New Mega Deduction a Good Start, But More Tax Reforms Are Needed

Evelyn Jacks

The Federal government has unveiled a Productivity Mega Deduction, which will provide immediate expensing under Capital Cost Allowance (CCA) provisions for a broad range of depreciable property, importantly on a permanent basis, for acquisitions on or after September 15, 2026. Check out the noteworthy exclusions are listed below. This tax reform is a good start, but much more needs to be done, especially for small business owners and average taxpayers to make Canada truly competitive across our tax base.

The Backdrop. Canada’s Prime Minister has called the times we are in a “global rupture”.  This reflects the fact that global trade rules are now entirely unpredictable and in some cases, broken. The resulting economic demands of trade behaviors that can be called “weaponized”, especially from our southern neighbors, at the extreme, could threaten our independence as a nation. That’s scary for everyone. And that’s exactly why now is the right time for a significant personal and corporate tax reform for 2027 and beyond.

The Productivity Mega Deduction is Not for Everyone. The new PMD will allow for immediate expensing of assets acquired in business.  That is, taxpayers who invest in eligible property will be able to fully deduct the costs in the year that the property becomes available for use.

Restrictions to the new Productivity Mega Deduction include certain types of vehicles in CCA Class 10 and Class 10.1, buildings in Class 1 and 3 and Class 14 assets – franchises, licenses and goodwill.  Property that is not eligible for immediate expensing would continue to be eligible for the existing temporary Accelerated Investment Incentive.

And that’s where things get complicated.

Used Equipment must Meet Specific Criteria. The background information on the new Mega deduction notes that eligible property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer is eligible for immediate expensing only if both of the following conditions are met:

• neither the taxpayer nor a non-arm's-length person previously owned the property; and
• the property has not been transferred to the taxpayer on a tax-deferred "rollover" basis.

So inter-company rollover transactions are out.  There is more news.

Loss Restrictions for Individuals and Partners.  In addition, rules will apply to restrict the ability of individuals, and partnerships with members who are individuals, to create or increase a loss, which is consistent with rules applied under temporary immediate expensing measure for small businesses which were introduced in 2021.  Should this be revisited?  Does that seem fair and equitable?

Excluded Vehicles.  The draft legislation included with the announcement specifically excludes the following vehicles, notably those who have been assembled outside of Canada and:

“property of a taxpayer that is included in Class 10 or 10.1 in Schedule II that is either a (i) a passenger vehicle, or a motor vehicle that is acquired primarily for use as a taxi, or described in paragraph (d) or (e) of the definition automobile in subsection 248(1) of the Act; and either has been used for any purpose before it was acquired by the taxpayer, or was assembled in a country other than Canada. . .”

Importantly, those acquiring Class 10.1 assets will have the option to elect out of the immediate expensing rules.   We’ll discuss more of these details as they emerge at the CE Summits on September 23, November 5 and January 20.  If you are a tax or financial professional answering questions about year end planning or personal/corporate taxation, you’ll want to take in these important professional sessions and earn valuable CE Credits too. 

Big and Bold Tax Reforms for All.  The government says it has cut Canada's marginal effective tax rate, defined as a measure of tax on businesses that is used to compare tax competitiveness between nations, from 13 per cent down to 6.4 per cent.  This rate is now the lowest of any country in the G7.

These initiatives are admirable, but they are focused on big business investment.  Lost in the announcements to date is the day-to-day economic uncertainty the backbone of Canada’s economy is facing.  That’s the small business owner and the individual taxpayer who need a cash flow break, now. 

Governments can most effectively help with as big and bold an initiative for those very people: a significant personal and corporate tax reform, particularly at the federal level, in the upcoming fall budget that reduces personal and corporate taxes in early 2027.

The Case for Lower Taxes. High taxes make Canada a less attractive place to work and do business in.  We can change that with a real commitment to recreate the ideals of a new tax system for a new economy:   fairness, equity, simplicity and compliance all on the table for dissection and introspection. 

When tax rates drop, cash flow increases for the consumer spending, so vitally needed by Canadian small businesses challenged to survive the trade war, pay off the debt they are challenged with, increase their margins for reinvestment and hire more staff, too.

Lower personal taxes can increase labor force productivity – people will want to work more hours or strive higher for the next promotion.  That helps small businesses grow and encourages new entrepreneurship ventures, too.

Tax reform will also be very important for the average investor as well.  It’s important to give that person a direct opportunity to invest in the new economy in Canada.  More money in the pocket every two weeks, means more savings in RRSPs, TFSAs and other important tax-preferred investments that help Canadians position themselves for a prosperous and independent retirement.

Bottom Line.  One can’t avoid the messaging of the economic pain to come from the changing global trade rules.  Mark Carney announced early this month that Canada needs to  “pivot and prosper” in order to emerge “stronger and more resilient”. 

This new corporate tax reform in fact, could make Canada a tax haven of sorts to attract new business investment for new economy building – both from within Canada and from afar.  This in turn can create better jobs for those who will be laid off as a result of the tariff war. Increasing the small business deduction and reducing tax rates will help businesses retain more earnings for growth investing.

The new Productivity Mega Deduction is now bringing some clarity, together with announcements at the Canada Investment Summit, focused on “what we can control”.  Canada seeks to “catalyse $1 trillion in total investment in Canada over the next five years...” and that’s certainly good news.  It will bring new jobs for massive projects and no doubt, some more big tax breaks as well.   

But lower personal and small business tax breaks will put more money into the hands of everyday people on Main Street Canada. 

Hopefully there is more in significant tax reforms to come for those folks in the upcoming Federal Budget. What’s your take?  Please weigh in on the Knowledge Bureau Poll this month.

In the meantime, while we cannot eliminate uncertainty, we can plan for it and use this time as an opportunity to review investment portfolios to ensure they have proper liquidity, risk controls, and a clear investment framework. 

Tune in for a conversation on just that as we launch Season 3 of Real Tax News with Evelyn Jacks and Friends, Mark Taucar and Nicolas Johnson of Accilent Capital Management, partners in the Acuity Conference for Distinguished Advisors November 22 to 24 in Victoria BC It’s a fascinating conversation.  Watch for it Friday, September 18.