At a glance
- Proposed immediate expensing rules could improve after-tax cash flow for businesses investing in manufacturing and processing buildings.
- At least 90% of a building’s floor space must be used for manufacturing and processing activities.
- The first-year capital cost allowance rate is set to gradually decrease from 2030 to 2033.
- Changes in building use within 10 years could trigger a manufacturing building recapture event.
- Before claiming, businesses should calculate floor space use, document eligibility, and monitor changes.
The proposed immediate expensing rules for manufacturing and processing (M&P) buildings could significantly improve after-tax cash flow for businesses investing in new facilities, expansions, or major renovations.
This article outlines how the immediate expensing incentive works, which buildings may qualify, and future recapture considerations related to the enhanced deduction. The proposed changes are still under parliamentary review and have not yet been enacted.
What is the immediate expensing of M&P buildings tax incentive?
The proposed tax measure allows businesses to immediately write off the cost of M&P buildings, including significant additions or renovations to existing buildings, acquired after Nov. 3, 2025, provided these buildings are used for M&P activities before 2030. In other words, an enhanced first-year capital cost allowance (CCA) of 100% may be taken on eligible M&P buildings.
A key requirement to benefit from this measure is that at least 90% of the building’s square footage must be used for M&P activities (see below for calculating the 90% floor space requirement). There will be a four-year phase-out period from 2030 to 2033, during which the first-year CCA will be gradually reduced:
| First-year CCA rate | Year ends (where it is the first year the 90% floor space test is met) |
|---|---|
| 100% | Before 2030 |
| 75% | In 2030 or 2031 |
| 55% | In 2032 or 2033 |
What are the existing capital cost allowance rules on M&P buildings?
Most buildings are classified as Class 1 with a base CCA rate of 4%. Eligible buildings may qualify for an additional 6% CCA if, at the end of a taxation year, at least 90% of the building’s floor space is used in Canada for the M&P of goods for sale or lease. Note that this additional 6% CCA is not automatic and requires filing a valid separate class election.
Where a building qualifies for the additional 6% CCA, the combined CCA rate would be 10%, subject to the available-for-use rules and, where applicable, the half-year rule, or the accelerated or reaccelerated investment incentive rules. Under the new rules for the immediate expensing of M&P buildings, the same 90% floor space requirement applies.
What is an eligible manufacturing building under the new rules?
The proposed legislation defines an eligible manufacturing building to generally include a building that is:
- located in Canada;
- acquired after Nov. 3, 2025;
- included in Class 1; and
- reasonably expected to meet the 90% floor space requirement once it is used.
It must also be either:
- a new building where no person has previously claimed CCA; or
- a previously owned building that was acquired from an arm’s length party and not acquired on a tax-deferred rollover basis.
To qualify for a full write-off, a separate class election must be filed for the eligible manufacturing building in the taxation year in which the building is acquired.
For an eligible manufacturing building that was under construction on Nov. 4, 2025, capital costs incurred before that date may be eligible to be fully written off, provided all other conditions are met.
How is the 90% floor space test determined for M&P buildings?
As mentioned, a key requirement for the immediate expensing of M&P buildings is that at least 90% of the building’s floor space must be used in Canada for the M&P of goods for sale or lease. The property owner does not need to carry on the M&P themselves and can lease the building to a tenant who uses it for M&P. Note that the 90% test is applied at year-end.
What qualifies as a manufacturing and processing activity?
The Income Tax Act does not define M&P, so these terms are interpreted at their common meaning, which includes considering relevant jurisprudence and guidance from the Canada Revenue Agency (CRA). The Income Tax Regulations list specific activities or processes that are not considered M&P for CCA purposes, such as farming, fishing, logging, construction, and certain resource activities.
As general guidance provided in Income Tax Folio S4-F15-C1, Manufacturing and Processing, the CRA states the following:
There is a body of jurisprudence dealing with activities considered to be M&P and those not considered to be M&P. This case law developed due to a previous federal law that reduced the tax rate on M&P profits. This jurisprudence can be useful in determining whether a main activity is M&P or not. However, it does not directly assist in interpreting the floor space requirement.
Applying the floor space test: Specific CRA guidance
The CRA previously expressed its views with respect to whether the 90% test would be considered met in the situation where the floor space of the bathroom, cafeteria, and office of a building collectively exceed 10% of the total floor space of the building but the rest of the building is used exclusively for M&P in Canada. The CRA indicated that in this situation, if the floor space of the bathroom and cafeteria are used by personnel engaged in M&P and the nature of the activities carried out in the office are related to such personnel, then the floor space of these areas may be regarded as being used for M&P. As such, in this case, the 90% floor space test would be considered met for enhanced CCA purposes.
In another interpretation, the CRA lays out its views on whether front office areas (used for management, quality and assurance, and sales), and warehouses for purchased inventory count towards the 90% floor space requirement for purposes of the Ontario Made Manufacturing Investment Tax Credit. Although this is an Ontario credit, the provision refers to the same federal legislation as the 90% floor space requirement used for enhanced CCA purposes. As such, the CRA’s view in this interpretation is informative.
Specifically, the CRA indicated that facilities used by personnel engaged in M&P, such as quality and assurance, or office areas directly related to M&P personnel, may count towards the 90% floor space test. However, sales, distribution, and administration would generally not qualify. In addition, space used to store raw materials for M&P may be included, but a warehouse used exclusively for non-M&P materials would not qualify.
Each case will be unique and must stand on the relevant facts.
What about additions or renovations to an existing building?
Additions to an existing building can qualify for immediate expensing, regardless of whether the original building qualified or has already been fully written off, provided all other conditions are met.
A special rule provides that additions or alterations to a building are deemed to be a separate building for purposes of applying the immediate expensing rules for M&P buildings. However, even though the addition is deemed to be a separate building, the 90% floor space test is determined based on the total floor space of the existing building plus the addition.
What can trigger recapture of immediate expensing?
Under the proposed rules, a manufacturing building recapture event occurs when:
- immediate expensing was previously claimed on the M&P building; and
- within 10 calendar years of the end of that year, the taxpayer begins to use more than 10% of the building’s floor space for purposes other than M&P.
In such scenarios, the amount of enhanced CCA claimed (i.e., immediate expensing of M&P buildings) that exceeds the maximum amount of CCA that would have otherwise been available under the normal rules must be added back to income in that year.
This means the additional amount of CCA claimed would be effectively recaptured into income in a later year if the M&P building fails to meet the 90% floor space test within 10 calendar years of the end of the year that the immediate expensing was claimed. If this recapture occurs, an undepreciated capital cost (UCC) balance will be restored equal to the recaptured amount. This UCC balance can be claimed in future years at the regularly applicable CCA rates.
As such, it will be important to monitor changes in building usage to ensure that a manufacturing building recapture event does not occur within 10 years as the benefit of immediate expensing would be negated.
Key considerations before claiming immediate expensing
Claiming 100% of building costs as a CCA deduction can have significant and immediate tax savings. Given the size of this deduction, it would be prudent to confirm the following prior to making an election to claim the full cost as CCA:
- Review the activities planned for the building and confirm they would be considered M&P by referencing the Income Tax Regulations, CRA guidance, and case law.
- Using detailed specifications for the building, determine floor space used and not used in M&P activities.
- Confirm through calculation that at least 90% of the total floor space is used in M&P activities.
- Document the steps noted above.
- Monitor building usage to ensure that the total non-manufacturing floor space use does not exceed 10% in the 10 years following the immediate expensing of the building.
How BDO can help
The immediate expensing of M&P buildings is a significant tax incentive that allows businesses to optimize cash flow and expedite investments. However, complexities often arise when navigating new legislation. Contact our team for tailored guidance.
The information in this publication is current as of June 16, 2026.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.