The federal government’s new budget includes incentives that allow businesses to write off investments faster as long as they improve a company’s productivity. Finance Minister François-Philippe Champagne said in his budget remarks that with these measures “we will supercharge growth in Canada and become the strongest economy of the G7.”
Any tax relief is welcome, but this accelerated depreciation — what the government calls a “productivity super-deduction” — misses the mark.
How the tax change works
Ways to enhance a company’s productivity include new machinery and equipment, but also less obvious items like patents and computers, zero-emission vehicles, scientific research and hands-on experience. In short, if a business invests in something that is likely to drive growth, the government will provide beneficial tax treatment to make that investment cheaper.
Clearly federal policymakers want to stimulate the economy at a time of international trade disputes and protectionist measures — and this move does exactly that. Businesses will only experience this new tax benefit if they make new investments. That ensures growth, whereas a corporate income tax cut would give companies a financial break simply for maintaining their normal level of investment and productivity.
The government’s view is companies must do more than keep up the status quo if they are to receive taxpayer dollars. They need to hire, transform and expand. The super-deduction gives them reasons to do that and softens the financial hit to the treasury by limiting benefits to those reinvesting.
On its face, this is a good thing, but it’s the wrong tool for the times.
A need for certainty
The main flaw with accelerated depreciation is the same one that makes it so attractive to policymakers: It is too limited in scope.
Many sectors and businesses in Canada have been badly hurt by U.S. tariffs on our goods. As the budget points out, steel exports are down 33 per cent compared with the 2024 average. Aluminum exports are down 32 per cent. Canola faces tariffs between 76 and 100 per cent. Auto exports are down nine per cent and are projected to drop further (pages 40 and 41).
These industries are bearing the brunt of the trade war. They are losing purchase orders and revenue. They are deciding if and when to lay off staff or close shop. Now the federal government has announced it will help them, but only if they invest money they clearly do not have.
Accelerated depreciation gives businesses a benefit by reducing the corporate income tax they owe. But if you’re not making much money in the first place, you don’t have any corporate income tax to offset.
Asking companies that are losing business to invest in retooling themselves is like having a home renovation tax credit, but only for people who were recently laid off. The sectors most heavily affected by tariffs do not have the certainty or the cash flow they need to make significant economic commitments. Without support targeted to their individual needs, they won’t get there.
The chart below, taken from the budget, shows that once the super-deduction is factored in, Canada will have the lowest marginal effective tax rate in the G7 (page 87). That’s true — but only if businesses are able to make new investments.
The federal government is quick to point out our tax advantage compared with countries like Japan or the United Kingdom. But they are not culprits. The reality is our companies are being targeted by one country: the United States. Our major auto producers are having their access to the U.S. market squeezed by tariffs. The negative impact of tariffs is outweighing the small positive advantage Canada may have on taxes.
A drop in the bucket
The other major drawback of the super-deduction is its size. A similar measure introduced by former prime minister Justin Trudeau’s government resulted in nearly $14.4 billion in tax breaks over five-plus years. Prime Minister Mark Carney’s “super” version amounts to an additional $1.5 billion (page 123) — not quite a 10 per cent increase.
Is an incremental improvement enough to a business struggling to survive? The return needs to be incredibly attractive to overcome the impact of tariffs. There are better measures to help Canada survive the trade war. The solution to a never-before-seen economic crisis cannot and should not be a slightly improved version of something we used to have.
The better way
The super-deduction is being used by a government that wants to protect its fiscal plan and not overspend. It’s an interesting choice considering the size of the projected deficit. If the government truly wants to support industries, it needs to provide relief to businesses that cannot be reasonably expected to retool at such an uncertain time.
Ottawa could do this by cutting corporate income taxes outright. This would still reduce Canada’s marginal effective tax rate and make Canada a more competitive place to do business for all sectors, including those that do not have large amounts of surplus dollars to reinvest during a trade war. The government could also cover employer contributions to the Canada Pension Plan and Employment Insurance premiums for businesses in affected sectors to make the cost of keeping workers on the payroll cheaper.
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These measures could be time limited and could end if a new trade deal were struck that removed the existing tariffs. If cost were a concern, the government could simply delay some of the $115 billion in planned capital expenditures for everything from new theatres to university expansions (pages 102-103).
This is not to argue that the super-deduction should be dropped, but Ottawa must be reasonable about the prospects for success. Some businesses will benefit and there will be a deduction in the taxes they owe.
But how big will that benefit be? Are the new tax breaks ‘super’? Perhaps only history will be the judge.
