The budget should make investment incentives permanent

As Canadians have learned over the past nine months, their economy is very vulnerable to coercive U.S. trade policies. When it comes to tax policy, however, Canada has the power to shape its own competitiveness by making itself an attractive destination for investment. The 2025 budget season is the moment to seize that advantage.

Capital allowances, the tax rules that determine by how much businesses can offset the cost of their long-term assets, are crucial to investment decisions. When structured effectively, they can foster innovation and drive long-term economic growth. Currently, Canada has the fifth best capital cost recovery system in the OECD, but it won’t for much longer if policy-makers don’t act. The high ranking is tied to a policy that provides immediate deductions for investments in equipment and accelerated depreciation for industrial buildings. But these measures are scheduled to expire by 2028.

If Canada doesn’t make these provisions permanent, its ranking will drop all the way to 13th, and that will likely reduce capital investment and, consequently, economic growth. Draft legislation released Aug. 15 made no mention of accelerated investment incentives or immediate expensing, so phase-out appears to be the country’s current trajectory. But the federal budget doesn’t come down until Nov. 4. Lawmakers can still reintroduce these provisions and also make them permanent — which they should do.

Before immediate writeoffs were introduced in 2018, Canada required businesses to deduct costs over time, as most countries do. Rules that simply set the pace for claiming deductions may not seem like a critical misstep, but the delays they establish allow time to erode the value of deductions, thus effectively increasing the costs of investment.

When businesses cannot fully deduct capital expenditures, they make fewer investments in equipment and machinery, causing declines in worker productivity and wages. Allowing businesses to instead deduct the full costs of their investments right away puts Canada in a leading position — for now, at least. But investors need legal and policy certainty, and the latest investment data show that such confidence is still lacking, as investment in machinery and equipment has fallen to a record low. Making fast writeoffs permanent will provide the legal certainty necessary to attract and retain the investments that will help Canada reverse its current slow economic growth.

Canadian policy-makers should learn from their colleagues in the Anglosphere.

In the United Kingdom, the temporary super-deduction of 130 per cent for equipment, which expired in 2023, was replaced by full expensing. And long-lived assets now get a 50 per cent first-year deduction. This change is expected to raise long-run GDP by 0.9 per cent, investment by 1.5 per cent and wages by 0.8 per cent, all compared to pre-2021 rules.

Similarly, the United States adopted the temporary policy of bonus depreciation in 2017, with phaseout beginning in 2023. Fortunately, in 2025, full expensing was made permanent, giving Americans a lead against other countries. The Tax Foundation estimates that in the long run — over a 10-year period — this provision will increase the stock of capital by one per cent and boost GDP by 0.6 per cent.

The U.S. is also temporarily providing 100 per cent expensing for roughly 10 to 15 per cent of all buildings and structures. These provisions are projected to give the U.S. the third most favourable capital cost recovery system in the OECD, at least temporarily.

Unfortunately, there are also plenty of negative examples for Canada to learn from. Many OECD countries have allowed more generous cost recovery policies to expire in recent years, causing their economies to slow.

Skeptics may question the fiscal costs required to invest in implementing or extending capital cost recovery policies, but in fact the peak fiscal costs have already been incurred. Because the revenue costs of immediate expensing are front-loaded to the first years from its introduction, this simply shifts available deductions backward in time once, reducing the deductions available to businesses and the associated revenue costs in subsequent years. And, of course, the fiscal downside is that if policy-makers let the measures expire, their macroeconomic benefits will decline as investment begins to fall.

Making immediate deduction of investments in machinery and equipment a permanent feature of corporate taxation would boost the competitiveness of Canada’s tax system. In the continuing competition for growth-spurring investments, Canada cannot afford to fall behind.

Cristina Enache writes on the economics of tax policy for the Tax Foundation, which has offices in Washington, D.C., and Brussels.