Carney unveils permanent ‘productivity mega deduction’ as tax experts warn of sectoral distortions

Prime Minister Mark Carney unveiled a permanent “productivity mega deduction” at the inaugural Canada Investment Summit in Toronto that lets companies immediately write off roughly two-thirds of their capital assets, up from about 15 percent, a change Ottawa says will cut the marginal effective tax rate on new investment from about 13 percent to 6.4 percent. The government is pitching the measure as a decisive edge over the U.S., but tax experts argue it fails basic tests of efficiency, fairness and simplicity, pushing some sectors into negative tax rates that favour capital over workers. The announcement supersedes last year’s time-limited “super productivity deduction,” which covered roughly 15 per cent of capital assets. Assets eligible for immediate expensing under the expanded version include machinery, software, research and development, pipelines, fibre-optic cables and rail track. Carney said the policy earned its name “because the advantage it confers is huge.” Under standard rules, a firm buying a long-lived asset deducts its cost gradually over many years. Immediate expensing lets the company claim the full cost as soon as the asset is available for use, lowering its tax bill sooner and improving near-term cash flow without changing the total deduction. “Your investment dollars will go a lot further in Canada than anywhere else in the advanced world,” Carney said. Critics of the design argue that pairing full expensing with continued interest deductibility effectively lets companies write off the same investment twice, driving effective rates below zero in some industries and tilting firms toward capital-intensive processes such as artificial intelligence rather than hiring. The Department of Finance’s own backgrounder acknowledges that negative effective rates could prompt over-investment in capacity in agriculture and fishing, manufacturing and processing, and transportation and storage. Critics contend a lower general corporate rate would encourage investment across all activities without government selecting the winners. Jack M. Mintz, the President’s Fellow of the School of Public Policy at the University of Calgary, faulted the earlier super-deduction for its expiry date and sectoral focus. “Given that investment is a long-term decision, temporary incentives have less appeal to companies,” Mintz wrote. Making the deduction permanent answers that objection, but Mintz has also argued that a tax system tilted toward favoured industries misallocates capital and ultimately drags on productivity. Charles Lammam, writing in The Hub, described the super-deduction as a targeted, temporary tool that swapped political judgment for market signals and called for rebuilding the system from the ground up. The deduction also leaves deeper structural problems untouched, the experts argue. Mintz noted that by 2012 Canada’s combined corporate rate of 26 percent sat 13 points below the U.S. rate and seven below the OECD average, and observed that the country has generally lost those tax advantages in the years since. Lammam pointed to personal taxes, noting Canada’s top federal rate applies at about $258,000 of income compared with roughly $850,000 in Canadian dollars in the U.S. “Hitting earners at 2.7 times the average wage makes Canada a talent-repelling outlier in global competition,” Lammam argued. As The Hub reported earlier this month, a Fraser Institute study found Canadian business investment per worker fell to $16,493 in 2024 while the U.S. figure climbed to $30,555, leaving Canada at 54 per cent of the American level. Labour productivity rose 26.7 per cent in Canada between 1999 and 2025 against 67.9 per cent in the U.S., and Canadian productivity in 2025 sat below its 2020 level. Hub contributors have argued that the Carney government’s incentives repeat a pattern of targeted, sector-specific tax breaks rather than the low-rate, neutral reform that produced Canada’s 26.2 per cent combined corporate rate by 2012. Manufacturing already faced an effective rate near zero or below after the 2025 budget, while construction confronted a rate above 20 per cent and high-output sectors such as oil and gas remained heavily taxed. Canada ranks 13th overall in the Tax Foundation’s International Tax Competitiveness Index but 22nd on corporate taxes and 27th on individual taxes. The corporate tax review the Liberals promised during the election was absent from the November budget. Ottawa’s case rests on the projected fall in the marginal effective tax rate, while Mintz and Lammam argue the sectoral distortions embedded in the design could lower productivity regardless of the headline number. An early test will come from firms already spending heavily on eligible assets: Canadian National Railway plans roughly $2.8 billion in capital spending in 2026, with rail track among the assets Carney named as qualifying. Prime Minister Mark Carney announced a permanent ‘productivity mega deduction’ at the Canada Investment Summit, allowing companies to immediately write off about two-thirds of their capital assets. This change aims to reduce the marginal effective tax rate on new investments significantly, positioning Canada as a competitive alternative to the U.S. However, tax experts caution that the policy could create sectoral distortions, favoring capital over labor and leading to negative tax rates in some industries. Critics argue for a more neutral tax system that encourages investment across all sectors without government favoritism. Ask about this article — or anything in Canadian politics, economics, and public policy — powered by The Hub’s 5,000-article archive and deep area expertise. Comments (0)