Don't be fooled by the government's marketing of its 'mega' productivity deduction

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Walk down any grocery aisle and you’ll find a paper towel roll labelled “Mega” sitting next to a regular one: same width, often similar sheet count, just marketed as though it were categorically different. That’s a communications and marketing strategy, not a better product, and it works because most shoppers grab and go rather than checking the fine print. Subscribe now to read the latest news in your city and across Canada.

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Get email updates from your favourite authors. Create an account or sign in to continue with your reading experience. Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors Sign In or Create an Account or Similarly, the Department of Finance on Sept. 15 released a backgrounder and companion draft legislation for something it has branded the Productivity Mega Deduction.

Worth noting is that the word “Mega” doesn’t appear anywhere in the actual draft legislative amendments. The statute refers only to “immediate expensing property.” Get the latest headlines, breaking news and columns. By signing up you consent to receive the above newsletter from Postmedia Network Inc.

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We encountered an issue signing you up. Please try again But using mega is symptomatic of a pattern where consequential tax policy gets announced and branded through press releases rather than through Parliament, and the branding regularly outruns the substance. The rebranding of the long-standing GST credit into the Groceries and Essentials Benefit was another ridiculous example of the same instinct.

It would be refreshing to see less branding, fewer cutesy names and more focus on sound tax policy. Canadians should demand the same instead of taking a backgrounder’s framing at face value. Strip the label off the new measure and there is a real, substantive measure underneath, one that deserves to be judged on its mechanics, not its marketing.

It builds on the Productivity Super-Deduction — another cute name — from the last budget, which provided immediate expensing on a very limited category of assets. It significantly expands the category of assets eligible for immediate expensing and makes it permanent rather than temporary. The finance department estimates the incremental fiscal cost of this measure at $36 billion over five years, starting in 2026-27.

Mechanically, immediate expensing lets a business deduct the full capital cost of eligible property in the year it becomes available for use, instead of amortizing its cost over a number of years on a declining-balance basis. The measure applies to property acquired on or after Sept. 15, 2026, but the excluded categories include most buildings, franchises, licences, goodwill, regulated pipelines and specified mineral and timber interests. Used property only qualifies if neither the taxpayer nor a non-arm’s-length person owned it before, and individuals and partnerships with individual members can’t use the measure to create or increase a loss.

What if the business financed the acquisition with debt? Combine immediate expensing with ordinary interest deductibility, and a business can write off the entire cost of an asset immediately while continuing to deduct the interest on the debt used to finance it. That interaction can push the effective tax burden on an investment below zero.

The finance department’s modelling shows just how far the resulting tax burden can fall: manufacturing at minus 1.2 per cent, transportation at minus 2.3 per cent and agriculture at minus six per cent, compared with 9.9 per cent for services and 19.3 per cent for retail trade. The largest gains accrue to more capital-intensive Canadian businesses , while services businesses — which represent roughly 77 per cent of Canadian businesses and 75 per cent of the country’s gross domestic product (GDP) — receive a materially smaller benefit. A few restrictions in the fine print deserve more attention than they’re getting, such as the treatment of a later disposition, what happens when a taxpayer deliberately claims less than 100 per cent and that the differences between federal and provincial treatment can materially change the result.

A 100 per cent write-off sounds simple, but the planning around whether, when and where to claim it is not. Then there’s the question the backgrounder never asks directly: why not just cut the corporate rate instead? As economist Jack Mintz calculates , the finance department’s $36-billion, five-year cost estimate is roughly equivalent to a 0.9-percentage-point cut to the federal corporate rate.

Rather than favouring businesses making qualifying capital investments, a general rate cut would apply broadly across profitable corporate activities. It’s a legitimate alternative that deserves consideration. Mintz reaches a harsher verdict on the measure overall, saying it fails the tests of efficiency, fairness and simplicity, and pointing to Michael Wilson’s 1985 budget as proof Canada has scaled back “mega” preferences for lower rates before without losing revenue.

I agree. The Parliamentary Budget Officer’s investment multiplier analysis , published five days before the mega deduction announcement, also gives reason for skepticism. Assessing the last budget’s broader $41.3-billion investment package across five program areas, the PBO said tax measures — including immediate expensing — generate the second-lowest return, ahead of only industrial development programs.

On the PBO’s model, tax measures produce only 70 cents to 80 cents of additional real GDP for every dollar after five years, depending on the monetary-policy assumption. That is hardly an obvious economic home run. None of this means immediate expensing is worthless.

Profitable, capital-intensive businesses, such as manufacturers, farming, energy and resource companies, transportation and logistics, will genuinely benefit, and accelerating write-offs is a defensible lever among several. But defensible and mega aren’t the same word. Pick that roll up and it may still be a perfectly decent roll of paper towels.

It just isn’t necessarily mega because someone printed the word on the wrapper. The same is true here. Permanent immediate expensing is real tax policy, with a real $36-billion price tag and real advantages for businesses that can use it.

But it also deliberately favours some investments over others. Governments reach for words like mega because ordinary tax policy sounds more impressive with better packaging. Canadians would be better served by less marketing and more debate about what is actually inside.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, co-host of Canadian Tax Matters, a former chair of the Canadian Tax Foundation and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody . _____________________________________________________________ If you like this story, sign up for the FP Investor Newsletter. _____________________________________________________________ Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here .

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Source: Financial Post