The ‘Productivity Mega Deduction’ Really is Huge

The name is cheesy, but the “Productivity Mega Deduction” announced today by Prime Minister Mark Carney is, in fact, a very big deal.

Carney made the announcement at his landmark Canada Investment Summit, which convened asset managers who collectively control around US$70 trillion.

In the face of a sovereignty crisis, Canadians elected a world-famous superstar economist as prime minister, so it shouldn’t come as a surprise that Carney’s big swing is a tax break for capital investment.

The Productivity Mega Deduction is basically an expansion of the Productivity Super-Deduction announced a year ago, in the 2025 budget.

In Budget 2025, the government announced that companies would be able to write off the capital costs of certain productivity enhancing investments — “machinery, equipment, technology, and other productivity-enhancing assets” according to the budget document. In practice, that means that instead of deducting the cost of a new machine gradually over many years, a company can deduct much more of it, much sooner. That lowers its tax bill up front and makes the investment more attractive. 

The federal government now says that “super deduction” covered about 15 per cent of capital investment assets. The new “mega deduction” will cover more like 65 per cent of capital expenditures — “fibre-optic cable, mining property, oil and gas pipelines, software, research and development, computer equipment, aircraft and vehicles, patents, rail track, bridges, and roads.”

The measure targets an area where Canadian investment is currently weak. Non-residential capital spending is expected to reach $401.2B in 2026, but machinery and equipment investment is expected to decline 0.6% to $127.2B, according to Statistics Canada. 

In other words, the kind of investment that most directly makes workers more productive (machines, equipment and technology) is actually shrinking, and that’s precisely the gap the “mega deduction” is meant to close.

Some notable things that stand out about all of this:

• The government says this tax credit will cost us about $36 billion over five years. That’s a lot of money. The government also says that this tax deduction is a key element of the plan to attract $1 trillion of capital investment. If that happens, that’s a lot of money too. The harder question is how much of that $36 billion will subsidize investments that companies were already planning to make.
• Back in 2025 the government boasted about having the lowest effective tax rate in the OECD for capital investment. And now with this expanded deduction we’re … even lower. Part of the logic is keeping pace with the U.S., which made 100 per cent bonus depreciation permanent in 2025. The effective tax rate is probably less important than the specific kinds of capital investments that the government is targeting here.
• This is a huge incentive for capital allocators to invest in productivity-enhancing tools and systems (something Canadian firms have been historically bad at). Actual stuff that drives economic growth. By contrast, a lot of foreign direct investment recently has taken the form of investors buying Canadian companies, and that’s not covered by this deduction.
• The research and development, patents, software, and computer equipment could be a really big deal for driving investment in the digital economy.

It’s an encouraging step towards strengthening investment in Canada. We’ll be tracking the economic data and see what kinds of investment actually materializes as a result of this expanded credit. As with everything announced this week, the devil is in the details.