In a significant policy announcement released on September 15, Canada’s Minister of Finance and National Revenue, François-Philippe Champagne, revealed that the federal government will make full expensing for machinery, equipment, and patent rights permanent. The move marks a critical turning point for capital investment across the country, providing investors with a reliable, long-term expectation of a lower cost of capital while actively reducing the traditional tax bias that has historically penalized long-term investments in Canadian enterprise.
Under the newly introduced framework—dubbed the "Productivity Mega Deduction"—businesses will continue to enjoy the ability to immediately deduct the full cost of their capital expenditures on eligible machinery, equipment, and patent rights the moment those assets become available for use. This policy direction represents a stark departure from previous trajectories. Without this intervention, the temporary full expensing rules that were reinstated in 2025 were scheduled to begin phasing out after 2029, steadily returning to less competitive cost recovery provisions between 2030 and 2033. Policymakers and economic analysts note that letting those provisions expire would have forfeited hard-won gains in productivity and competitiveness. By securing permanence, Ottawa aims to anchor business confidence and solidify Canada’s standing as an attractive jurisdiction for domestic and international capital.
Background and Evolution of Canadian Capital Allowances
The journey toward permanent full expensing has deep roots in North American fiscal policy competition. In 2018, the Canadian government significantly enhanced its capital allowances in direct response to the temporary bonus depreciation measures introduced in the United States under the 2017 Tax Cuts and Jobs Act (TCJA). To maintain economic parity and prevent investment flight across the border, Canada adopted temporary immediate expensing for equipment and machinery utilized in the manufacturing and processing of goods, alongside qualified clean energy investments. Concurrently, the government introduced accelerated depreciation schedules for non-residential buildings and various intangible assets.
These temporary policies were initially set to begin phasing out in 2024. However, recognizing the evolving economic landscape and the ongoing need to stimulate private sector investment, the measures were reinstated in 2025. Under that iteration, they were slated to remain in effect until 2029 before undergoing a gradual phase-out between 2030 and 2033. Furthermore, immediate expensing was extended to encompass patents, data network infrastructure equipment, and general-purpose electronic data-processing equipment alongside systems software acquired after April 15, 2024, provided they became available for use before 2027.
Had the original phase-out schedule proceeded, the economic consequences would have been pronounced. By the end of 2033 and into 2034, the various temporary provisions would have fully expired. Buildings utilized in manufacturing and processing would have experienced a drop in their first-year write-off from 15 percent in 2025 down to 10 percent by 2034, while other non-residential buildings would have seen deductions decrease from 9 percent to 6 percent. Measured in net present value terms, Canada’s deduction for equipment and machinery would have fallen from 100 percent in 2025 to 93.5 percent in 2034.
Furthermore, projections indicated that by the end of 2027, intangible assets in Canada would have languished with the second-lowest capital cost recovery in the entire Organisation for Economic Co-operation and Development (OECD), standing at a meager 43 percent. Although Canadian businesses were collectively positioned to deduct 85 percent of their capital investments across all asset types in 2025, that aggregate figure was projected to slide downward to 72.8 percent by 2034.
Complementing these executive announcements, a separate legislative measure—Bill C-31, currently making its way through the Senate—seeks to implement additional provisions from the 2025 federal budget. This bill is anticipated to formally introduce immediate expensing for manufacturing and processing buildings. If enacted, the temporary immediate expensing would apply retroactively to eligible buildings acquired on or after November 4, 2025.
The Proposal for Permanent and Broader Full Expensing
The core of the federal government’s newly unveiled Productivity Mega Deduction is its permanence. By permanently locking in full expensing for machinery, equipment, and patent rights, the policy avoids the looming cliff-edge effect that was designed to begin after 2029. According to the Ministry of Finance, the reform significantly broadens the practical scope of full expensing, expanding its coverage from roughly 15 percent to approximately two-thirds of all private business capital investment in the country.
Nevertheless, the proposal does maintain certain scheduled phase-outs. Temporary full expensing for manufacturing and processing buildings, as well as accelerated depreciation for other non-residential buildings, will still follow their planned reductions. Specifically, beginning in 2030, full expensing for manufacturing and processing buildings will start to phase down, reducing its value from 100 percent to 61.4 percent of purchasing costs by 2034.
Even with those specific building-related phase-outs factored in, the overarching impact of the permanent machinery and patent provisions means that businesses will still be able to permanently deduct roughly 84.1 percent of their capital investment costs across the broader capital stock. This stands in stark contrast to the baseline scenario where overall cost recovery would have eroded down to 72.8 percent by 2034. By providing a reliable, predictable investment climate, the policy keeps the cost of capital low throughout the economy, thereby fueling private sector capital formation and fostering sustainable, long-term economic growth.
Consolidating Canada’s International Competitiveness
From an international perspective, the move to make full expensing permanent elevates Canada’s capital cost recovery framework into elite global standing. Under the government’s proposal, Canada’s capital allowances system is projected to rank as the fourth best among all 38 OECD member countries. This prevents a potential slide to seventh place, which would have occurred as temporary U.S. full expensing provisions for industrial buildings phase out between 2028 and 2030.
For the period spanning 2026 to 2029—prior to the scheduled phase-out of its own full expensing for manufacturing and processing buildings—Canada will share the distinction of having the best capital cost recovery in the OECD, placing alongside Estonia and Latvia. By 2030, Canada’s broad full expensing regime will ensure that businesses enjoy the strongest cost recovery among any large, developed economy. The net present value of capital stock recovery is expected to hover around 84.1 percent, vastly outstripping the current OECD average of 68.8 percent.
Under this framework, Canada would outperform other major industrialized economies that maintain broad expensing regimes, including the United States, the United Kingdom, and the European Union—assuming the European Commission’s narrower research and development full expensing proposal within the broader EU tax omnibus framework takes effect. The only major exceptions among developed peers are the Baltic nations. Lithuania implemented permanent full expensing for machinery, equipment, and most acquired intangible rights starting in 2026. Meanwhile, Estonia and Latvia operate unique distribution-based corporate tax systems where corporate profits are entirely exempt from annual taxation, being taxed only upon distribution to shareholders. This structural difference grants those two nations a form of cost recovery equivalent to full expensing for all investments, occasionally offering superior benefits for companies facing temporary losses or utilizing loss carryforwards.
Meanwhile, the United States has maintained permanent full expensing for machinery and equipment while temporarily extending it to most industrial buildings, capturing roughly 10 to 15 percent of all buildings and structures. This currently gives the U.S. a broader expensing footprint than Canada. However, because those U.S. provisions for industrial buildings are scheduled to phase out between 2028 and 2030—predating the conclusion of Canada’s accelerated depreciation schedules for non-residential buildings—Canadian capital allowances are currently tracking to become more favorable than those of its southern neighbor.
When evaluated through the analytical framework of the International Tax Competitiveness Index, the reform largely preserves and consolidates Canada’s recently improved international standing. Among the 38 OECD countries evaluated in the Index, the full suite of temporary expensing provisions introduced in the 2025 federal budget was projected to lift Canada’s corporate tax rank by eight positions, moving it from 22nd to 14th place. By cementing full expensing for machinery and patents on a permanent basis, the government ensures Canada can maintain a competitive position at 19th place in 2030, successfully averting a regression back to the 22nd position as other nations adjust their own capital allowances over time.
