Tax Insights: Canada’s Productivity Mega Deduction ─ Its application to mining companies

Issue 2026-38

In brief

What happened? 

On September 15, 2026, the Department of Finance released draft legislative proposals to implement the newly announced Productivity Mega Deduction (PMD), which will provide immediate expensing (i.e. 100% capital cost allowance [CCA] deduction) for a broad-based range of depreciable property that is acquired and available for use after September 14, 2026.

The PMD is also available for Canadian development expenses (CDE) incurred after September 14, 2026. This would allow mining companies to immediately deduct CDE, instead of adding it to a tax pool and deducting it annually over multiple years on a declining balance basis. The CDE may also be renounced to flow‑through share investors.

Why is it relevant?

The PMD represents the most significant change to capital cost recovery for Canadian mining investments in years, allowing 100% immediate expensing for CDE incurred and most depreciable property acquired and available for use after September 14, 2026. The measure would materially accelerate after-tax cash flow for mining companies undertaking equipment purchases, mine development and infrastructure builds — improving project economics and potentially shortening payback periods on large capital programs. Extending the 100% immediate deduction to CDE would also allow for additional development capital to be raised through the flow‑through share regime.

Actions to consider

Canadian mining companies should:

• classify planned capital investments and CDE spend to confirm eligibility for immediate expensing under the proposed PMD rules
• model tax and cash-flow impacts of the PMD on anticipated major projects, transactions and financing
• track the progress of enacting legislation and monitor timing of the new rules

In detail

Productivity Mega Deduction – capital cost allowance

The PMD, which provides a 100% CCA deduction in the year the depreciable property becomes available for use, will be available on a permanent basis for most depreciable property that is acquired and available for use after September 14, 2026.

Eligible property and expenses – CCA

Under the PMD, depreciable property that is eligible for immediate expensing will include all capital property that is subject to the CCA rules, except for:

• buildings (and additions to buildings) included in CCA classes 1 and 3
• property included in CCA:
  • classes 14 and 14.1 (e.g. franchises, licenses and goodwill)
  • class 51 (e.g. regulated natural gas distribution pipelines)
• certain vehicles in CCA classes 10 and 10.1, including passenger and rental vehicles, taxis and certain delivery vans or pick-up trucks — although new vehicles of these types that are assembled in Canada will be eligible for the PMD, and
• property depreciated under CCA schedule V (industrial mineral mines) and schedule VI (timber limits and cutting rights) of the Income Tax Regulations

Restrictions – CCA

Eligible property that has been used, or acquired for use, for any purpose before it is acquired by the taxpayer will not be eligible for immediate expensing if:

• the taxpayer or a non-arm's-length person previously owned the property, or
• the property has been transferred to the taxpayer on a tax-deferred "rollover" basis

Rules will also apply to restrict the ability of individuals, and partnerships with members who are individuals, to create or increase a loss from the business or property, by claiming the PMD.

Application to Canadian mining companies – CCA

Generally, most depreciable property acquired for the purpose of gaining or producing income from a mine — including machinery, processing equipment and mining‑related buildings such as mills and processing plants — is classified in either class 41 or class 41.2. Because these classes have their own specific inclusion for buildings and structures used primarily for mining operations, these assets generally fall outside the class 1 building exclusion and therefore should qualify for the PMD, allowing for a 100% CCA deduction in the year they become available for use (provided they are acquired after September 14, 2026 and meet the other eligibility conditions).

This is a favourable outcome for the sector: unlike industries where mine-site-type buildings would typically default to class 1 (and therefore be excluded from immediate expensing), the mining-specific carve-out under class 41/41.2 means that a substantial portion of a mining company's capital program — including major structures like mills — should be eligible for the deduction.

That said, not all mining-related structures will automatically qualify. Buildings or portions of buildings that are not used primarily for mining operations — for example, general corporate offices, administrative buildings, or other ancillary structures not directly tied to extraction or processing activity — may fall back to class 1 and therefore be excluded from the PMD. Companies with mixed-use buildings should also consider whether the primary-use test is met at the building or component level.

How Canadian businesses can prepare

Canadian mining companies should:

• map planned capital investments against CCA classifications – identify which mining equipment, machinery, mobile fleet and processing infrastructure qualify as immediate expensing property, and confirm eligibility under the new rules.
• model the cash-tax impact on major projects – quantify how immediate expensing affects taxable income, tax pools and net after-tax cash flows in life of mine models.

Productivity Mega Deduction – Canadian development expenses

In addition to the immediate expensing available for the acquisition of depreciable property, the PMD extends immediate expensing to CDE incurred by mining companies after September 14, 2026. Historically, CDE has been deductible on a 30% declining-balance basis; although qualifying reaccelerated CDE has recently benefited from an enhanced 45% deduction rate. Under the new rules, qualifying CDE can instead be written off in full in the year it is incurred — a significant acceleration for capital-intensive mine development. In addition, the proposal would permanently retain the enhanced 45% deduction rate applicable to reaccelerated CDE, without any scheduled phase-out.

Restrictions – CDE

Immediate expensing for CDE will not be available for:

• expenses in respect of which the taxpayer is a successor (within the meaning of subsection 66.7(4) of the Income Tax Act (ITA)), or
• the cost of a Canadian resource property (CRP) acquired by the taxpayer from a non-arm’s length person

Application to Canadian mining companies – CDE

Under ITA subsection 66.2(5), CDE relevant to mining companies generally falls into three categories, distinguished by whether the expense is incurred before or after the mine reaches commercial production, or whether the expense relates to the acquisition of a Canadian resource property:

• Pre-production development costs (ITA paragraph 66.2(5)(c.2)) – Expenses incurred for the purpose of bringing a new mine into commercial production, incurred before the mine reaches production in reasonable commercial quantities, including:
  • clearing, removing overburden and stripping
  • sinking a mine shaft
  • constructing an adit or other underground entry, or
  • drilling a well for the extraction of lithium from brines
• Post-production underground development costs (ITA paragraph 66.2(5)(d)) – Expenses incurred in respect of a mine that has already come into production, for underground development work designed for continuing use, including:
  • sinking or excavating a mine shaft, main haulage way, or similar underground work built after the mine came into production
  • extending any such shaft, haulage way or similar work
  • drilling or completing a well for lithium extraction from brines, after production has commenced

This distinction matters, because it determines when shaft-sinking, stripping or haulage-way costs are treated as CDE — whether the company is developing a new mine or expanding an existing, producing mine.

• Acquisition of Canadian resource property (ITA paragraph 66.2(5)(e)) – The cost to the taxpayer of acquiring a CRP qualifies as CDE. The definition of CRP includes:
  • any right, licence or privilege to prospect, explore, drill or mine for minerals in a mineral resource in Canada
  • any right to a rental or royalty computed by reference to the amount or value of production from a mineral resource in Canada (e.g. a net smelter return royalty), if the payer has an interest in the mineral resource and 90% or more of the royalty is payable out of, or from the proceeds of, the production from the mineral resource, and
  • any real property (not including any depreciable property) the principal value of which depends on its mineral resource content

For mining companies, mine development is capital-intensive and often spans several years before a project reaches commercial production. The ability to immediately expense CDE — rather than deduct it gradually over multiple years — can materially improve cash flow during the development phase, potentially well before the mine begins generating revenue. This benefit applies equally to:

• new mine development (pre-production stripping, shaft-sinking, adit construction), and
• underground expansion at existing, already-producing mines (shaft extensions, new haulage ways)

While the ability to fund CDE with flow-through shares already exists within the ITA, providing flow‑through share investors with a 100% immediate deduction (similar to Canadian exploration expenses) may make CDE flow-through share issuance more attractive, compared to the existing rules.

How Canadian businesses can prepare

Canadian mining companies should:

• classify development spend correctly – distinguish between pre-production CDE (ITA paragraph 66.2(5)(c.2)), post-production CDE (ITA paragraph 66.2(5)(d)), Canadian exploration expenses and costs that are capitalized to depreciable property (which are excluded from CDE). This distinction is even more important if flow through share financing is being considered, given that the underlying tax treatment determines the ability and timing of the renunciation of expenses and whether certain tax credits are available to flow through share investors.
• review ongoing development costs – for the 2026 taxation year, CDE will need to be bifurcated between expenses incurred before and on or after September 15, 2026 to determine whether immediate expensing is available.
• model the cash-flow impact – when considering mergers and acquisitions, the acquisition of CRP and the immediate expensing available for the purchase price allocated to CRP and depreciable property will make an asset acquisition more desirable than acquiring the shares of a target company.

The takeaway

For a capital-intensive sector like mining, investment decisions often hinge on the timing and certainty of tax recovery. The PMD is a meaningful shift from the temporary accelerated CCA and CDE measures that miners have relied on in recent years to what the Department of Finance has described as a permanent feature of the tax system. Canadian mining companies should monitor the progress of the draft legislative proposals and any forthcoming guidance as the rules move toward enactment, to ensure investment plans remain aligned with the final rules.