Canada’s Proposed Productivity Mega Deduction: Key Considerations for Startups

On September 15, 2026, the Government of Canada released draft legislative amendments to the Income Tax Act and the Income Tax Regulations for a new “Productivity Mega Deduction” (“PMD”). If enacted as proposed, the PMD would permanently permit immediate expensing of a broad range of depreciable property acquired on or after September 15, 2026. It would also permit immediate expensing of certain Canadian development expenses incurred on or after that date. The details and key considerations are summarized below.

For further information, see the Prime Minister’s news release, the draft legislation and the Department of Finance backgrounder.

Key Takeaways:

1. If enacted as proposed, the PMD would permanently permit immediate expensing for a broad range of depreciable property acquired on or after September 15, 2026, generally in the taxation year in which the property becomes available for use, subject to applicable exclusions and restrictions. For startups, potentially eligible assets may include computers, servers, data-network infrastructure, machinery, laboratory equipment, furniture and certain acquired software or other technology assets, depending on their legal characteristics and capital cost allowance (“CCA”) classification.
2. Canadian development expenses incurred on or after September 15, 2026, may also qualify for immediate expensing. “Canadian development expense” is principally associated with Canadian resource activities and is subject to a detailed definition in the Income Tax Act.
3. Immediate expensing is principally a timing and present-value benefit, not necessarily a permanent tax saving. A pre-revenue or loss-making startup may receive limited immediate benefit unless the resulting non-capital loss can be applied against taxable income from another taxation year. Property that does not qualify for the proposed PMD may remain eligible for an enhanced first-year deduction under the temporary Accelerated Investment Incentive (a temporary enhanced first-year CCA measure).

Background:

Under the existing CCA regime, taxpayers are generally entitled to deduct the cost of depreciable property over multiple years at rates prescribed for the applicable property under the Income Tax Regulations, although temporary and targeted immediate expensing measures currently exist. Where permitted, immediate expensing accelerates deductions by allowing a taxpayer to deduct the entire cost of a depreciable asset in the year in which it becomes available for use, rather than claiming CCA over multiple years, and typically on a declining balance basis. This may improve near-term after-tax cash flow and the present value of the associated tax shield, but does not necessarily reduce the investment’s ultimate after-tax cost.

Eligibility and Restrictions:

The proposed PMD would generally apply to property that is depreciable under the CCA rules and acquired on or after September 15, 2026, other than “excluded property”. Under the proposed legislation, examples of excluded property would include:

• buildings and additions to buildings included in CCA Classes 1 and 3;
• property included in CCA Classes 14 and 14.1, such as franchises, licences and goodwill;
• property included in CCA Class 51, such as regulated natural gas distribution pipelines;
• certain vehicles included in CCA Classes 10 and 10.1, with detailed eligibility depending on matters including the vehicle type, prior use and, where applicable, place of assembly; and
• property depreciated in accordance with Schedules V and VI to the Income Tax Regulations.

Previously used depreciable property may also qualify but only if neither the taxpayer nor a person or partnership that does not deal at arm’s length with the taxpayer previously owned the property and the property was not transferred to the taxpayer on a tax-deferred rollover basis. The detailed prior-use and acquisition rules should be reviewed for each transaction.

The proposed PMD would also limit the ability of individuals and partnerships with individual members to create or increase a loss. This proposed limitation would not generally apply to corporations.

Although excluded from the proposed PMD as Class 1 property, manufacturing and processing buildings may remain eligible for the separate temporary immediate-expensing measure announced in Budget 2025. Other non-qualifying property may remain eligible for the temporary Accelerated Investment Incentive.

Implications for Startups:

The proposed PMD may be particularly relevant to profitable, capital-intensive startups in advanced manufacturing, life sciences, robotics, clean technology, data infrastructure and hardware-enabled businesses. Accelerating deductions may improve near-term after-tax cash flow and the present value of the tax shield, but the benefit depends on the property’s CCA classification, the taxpayer’s projected taxable income and expected holding period.

A corporation without current taxable income may generally create or increase a non-capital loss by immediately expensing eligible depreciable property under the proposed PMD. The eligible capital expenditure does not itself generate a refundable credit, but the resulting loss may have value if it can be carried back or applied against taxable income in a future taxation year. The value of immediate expensing therefore depends on whether and when the loss can be used. Acquisitions, reorganizations, changes of control and other loss-restriction events may affect the availability or use of losses and should be reviewed separately.

Other considerations include reduced CCA deductions in future years, possible recaptured income on a disposition where CCA has been previously claimed, uncertainty regarding asset classification, financing costs and interactions with other deductions and incentives. Taxpayers should also confirm the corresponding provincial or territorial income-tax treatment.

The legislative proposals implementing the PMD remain in draft form and may be amended before enactment. As with any proposed tax measure, taxpayers should assess the potential impact of the proposed PMD in light of their circumstances.

If you have any questions regarding the above, or wish to request a consultation, please contact Rebecca Cochrane ([email protected]), Jesse Brodlieb ([email protected]), Leanne Stevens ([email protected]) or any other member of Wildeboer Dellelce LLP. The authors gratefully acknowledge the assistance of articling student Daivik Shelat in the preparation of this update.

This update is intended as a general summary only and should not be regarded or relied upon as legal advice for any particular client or circumstance.

If you would like further information about the matters discussed in this update, or wish to discuss how they may apply to your circumstances, please contact us.