Federal government expands business investment tax deduction

The federal government has announced changes to Canada’s capital cost allowance system that will allow businesses to deduct the full cost of more capital investments in the year they are purchased and put to use.

Called the Productivity Mega Deduction, the measure expands the type of assets that qualify for immediate expensing, building on provisions introduced in Budget 2025.

Under Canada’s tax system, assets such as equipment, vehicles, buildings and technology are typically deducted over a number of years through depreciation. Immediate expensing allows eligible businesses to claim the full deduction in the first year rather than spreading it out over time.

The expanded deduction will apply to a broader range of business assets, including software, computer equipment, research and development investments, fibre-optic infrastructure, transportation assets, mining property, and certain energy-related infrastructure.

The federal government also announced that immediate expensing will become a permanent feature of the tax system for eligible investments.

According to the government, the changes are intended to reduce the after-tax cost of purchasing new assets and encourage businesses to invest in equipment, technology, and infrastructure.

Federal officials estimate the measures will reduce Canada’s marginal effective tax rate on new business investment from approximately 13 per cent to 6.4 per cent.

For the agriculture and fishing sector, the federal government estimates the measure would reduce the marginal effective tax rate on new investment from 7.6 per cent to negative 6.0 per cent.

Finance Minister François-Philippe Champagne said the changes represent a significant update to Canada’s business tax system and are designed to support new investment.

For businesses considering capital purchases, the changes could affect how and when the cost of those investments can be deducted for tax purposes. Whether a specific purchase qualifies will depend on the type of asset and the rules established by the Canada Revenue Agency.

The government says additional details on eligible asset classes and implementation will be released as the program moves forward.