Budget 2025 introduced a new “productivity super-deduction” meant to encourage capital investment and improve Canada’s lacklustre productivity.
The federal government says the tax incentives will reduce Canada’s marginal effective tax rate (METR) by more than two percentage points to 13.2% from 15.6%, maintaining its status as the lowest in the G7.
“With the productivity super-deduction, Canada’s METRs are competitive with those in the U.S. across most sectors, particularly in manufacturing and processing,” the budget said.
The super-deduction consists of a set of enhanced tax incentives meant to encourage capital investment, including a new measure to allow immediate expensing (a 100% first-year writeoff) for manufacturing or processing buildings and the reinstatement of the existing Accelerated Investment Incentive.
The new proposal would apply to manufacturing or processing buildings acquired on or after Nov. 4, and used for manufacturing or processing before 2030. It would also allow for accelerated capital cost allowances for low-carbon liquefied natural gas facilities. It would be phased out over a four-year period between 2030 and 2033.
“Private investment in new machinery, buildings and technology is one of the most effective ways to increase productivity, helping workers produce more in less time and boosting Canada’s long-term growth,” stated the budget, which outlines spending of $110 billion over five years on measures to address productivity and competitiveness.
“These are helpful measures that many businesses have been asking for, some of them parallel changes that were made in the U.S. recently, in terms of their ability to write off capital costs of various expenses,” Jamie Golombek, managing director, tax and estate planning at CIBC Private Wealth Management, said, referring to the U.S.’s “one big beautiful bill.”
“When you have a business that’s in the manufacturing and processing area, the ability now to write off 100% of the cost of that building as opposed to depreciating it over time is a huge incentive for businesses to be able to recoup for tax purposes the investment associated with that new facility.”
He added that the timelines to take advantage of the incentive are reasonable. While businesses need to start using the new building for manufacturing or processing before 2030 to get the full, 100% tax writeoff, those that don’t start until 2030 or 2031 would still be eligible for a 75% writeoff. In 2032 and 2033, the rate falls to 55%.
As announced in the fall economic statement, the Accelerated Investment Incentive provides an enhanced first-year writeoff for most capital assets, as set out in the fall economic statement. The incentive, which includes manufacturing or processing machinery and equipment, clean energy generation and zero-emissions vehicles, and capital expenses for scientific research and experimental development, was previously planned to be eliminated after 2027. Productivity-enhancing assets such as patents, data network infrastructure and computers are also eligible for the incentive.
In 2025-26, the two measures together (the productivity super-deduction) are projected to cost $45 million, increasing to $280 million next year. The total cost over five years is projected at $1.5 billion.
SR&ED
The budget proposes enhancements to the Scientific Research and Experimental Development (SR&ED) tax incentives over and above those that were already included in the fall economic statement. The SR&ED currently give Canadian-controlled private corporations (CCPCs) an enhanced 35% refundable tax credit on their first $3 million of qualified research and development-related expenses. (Public and foreign companies get a 15% non-refundable credit for research and development within Canada.)
The fall economic statement proposed to increase the expenditure limit to $4.5 million, allowing a CCPC to claim up to $1.575 million per year of the enhanced refundable tax credit.
The budget now proposes to up that to $6 million, effective for taxation years that begin on or after Dec. 16, 2024.
The SR&ED is expected to cost $3 million in 2025-26, ramping up to $70 million in 2026-27, with a total cost over five years of $293 million.
The budget also announced plans to streamline administration of the SR&ED program to reduce information requirements and speed up claims processing.
To do so, it will enlist CRA to start an elective pre-claim approval process for businesses to get an up-front technical approval of their eligible SR&ED projects, before they incur costs. For claims submitted through this elective process that require an expenditure review, processing time will be cut in half to 90 days from 180 days. And the budget says CRA will increase the use of AI in the program’s administration, speeding up processing claims.
These improvements do not carry a fiscal cost and will be implemented into SR&ED program operations as of April 1, 2026.