Productivity Mega Deduction: what qualifies, when it starts, how it works with grants

What is the Productivity Mega Deduction?

It is a proposed, permanent form of what tax practitioners call immediate expensing. Normally a business deducts the cost of equipment a slice at a time through capital cost allowance, at a rate set for each class of asset. Under the Mega Deduction, the whole cost comes off taxable income in the year the asset becomes available for use.

It builds on the Productivity Super-Deduction from Budget 2025, which gave immediate expensing to about 15% of business investment in capital assets: manufacturing and processing machinery and buildings, clean energy and energy conservation equipment, zero-emission vehicles, patents, data network infrastructure and computers. Finance says the Mega Deduction widens that to about two-thirds of investment in capital assets. Property that does not qualify keeps the enhanced first-year deduction under the temporary Accelerated Investment Incentive, which runs for property available for use before 2030.

Finance estimates the cost at $36 billion over five years, starting in 2026-27, and says the change cuts Canada's marginal effective tax rate on new business investment from 13.0% to 6.4%, against 16.9% in the United States.

Is the Productivity Mega Deduction law yet?

No. As of October 5, 2026 it is a proposal. The government announced it and published draft amendments to the Income Tax Act and Income Tax Regulations on September 15, 2026, and ministers repeated the announcement across the country from September 30 to October 3. It still has to be introduced in a bill and passed by Parliament, and the details can change on the way.

The draft rules apply from September 15, 2026, the date Finance calls Announcement Day, so a purchase made now is planned against the proposal: if the measure passes as drafted, the deduction covers it. Talk to your accountant before you commit a large purchase on the assumption that it will.

What property qualifies, and what does not?

Under the draft rules, any property of a prescribed CCA class qualifies unless it is on the excluded list. That reverses the old approach, which named the classes that qualified.

Manufacturing and processing buildings are not covered, because Class 1 is excluded. They stay under the temporary immediate expensing for manufacturing buildings proposed in Budget 2025. Liquefied natural gas equipment has its own rule: an extra allowance that brings the CCA rate on Class 47 liquefaction equipment to 100%, usable only against income from that facility.

Do vehicles qualify for the Mega Deduction?

Many do. Heavy trucks, tractor-trailers, buses and off-road equipment follow the general rule. Cars, SUVs, taxis, and vans or pick-up trucks used mainly to haul goods or equipment for the business face two extra conditions in the draft: the vehicle must not have been used before you bought it, and it must have been assembled in Canada. A used or imported car, SUV, work van or pick-up does not qualify.

Two more details for passenger vehicles in Class 10.1. The existing cost ceiling still caps how much of a passenger vehicle's price counts. And you can elect, on the return for the year you buy it, to keep the vehicle out of immediate expensing. Electing out keeps the usual Class 10.1 rule, where selling the car later does not trigger recapture.

Does used equipment qualify?

Yes, with two conditions. Used property qualifies if neither you nor anyone you do not deal with at arm's length (such as a related company or a family member) owned it before, and it did not come to you through a tax-deferred rollover. Buying a used machine from an unrelated dealer works. Moving equipment you already own into a new company does not. The vehicle rule above is stricter: used passenger vehicles are excluded either way.

When can you claim it?

In the tax year the asset becomes available for use, provided you acquired it on or after September 15, 2026. "Available for use" generally means installed and ready to work, so timing matters at year end. A machine bought in December but not installed until January is deducted in the following tax year.

For a corporation with a calendar year end, eligible equipment acquired from September 15, 2026 and in use by December 31 goes on the 2026 return. Equipment bought before September 15 stays under the rules that applied when you bought it.

How much is the Mega Deduction worth? A worked example

Take an Ontario contractor, incorporated, buying a new $150,000 excavator. Excavators sit in CCA Class 38, which depreciates at 30% a year on a declining balance. For an excavator bought earlier in 2026, the Accelerated Investment Incentive allowed about 45% of the cost in the first year, $67,500, with the rest coming off over the following years. Under the Mega Deduction, the full $150,000 comes off in the year the excavator goes to work.

Two honest limits. First, it is mostly timing: the total you deduct over the life of the excavator is the same, so the deductions you take now are deductions you will not have later. Second, when you sell the asset, proceeds up to its original cost are generally taxed back as recaptured depreciation, because you already deducted the whole cost. The benefit is real (tax saved now is cash you can use now) but it is a deferral, not a discount on the excavator.

Rates: federal small-business rate 9% plus Ontario 3.2%; federal general rate 15% plus Ontario 11.5%. Your rate depends on your province and income.

Can you combine the Mega Deduction with grants and tax credits?

Yes, and you should, but each dollar of help shrinks the deduction. The CRA's rule is that when you receive a grant, subsidy or rebate from a government to buy depreciable property, you subtract it from the property's capital cost. A federal investment tax credit works the same way one year later: the credit you claim reduces the undepreciated capital cost of the class at the start of the following year. You deduct the cost you actually carried.

Provincial credits are usually treated as government assistance; ask your accountant which year yours reduces. Loans and repayable contributions do not reduce the cost as long as they must be repaid.

The practical point is about cash. A deduction only saves money if you owe tax, while a grant, or a refundable credit, pays even when you do not. A young or loss-making company gets more from a refundable credit or a grant on the same purchase than from a bigger deduction it cannot yet use. A corporation can turn a deduction it cannot use into a loss and carry it back three years or forward twenty, but only the carry-back puts cash in hand now, and only if it paid tax in those years. You also do not have to claim the full amount: a business with little income can claim less and keep the rest for later years.

What should you do before buying equipment?

1. Apply for grants first. Many grant programs pay only for costs incurred after approval, so buying first can cost you the grant. The deduction waits for you; many grants do not.
2. Confirm the CCA class with your accountant, and check the asset is not on the excluded list.
3. Mind the date. Acquired on or after September 15, 2026, and in use before your year end, to claim it this year.
4. For a car, SUV, van or pick-up, confirm it is new and assembled in Canada.
5. Keep the paperwork: the invoice, the delivery and installation date, and any grant or credit received on the asset.
6. Watch for changes. The measure is still a proposal until Parliament passes it.

Which equipment programs work alongside it?

These programs in our catalogue pay toward the same kinds of assets. The grants and tax credits below reduce the amount you deduct under the rule above; the loans and repayable contributions generally do not, as long as they must be repaid. Each program sets its own conditions.

Federal

• Clean Technology Manufacturing ITC: up to 30%, refundable, for corporations buying machinery used primarily to make clean technology products or to extract and process certain critical minerals.
• Clean Technology ITC: up to 30%, refundable, for corporations buying equipment such as solar, wind, heat pumps, stationary storage and non-road zero-emission vehicles. It cannot be claimed on the same property as the manufacturing credit.
• Regional Tariff Response Initiative: up to $3 million non-repayable for incorporated businesses hit by tariffs with at least $1 million in annual revenue, of which up to $1 million can fund a pivot project such as new equipment, delivered by the regional development agencies.
• Business Scale-up and Productivity: interest-free repayable contributions for equipment and productivity projects from FedDev Ontario, PrairiesCan, ACOA and CED Quebec.
• Atlantic Investment Tax Credit (Atlantic provinces and the Gaspé region): 10% on new buildings, machinery and equipment used in manufacturing, farming, fishing, forestry and other qualifying activities.
• BDC Equipment Loan: financing of up to 125% of the purchase price for businesses with at least 12 months of revenue. A loan, so the full cost stays deductible.

Provincial

• Ontario: Ontario Made Manufacturing ITC: 15%, refundable for Canadian-controlled private corporations, up to $3 million a year, on manufacturing buildings, machinery and equipment.
• British Columbia: Manufacturing and Processing ITC: 15%, refundable, for Canadian-controlled private corporations, on new manufacturing buildings, machinery and equipment from April 1, 2026, up to $300,000 per property.
• Manitoba: Manufacturing Investment Tax Credit: 8% (7% refundable) on manufacturing buildings and other qualifying property. From July 1, 2026, much manufacturing machinery and equipment gets an upfront sales tax exemption at purchase instead of the refundable credit.

Large processing projects ($10 million or more)

• Alberta: Agri-Processing Investment Tax Credit: 12%, non-refundable, for projects of $10 million or more in value-added agri-processing.
• Saskatchewan: Critical Minerals Processing Investment Incentive: 15% transferable credits on processing projects of $10 million or more.

For the wider picture, see our guides to equipment and capital funding, manufacturing grants and business tax credits.

Who gains most, and who gains little?

• Gains most: profitable corporations that buy a lot of equipment, vehicles or software. Finance's sector estimates show the biggest drops in the tax rate on new investment in transportation and storage, agriculture and fishing, and forestry.
• Gains less: small corporations already paying the small-business rate, because each dollar deducted saves less tax, and service businesses with few assets.
• Gains little now: businesses with no taxable income. A corporation can carry the resulting loss forward. A sole proprietor, or a partnership with individual partners, cannot use the deduction to create or increase a loss: the claim is limited to the income of the business that uses the asset.
• Not covered: anyone whose main investment is a building, a franchise or goodwill.

Manufacturing barely moves because its machinery already had immediate expensing. A negative rate means the tax system, including credits, subsidises the marginal investment.

Frequently asked questions

What is the Productivity Mega Deduction?

A proposed, permanent federal measure that lets businesses deduct the full cost of most depreciable property in the year it becomes available for use. It applies to property acquired on or after September 15, 2026, and Finance says it widens immediate expensing from about 15% of investment in capital assets to about two-thirds.

When does the Productivity Mega Deduction start?

It applies to property acquired on or after September 15, 2026. It is claimed in the tax year the property becomes available for use and has no end date.

Is the Productivity Mega Deduction law?

Not yet. Draft legislation was released on September 15, 2026. It still has to be passed by Parliament, and the details may change.

Do I need to apply for the Productivity Mega Deduction?

No. It is claimed as capital cost allowance on your income tax return. There is no application form or approval.

Does a grant reduce the Productivity Mega Deduction?

Yes. A government grant, subsidy or rebate toward an asset is subtracted from its capital cost, so you deduct the cost net of the grant. An investment tax credit reduces the balance the following year. A loan does not reduce it.

Do vehicles qualify for the Productivity Mega Deduction?

Many do. Cars, SUVs, taxis, and vans or pick-ups used mainly to haul goods or equipment qualify only if they are new and assembled in Canada, and the passenger vehicle cost ceiling still applies. Heavy trucks and off-road equipment follow the general rule.

Can sole proprietors claim the Productivity Mega Deduction?

Yes, but the claim is limited to the income of the business that uses the asset. An individual, or a partnership with individual partners, cannot use it to create or increase a loss.