Tax Insights: Canada’s Productivity Mega Deduction ─ Accelerating capital cost recovery in the oil and gas sector

Issue 2026-39

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 proposals also include additional CCA deductions for qualified liquefaction equipment.

The PMD is also available for Canadian development expenses (CDE) incurred after September 14, 2026. This would allow oil and gas 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.  

Why is it relevant?

The PMD marks the most significant change to capital cost recovery for Canadian oil and gas investments in many years. It permits 100% immediate expensing for CDE incurred, as well as for most depreciable property acquired and available for use, after September 14, 2026. The measure would substantially accelerate after‑tax cash flow for oil and gas companies investing in equipment, resource property development and infrastructure — improving project economics and potentially reducing the payback periods for major capital programs.

Actions to consider

Canadian oil, gas and liquefied natural gas (LNG) companies should:

• review 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 – immediate expensing

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, all depreciable capital property that is subject to the CCA rules will be eligible for immediate expensing, 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. 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
• qualified liquefaction equipment in CCA class 47, 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 oil and gas companies – CCA

Generally, for conventional oil and gas production, depreciable property includes the tangible assets used to facilitate production. These assets consist mainly of wellhead equipment, flow lines, gathering systems, batteries, compressors, dehydrators and gas plants.

The main CCA classes of depreciable property relevant to the oil and gas sector include:

The above noted depreciable property should qualify for the PMD, allowing for a 100% CCA deduction in the year it becomes available for use (provided it is acquired after September 14, 2026 and meets the other eligibility conditions). This is a favourable outcome for the sector, because this property would constitute a substantial portion of an oil and gas company's capital program.

However, not all oil and gas-related structures will automatically qualify. Buildings or portions of buildings that are not used primarily for oil and gas operations — for example, general corporate offices, administrative buildings, or other ancillary structures not directly tied to extraction or production 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.

Qualified liquefaction equipment (class 47) – CCA

Qualified liquefaction equipment is an excluded property under the PMD and is, therefore, not eligible for immediate expensing. However, under the PMD, an enhanced deduction in respect of CCA class 47 liquefaction equipment used in LNG facilities takes the form of an additional allowance that will bring the effective CCA rate for this property up to 100%. This additional allowance will only be deductible against income of the taxpayer that is attributable to the liquefaction of natural gas at that facility.

The 10% accelerated CCA rate for eligible class 1 non‑residential buildings used in LNG facilities, that was announced in the federal 2026 Spring Economic Update (SEU), will continue to apply. However, one key change is that LNG facilities will not be required to satisfy the expected emissions intensity requirement that had been proposed in the SEU to qualify for either:

• the enhanced deduction for class 47 liquefaction equipment
• the accelerated CCA for eligible class 1 non‑residential buildings

Since this enhanced deduction for class 47 liquefaction equipment used in LNG facilities modifies a 2025 federal budget proposal, it will be available for eligible assets acquired after November 3, 2025.

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 for the development of oil and gas property 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 oil and gas property development. In addition, the proposal would permanently retain the enhanced 45% deduction rate that applies to reaccelerated CDE, without any scheduled phase‑out.

Restrictions – CDE

CDE incurred in respect of oil and gas activities:

• is not eligible for immediate expensing if those expenses are in respect of which the taxpayer is a successor (within the meaning of subsection 66.7(4) of the Income Tax Act (ITA))
• will continue to be ineligible for renunciation under a flow‑through share agreement — based on the draft legislation, there are no amendments to the existing flow‑through share rules

Application to Canadian oil and gas companies – CDE

Oil and gas related expenses that are generally classified as CDE (under ITA paragraphs 66.2(5)(a) and (b)) fall into two categories: drilling and completion activities, and recompletions. They include expenses for:

• drilling or converting a well for disposing waste liquids from an oil or gas well
• drilling or completing an oil or gas well, including certain well-site preparation and temporary access‑road costs, to the extent the costs are not Canadian exploration expenses
• drilling or converting wells for injecting water, gas or other substances to assist in the recovery of petroleum or natural gas
• drilling for water or gas to inject into a petroleum or natural gas formation
• drilling or converting wells used to monitor fluid levels, pressure changes or other phenomena in a petroleum or natural gas accumulation, and
• drilling or recompleting an oil or gas well after production from the well has commenced

For oil and gas companies, well development is capital intensive, so being able to immediately expense CDE — rather than deducting it gradually over multiple years — can significantly improve the cash flow and feasibility of these projects.

How Canadian businesses can prepare

Canadian oil, gas and LNG companies should:

• review planned capital investments against CCA classifications – identify what equipment, machinery, gathering systems 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 using financial models that cover the entire life of the project.
• 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.

The takeaway

Given the capital‑intensive nature of the oil and gas industry, the timing and predictability of tax recovery can play a key role in investment decisions. The PMD would replace the temporary accelerated CCA and CDE measures, which have been available to Canadian oil and gas companies in recent years, with what the Department of Finance has described as a permanent component of the tax system. Companies should monitor the progress of the draft legislative proposals and look out for any forthcoming guidance to ensure their investment plans are aligned with the final rules.