The Canadian government’s new “mega” corporate tax cut 

At the Canada Investment Summit on September 15, Prime Minister Carney announced a major change to the tax treatment of new investment, called the Productivity Mega Deduction. Mega, he joked, because the government had already brought in a Productivity Super Deduction in the 2025 federal budget.

The Productivity Mega Deduction comes alongside other neoliberal reforms aimed at spurring an “investment supercycle” as a counter to the United States’ trade war against Canada. These other measures include cutting government spending (outside of defence), deregulation for major resource projects, privatization of airports, and expanding non-U.S. trade and investment deals. It was fitting that former Conservative Prime Minister Stephen Harper closed out the summit with a speech praising Carney’s efforts. 

Reflecting his central banker days, Carney is keenly aware of the need to project confidence in the Canadian economy to the world. Carney’s “open for business” agenda plays well with the finance crowd and is laser-focused on bringing foreign capital to Canada, and Canadian capital back home. 

The problem is less that the Productivity Mega Deduction won’t spur investment, but its enormous climate and environmental side effects, and substantial fiscal cost to the federal budget. Hint: the Canadian Association of Petroleum Producers was one the first out the door applauding it. Let’s take a closer look at how it works, its potential to spur investment, and how it differs from last year’s more environmentally-friendly Productivity Super Deduction.

Immediate expensing of capital investments

Both the Productivity Mega Deduction (PMD) and the earlier Productivity Super Deduction (PSD) aim to tilt the tax system towards new private sector investment. The main difference is in what types of capital expenditures are covered, and that the PMD is intended to be a permanent measure.

The core idea is to allow businesses to engage in “immediate expensing” of capital investments, meaning those investments can be deducted to reduce taxable income in the year they start to be used. This is also known as “cash flow taxation” and it differs from the conventional method of expensing capital investment over multiple years through Capital Cost Allowances. 

Under immediate expensing, corporations benefit financially because, as the adage goes, time is money. Deducting the full capital cost upfront means money today, which is preferable to the same amount of money five or more years later arising for expensing capital investment over many tax years. Thus, the biggest beneficiary of the PMD is investment in very long-term assets, like oil pipelines or Liquefied Natural Gas terminals. 

Much of the government’s rationale rests on a technical concept called the “marginal effective tax rate” (METR), which aims to estimate how much tax is imposed on an additional dollar of investment. This is different from the statutory corporate income tax rate and the average taxes as a share of income paid by corporations. 

How quickly businesses can write off investments for tax purposes is central to how the federal government calculates the METR, which drops to zero for investments that businesses can write off in year one. The Department of Finance estimates that the PMD would lower Canada’s METR from 13 per cent to 6.4 per cent, the remainder reflecting the portion of capital investment treated under the old rules. 

Due to the industry-level differences in capital investment in buildings, machinery and equipment, patents and so forth, there is a wide range of METRs. In the Department of Finance’s backgrounder, three industries (agriculture and fishing, manufacturing and processing, and transportation and storage) would see the METR turn negative as a result of the PMD—in effect, the feds would be subsidizing capital investments in these areas. This is because there is already a tax deduction for interest paid on debt, and that is a big part of the “cost of capital” to corporations.

Mega versus Super

The 2025 budget’s Productivity Super Deduction (PSD) is a more focused measure: it was time-limited (investments up to 2030) and had some policy direction in support of clean energy. This made it broadly similar to the targeted investment tax credits introduced by the Trudeau government.

The PSD is applicable to manufacturing/processing machinery and equipment, clean energy and conservation equipment, zero emission vehicles, data network infrastructure, and capital expenditures related to research and development. For liquefied natural gas (LNG) equipment and buildings, immediate expensing was available only for “low-carbon” facilities meeting certain emission standards. Thus, the PSD has many desirable features from a climate and energy perspective. 

The PMD is a permanent change, not a temporary one as the PSD was. It ups the coverage from 15 per cent of capital investments being eligible under the PSD, to 65 per cent under the PMD and PSD together. While most of this is framed in very neutral tax jargon, the reality is that the PMD opens the doors to a lot of dirty investments, including oil and gas pipelines, (higher-carbon) LNG facilities and mining investments. 

In the Department of Finance backgrounder showing the impact of the PMD on METRs by industry, mining and oil and gas are conspicuously absent. These two industries are at the forefront of the federal government’s economic agenda, and they have most to gain from the PMD due to large capital investments that depreciate over very long periods of time. 

Including investments like oil and gas pipelines and upstream extraction facilities within the PMD framework just adds to the litany of fossil fuel subsidies already provided by federal and provincial governments. These supports include federal financing through Export Development Canada, tax and royalty credits, low-cost electricity and the federal investment in the Trans Mountain Pipeline Expansion. 

New AI data centres would also appear to be a major beneficiary of the PMD on top of the PSD. Companies are planning billions on facilities that will ultimately employ few people and drive additional investment in new carbon-intensive electricity generation projects. 

At what cost?

The fiscal cost to the move is estimated at $36 billion over five years. With the current federal deficit of an estimated $65 billion this year and $63 billion next year, cutting revenues by an additional $7-8 billion per year is no small amount. This hurts at a time when policymakers are, otherwise, telling us the cupboard is bare, and real public service cuts are underway in Ottawa and across Canada. Indeed, additional cuts may soon be justified to pay for the PMD. 

In handing over billions of dollars a year to big corporations through the PMD, the federal government is now carrying more of the risk associated with costly megaprojects. Consider an oil or gas pipeline where the feds allow an immediate write-off. Uncertainty about the underlying oil and gas market a decade from now is the main factor inhibiting investment at the moment, largely due to the clean energy transition underway in Asia and Europe. By allowing immediate expensing, the feds are bearing more of the load financially.

The Department of Finance makes a bullish argument that the PMD will lead to increased economic growth of up to $22 billion in increased GDP per year a decade from now. This is based on an economic multiplier effect of three, which contrasts with the Parliamentary Budget Office’s much lower estimate of 0.5 for corporate tax cuts. 

While this bit of modelling may be overly optimistic, there’s good reason to think that the PMD will be effective in propelling new investment, especially when accompanied by the rapid approvals promised of major projects. The PMD is more compelling as an investment driver than across-the-board corporate tax cuts, but we need to be asking if this is the right type of investment for the long-term health of the country. 

Under PM Carney, Canada is clearly “open for business” and putting the federal government’s finger on the scale towards megaprojects with large environmental costs and with regard to the rights and title of First Nations across the country. The PMD risks pushing Canada ever further down the road of fossil fuel production and exports, and away from our climate commitments under the Paris Agreement. 

About the author

Marc Lee

Marc Lee is a Senior Economist with the Canadian Centre for Policy Alternatives. Marc joined the CCPA’s British Columbia office in 1998, and is one of Canada’s leading progressive commentators on economic and environmental policy issues. From 2009 to 2015, Marc led the CCPA’s Climate Justice Project (CJP), which published a wide range of research on fair and effective approaches to climate action through integrating principles of social justice. Marc continues to write about climate and energy policy, strategies for affordable housing, federal and provincial budgets and macroeconomics. Marc has an MA in Economics from Simon Fraser University and a BA in Economics from the University of Western Ontario. Marc is a past chair of the Progressive Economics Forum, a national network of heterodox economists. He also served as a Visiting Professor at Simon Fraser University’s School of Public Policy in 2024 to 2025.