction-to-boost-canadas-advantage-as-the-most-competitive-g7-country-for-new-business-inve.html [“Finance Backgrounder”].

[3]Draft Legislative Proposals, supra note 1. Finance Backgrounder, ibid.

[4]Draft Legislative Proposals, ibid. Department of Finance Canada, Spring Economic Update 2026, online: https://budget.canada.ca/update-miseajour/2026/report-rapport/tm-mf-en.html  [“Spring Economic Update 2026”].

[5]PMO News Release, supra note 1.

[6]Ibid.

[7]Finance Backgrounder, supra note 2. NOTE: These are government projections and policy statements, not enacted outcomes.

[8]   https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance/accelerated-investment-incentive.html

[9]Draft Legislative Proposals, supra note 1. Spring Economic Update 2026, supra note 4.