Canada proposes permanent immediate expensing for most business capital investment

The federal government is proposing to allow businesses to immediately write off the full cost of most new capital investments, a change that could be particularly relevant to wood manufacturers considering investments in machinery and production technology.

The proposed Productivity Mega Deduction would make immediate expensing permanent for most depreciable property acquired on or after Sept. 15, 2026. Instead of deducting the cost of an eligible asset over several years through capital cost allowance, a business could deduct the full cost in the year the asset becomes available for use.

The measure significantly expands accelerated depreciation provisions introduced in Budget 2025. Those measures provided immediate expensing for about 15% of capital investment, including machinery and equipment used in manufacturing and processing. The new proposal would expand eligibility to roughly two-thirds of capital investment, according to the Department of Finance. The government estimates the incremental cost at $36 billion over five years beginning in 2026-27.

For secondary wood manufacturers, the significance is the broader treatment of capital equipment. Most property covered by Canada’s capital cost allowance system would qualify, subject to several exclusions. That could improve the economics of bringing forward investments in manufacturing assets by allowing the tax deduction to be taken immediately rather than spread over the useful life of the equipment.

Buildings are a notable exception. Class 1 and Class 3 buildings and additions would not qualify for the new permanent immediate-expensing measure. However, manufacturing and processing buildings would continue to qualify for the separate temporary immediate-expensing treatment announced in Budget 2025. Certain vehicles, goodwill, licences and several other classes of property are also excluded.

Finance Canada estimates the proposal would reduce Canada’s overall marginal effective tax rate, or METR, on new business investment from 13% to 6.4%. The department calculates the comparable 2026 U.S. rate at 16.9%. These figures are government estimates rather than measurements of the tax rate faced by any individual business.

The sector breakdown is particularly notable for wood-related industries. Finance Canada estimates the METR for forestry would fall from 9.5% to 1.8%, compared with 19.7% in the United States. For manufacturing and processing, the estimated Canadian rate would move from negative 0.4% to negative 1.2%, compared with 11.1% in the U.S.

The government says permanent immediate expensing is intended to encourage businesses to invest sooner by lowering the after-tax cost of new capital and providing greater certainty for long-term investment decisions.

The proposal would generally apply to eligible property acquired on or after Sept. 15, 2026. Assets that do not qualify for immediate expensing would continue to receive the enhanced first-year deduction available under the Accelerated Investment Incentive.