Prime Minister Mark Carney’s first budget is promising a suite of business tax measures to help jumpstart capital investment in the Canadian economy, as the country faces ongoing effects of a trade war with the United States.
All told, the budget tabled on Tuesday targets $500 billion in new private sector investments over the next five years.
Among the business tax measures included in the budget is an allowance for the immediate expensing of certain capital costs for manufacturers. Manufacturing and processing building that are acquired on or after Budget Day and used for those purposes before 2030 can be written off at 100 per cent in their first year.
The measure was an ask from the manufacturing sector and is in line with the incentives in U.S. President Donald Trump’s “One Big Beautiful Bill Act” passed in the summer, which provided 100 per cent expensing of qualifying manufacturing structures that are in service before 2031.
Dennis Darby, president and chief executive of the Canadian Manufacturers & Exporters, said he welcomes the move by the government, but hopes the measure becomes permanent.
The budget also reinstates the accelerated investment incentive, which provides an enhanced first-year write-off for most capital investments, and promises to bring back a tax incentive that previously expired at the end of 2024, called the accelerated capital cost allowances (CCA) for liquified natural gas (LNG) equipment and buildings.
However, the CCA incentive will only apply to low-carbon LNG facilities. LNG facilities in the top 25 per cent of emissions performance will be eligible for CCAs of 30 per cent for equipment and 10 per cent for non-residential buildings while facilities in the top 10 per cent of emissions performance will be entitled to CCAs of 50 per cent and 10 per cent for the same items. This measure will apply only to property acquired on or after Budget Day and before 2035. Tuesday’s budget did not provide details on what those emissions requirements would be but promised to provide details at a further date.
Notably, the oil and gas emissions cap remains in place, but the budget left the door open for its potential removal.
“Effective carbon markets, enhanced oil and gas methane regulations, and the deployment at scale of technologies such as carbon capture and storage would create the circumstances whereby the oil and gas emissions cap would no longer be required as it would have marginal value in reducing emissions,” the government said in the budget.
The budget also promises to do away with certain rules aimed at penalizing companies accused of “greenwashing.”
The government will also move forward with previously announced tax measures, including immediate expensing for clean energy generation and energy conservation equipment, zero-emission vehicles, patents, data network infrastructure, computers and capital expenditures for scientific research and experimental development.
These tax measures, which are dubbed the “Productivity Super Deduction” will cost an average of $2.7 billion annually and the government projects they could generate up to $9 billion in economic output annually over the next nine years.
The government says Canada now has a corporate tax advantage over its international counterparts. Thanks to the new tax measures, Canada’s marginal effective tax rate (METR) has dropped by more than two percentage points from 15.6 per cent to 13.2 per cent. This rate puts Canada the lowest in the G7 and is below the OECD average of 17.7 per cent and that of the U.S. at 17.6 per cent.
“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 federal government will also increase the expenditure limit for the Scientific Research and Experimental Development (SR&ED) tax incentive, from $4.5 million to $6 million to further encourage business investment in research and development and is promising to simplify the process for businesses to apply to the SR&ED program, to help increase uptick of users for the program.
“I think overall, this budget had a high test, and when you look at everything together it certainly invests in business in ways that we were calling for,” said David Pierce, vice-president of government relations at the Canadian Chamber of Commerce.
Pierce said only time will tell if these measures are enough to help businesses start investing again.
The growth agenda still comes at a cost to Ottawa’s balance sheet. Carney’s government is projecting a federal deficit of $78.3 billion for the 2025-2026 fiscal year, more than $36 billion more than forecast in the 2024 Fall Economic Statement. The deficit is projected to fall to $56.6 billion by 2030.
The federal budget is promising $89.7 billion in net new spending over the next five years, with $33.5 billion falling under capital investment. Taking into account spending measures announced between the 2024 Fall Economic Statement and the budget, total net new spending since the last fiscal update stands at $125.6 billion by 2030.
Federal debt charges are expected to grow over the next five years, from $53.4 billion in 2024-2025 to $76.1 billion by 2030. The federal debt is projected to hit $1.347 trillion in 2025-2026 and grow to $1.591 trillion by the end of the decade.
The Carney government also promises to find $60 billion in operational savings over the next five years through its comprehensive expenditure review. This will be achieved through right-sizing programs and finding efficiencies in the federal government. The budget promises workforce adjustment and attrition of public servants, to return the size of the federal workforce to “sustainable levels.”
“Broadly, this is an economically favourable pivot from the deficit budgets run by the prior government, but also comes with what looks like a substantial structural deficit down the road,” said Bank of Montreal senior economists Robert Kavcic and Shelley Kaushik, in a note to clients. “We’ll stop short of calling it transformational; and we’ll also stop short of pulling the fiscal alarm.”
Tuesday’s budget also announced immigration levels for 2026-2028, which will stabilize the permanent resident admission targets at 380,000 per year over the next three years, down from 395,000 in 2025.
The government is also increasing the share of economic migrants to 64 per cent from 59 per cent. The plan will also reduce the temporary resident admissions targets from 673,650 in 2025 to 385,000 in 2026 and 370,000 in 2027 and 2028.
Last month, Carney teased a talent-attraction program, with the budget promising up $1.7 billion for recruitment programs.
Big picture investment items over the next five years include $115 billion in infrastructure spending and $110 billion for productivity and competitiveness.
