How Canada’s productivity super-deduction could incentivize investment

Full expensing of manufacturing and processing buildings

The PSD introduced a full first‑year write‑off for qualifying manufacturing and processing (M&P) buildings—meaning businesses can now deduct 100 per cent of a qualifying building’s capital cost in the year it is first used for M&P activities.

This marks a substantial shift from the historical treatment of Class 1 buildings, even when accelerated measures were available. It also gives Canadian manufacturers highly favorable tax treatment for building investments as the immediate expensing dramatically accelerates cost recovery and is expected to be attractive for large M&P capital projects.

Under the new rules, the entire cost of the building can be deducted in the year it becomes available for use, subject to these conditions:

• The buildings must be acquired on or after Nov. 4, 2025.
• It must be used for M&P before 2030.
• At least 90 per cent of its floor space must be dedicated to M&P.

The deduction is scheduled to phase out gradually between 2030 and 2033, declining to a 75 per cent rate for first-year expensing in 2030–31 and to a 55 per cent rate in 2032–33. The timing of acquisitions will be an important consideration for businesses intending to maximize the benefits.

Latest legislative updates

The federal government’s January 2026 draft legislation introduced a series of technical amendments to clarify the application of the PSD. Most measures are retroactive to Nov. 4, 2025.

Notable changes include:

• A new recapture rule for manufacturing buildings claiming immediate expensing. If more than 10 per cent of the building is used to earn non‑manufacturing income within 10 years, it is treated as disposed and reacquired in a separate prescribed class at its undepreciated capital cost.
• Confirmation of a 100 per cent first‑year CCA for eligible manufacturing buildings until 2029 and an explicit prohibition from claiming any other CCA on the same building in the year immediate expensing is taken.
• Immediate expensing will no longer be prorated for short taxation years.
• Taxpayers may elect to place qualifying buildings in separate prescribed classes.
• Strengthening anti‑avoidance rules that deem transactions primarily undertaken to access accelerated CCA or immediate expensing as non-arm’s length.
• Additions or alterations to a manufacturing building may be treated as a separate building for first-year CCA and separate class election purposes.
• Additional clarifications that cover transitional rules for buildings under construction as of Nov. 4, 2025 and a formal definition of an eligible manufacturing building—including new floor‑space and eligibility criteria.

Planning consideration: Businesses must revisit their capital investment plans to effectively adapt to the PSD. This may involve reassessing the timing of planned expenditures such as accelerating the acquisition of qualifying assets, taking advantage of immediate expensing and enhanced cash flow. Reviewing asset classifications—including additions or alterations that may qualify as separate buildings, and considering separate prescribed classes—will be important to confirm eligibility and ensure deductions are claimed correctly.

Return of the accelerated investment incentive

The accelerated investment incentive (AII), which provides enhanced first-year depreciation for assets that do not qualify for full expensing, was reinstated in the 2025 budget as a pillar of the PSD after it started phasing out in 2024.

The AII temporarily increases the first-year CCA deduction available for eligible property by effectively suspending the half-year rule and enhancing the base for depreciation. Under the AII, an asset’s capital cost is included in the CCA pool at 1.5 times the net addition in the year the property becomes available for use.

While the AII does not provide full expensing, it materially accelerates deductions relative to standard CCA rules.

Planning consideration: Businesses should reassess the timing and classification of capital acquisitions, particularly for assets that may benefit from the AII’s enhanced first‑year deductions to maximize tax saving before the phase‑out begins in 2030. Taxpayers investing in innovation, technology, and research and development should be mindful of potential overlaps between accelerated deductions and the proposed scientific research and experimental development (SR&ED) tax incentive program. Longer-term capital planning should consider the scheduled phase-out of AII and any interaction with other available incentives to ensure optimal tax outcomes.

Immediate expensing of capital property

The proposed reinstatement of immediate expensing, as proposed in the 2024 fall economic statement, would allow businesses to deduct 100 per cent of the capital cost of eligible property in the year that the asset becomes available for use—rather than depreciating it over time under standard CCA rules.

If approved, immediate expensing would be available for qualifying assets acquired on or after Jan. 1, 2025 and for those available for use before 2030, subject to the availability-for-use rules. The measure, initially set to expire in 2024, would now phase out starting in 2030 and be fully eliminated for property that becomes available for use after 2033.

The reinstated measures apply to the following categories of assets:

• Clean energy generation and energy conservation equipment, and zero-emission vehicles.
• Productivity-enhancing assets including patents, data network infrastructure and computers.
• Capital expenditures related to SR&ED.

Planning consideration: Pending legislative approval, immediate expensing could significantly reduce the after-tax cost of eligible investments and accelerate cash-flow benefits. Businesses should consider re-evaluating the timing of capital acquisitions to maximize first-year deductions, particularly for assets that support productivity growth, innovation and clean-economy initiatives.

Enhanced CCA for low-carbon LNG facilities

The enhanced CCA for low-carbon liquefied natural gas (LNG) facilities and equipment provides a meaningful acceleration of capital cost recovery for taxpayers investing in infrastructure that meets Canada’s emissions-reduction thresholds.

The reinstated, accelerated CCA rates for LNG facilities—which were due to expire in 2024—will be subject to new emissions-performance thresholds. Qualifying facilities can access the enhanced depreciation based on the following emissions performance:

• Facilities in the top 25 per cent of emissions performance may claim CCA at 30 per cent for liquefaction equipment and 10 per cent for non-residential buildings used for LNG facilities.
• Facilities in the top 10 per cent of emissions performance may claim enhanced CCA of 50 per cent for liquefaction equipment and 10 per cent for non-residential buildings used for LNG facilities.

These rules apply to qualifying assets acquired on or after Nov. 4, 2025, and before 2035. Businesses should expect future guidance from the federal government detailing the emissions criteria for this component of the PSD.

Planning consideration: Businesses contemplating new LNG projects or expansions should carefully assess whether planned capital expenditures qualify under the enhanced CCA classes. This could significantly improve project economics through earlier tax deductions and enhanced cash flow.