At a glance
- What the 2026 federal budget could mean for individual and corporate tax rates.
- How the 2026 federal budget may build on new business investment incentives.
- Where Canada's federal budget could target critical minerals, clean technology, and innovation.
- Potential tax reforms that could affect small businesses, foreign investors, and capital reinvestment.
In mid-September, Prime Minister Mark Carney pre-empted some speculation about what this fall’s federal budget will contain by making two significant announcements: one aimed at attracting foreign investment to Canada, and the other, the Productivity Mega Deduction, aimed at increasing investment in capital assets in Canada by businesses located in Canada. This article summarizes these announcements as well as putting forward our thoughts on what could be in the 2026 federal budget.
This will be the Liberal government’s second budget under Prime Minister Mark Carney, and the first since the Liberal Party achieved a majority earlier this year. As economic uncertainty continues, the government has indicated that this budget will focus on boosting investment and competition, strengthening sovereignty, and addressing pressing economic challenges.
What are the government’s key areas of focus?
The upcoming budget is expected to outline the government’s next steps in:
- supporting people, workers, families, and businesses;
- building a strong economy;
- diversifying trade;
- attracting more international investment;
- ensuring responsible fiscal management;
- and positioning the country for long-term prosperity.
What can you expect with respect to income tax changes?
Individual tax rates
The Liberal Party campaigned on a platform of a middle-class tax cut and delivered a 1% reduction to the lowest personal tax rate to 14%. Therefore, it is unlikely that there will be a general increase in personal tax rates.
Change in corporate tax rates
Any general increase in corporate tax rates is unlikely. A general corporate tax reduction would be well received, as would an increase in the small business deduction. An increase in the small business deduction from $500,000 to $600,000 or $700,000 would follow similar increases in some provinces.
Special industry tax
Increased taxes on corporations in specific industries are possible, but unlikely to be able to generate significant revenue, or, like the scrapped Digital Services Tax, may not be palatable to international trading partners.
Tax reform
There has been much discussion about reforming the complexity and efficiency of the Canadian income tax system. However, big changes in the Canadian tax system are rare. The introduction of tax on capital gains after 1972 was historic, as was the introduction of the Goods and Services Tax in 1991. Since then, there have been some structural changes, such as the introduction of two systems of dividends: eligible dividends and dividends that are not eligible dividends in 2006, and a gradual reduction of the general corporate and small business tax rates between 2001 and 2012.
Many of the changes made each year benefit certain industries, such as the recent focus on:
- fast write-offs of capital investment in manufacturing;
- broadening and deepening Scientific Research and Experimental Development (SR&ED) investment tax credits; and
- introducing significant investments for Clean Energy and Technology.
However, in recent years, there has also been a focus on increased compliance for certain taxpayers, and this has not resulted in any simplicity or efficiencies in reporting.
Examples of such compliance include:
- the now-shelved Underused Housing Tax;
- increased reporting from all trusts;
- the on-again, off-again tax reporting for bare trusts; and
- additional reporting by Canadian corporations, who are members of large multi-national organizations, to meet certain international standards.
All of these changes, both positive and negative for the taxpayer, are focused on different groups of taxpayers, which has resulted in further fragmentation and complexity.
Small business deduction
Some commentators have suggested that the small business deduction be eliminated, and the overall corporate tax rate be reduced. Eliminating the small business deduction would significantly simplify parts of the tax system, but such change would be costly to many small business owners.
Tax deferred investment changes
Consider a corporation that manufactures car parts for automobile manufacturers and wants to exit that business to be a subcontractor for a manufacturer of military equipment. Under the current law, if the corporation followed this strategy, it would be taxable on the proceeds of divestiture and would only have the after-tax proceeds for re-investment within the corporation.
There would be an economic advantage in allowing businesses to switch to more profitable lines of business and to achieve a deferral of divestment gains. Such a plan has been suggested as a possible tax reform that would help to drive investment by existing businesses in new businesses.
International tax changes
The current government has clearly stated that they would like to increase and diversify international investment in Canada. On Sept. 14 and 15, 2026, Prime Minister Carney hosted the Canada Investment Summit. This was a two-day event focused on accelerating new investment into Canada. Ahead of this conference, the government announced streamlined Advance Tax Ruling (ATR) procedures to assist companies wanting to make business investments of $1 billion or more in Canada. This will allow potential investors to be clear on the Canadian tax consequences of such an investment on a priority basis.
Foreign companies doing business in Canada and their advisors often complain that the Canada Revenue Agency (CRA)’s administrative systems set up for non-residents are cumbersome and difficult to navigate from outside Canada. Increasing the resources available to the CRA to deal with non-resident corporate owners clearly and practically would go a long way towards reducing the friction of the administrative burden of investing in Canada.
For example:
Investments in incentives to drive business growth
Productivity Mega Deduction
As noted above, the government announced the Productivity Mega Deduction, which will allow immediate expensing of a wide range of depreciable property acquired on or after Sept. 15, 2026.
This new incentive builds on the Productivity Super Deduction that was announced in last year’s federal budget, which included immediate expensing of certain types of capital assets, such as M&P buildings and equipment, for a limited period of time. The new Productivity Mega Deduction will allow first-year full write-off for a broader range of assets with no expiry date or phase-out period for the incentive.
Expanded categories of assets that will qualify for immediate expensing now include fibre-optic cable, mining property, oil and gas pipelines, computer equipment, aircraft and vehicles, rail track, bridges, and roads.
Note that assets that are not eligible for this new incentive generally include buildings, franchises, licenses, goodwill, regulated natural gas distribution pipelines, and certain vehicles such as those that are assembled outside Canada. The immediate expensing of buildings used in manufacturing and processing is a separate measure and is unchanged by this announcement.
As the government estimates that this incentive will reduce the general federal marginal effective tax rate on new investments to 6.4%, this proposal will provide significant opportunities for businesses to optimize their cash flow position and accelerate investment in key assets.
Critical minerals support
In its last federal budget, the government confirmed its commitment to supporting critical mineral projects to promote domestic production and processing, to protect sovereignty and ensure economic resilience. This was to happen by partnering with Indigenous groups, domestic stakeholders and international allies. Industry experts have called on the government to provide financing support to move a project from discovery to development. This could be provided by expanding eligibility for Canadian exploration expenses to include project-advancement work, including engineering, technical studies and feasibility costs, or creating a new tax credit for these types of advancement expenses.
Clean economy tax incentives
In recent years, the government announced numerous tax incentives related to the clean economy, including specific investment tax credits and fast write-off of investments. It is likely that the government will continue to introduce new, or changes to existing, incentives to attract investment into clean technology.
Flow-through shares to support innovative technology investment
Flow-through shares have traditionally allowed investors in resource companies to be entitled to tax deductions not claimed by the resource companies—the tax incentives are flowed through to the investors. The 2025 Liberal platform proposed to create flow-through shares that would benefit investors in companies developing AI, or investing in quantum computing, biotech, or advanced manufacturing.
Creating a Canadian patent box regime
Consultations on creating a Canadian patent box regime were held in 2024, but a proposal was not included in the 2025 federal budget. Whether the government will proceed with a federal patent box remains to be seen. In general terms, a patent box refers to a system of allowing a lower corporate tax on profits from the commercial exploitation of intellectual property developed by the corporation. This would help to keep the rewards of Canadian innovation in Canada and to discourage selling the intellectual property to an offshore entity.
BDO can help you prepare for the 2026 federal budget
Federal budgets often bring changes that can pose risks or unlock new opportunities for businesses, shaping everything from financial strategy to market positioning. Your BDO advisor is available to discuss how any changes in the 2026 federal budget could affect future planning for your business.
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The information in this publication is current as of September 18, 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.