Canada just found a persuasive way to encourage companies to spend money.
Let them keep more of it.
At the Canada Investment Summit, Prime Minister Mark Carney unveiled what the government calls the “Productivity Mega Deduction,” a permanent expansion of immediate tax write-offs for business investment.
Carney said roughly two-thirds of capital assets will now qualify for immediate expensing, up from about 15%. That includes machinery, software, research and development, pipelines, fibre-optic cables and, importantly for today’s stock, rail infrastructure. His sales pitch was simple.
“Your investment dollars will go a lot further in Canada than anywhere else in the advanced world.”
For companies already planning to spend billions every year, that could make a meaningful difference.
Source: Getty Images
The details
Normally, a company buying an expensive long-term asset can’t necessarily deduct the entire cost from taxable income immediately. Instead, that deduction is spread over time. Immediate expensing accelerates that process.
A company can deduct the full cost of eligible new investments when those assets become available for use. That means lower taxes earlier, better near-term cash flow and potentially more attractive returns from investing another dollar in Canada.
Carney said the expanded policy earns its slightly dramatic name “because the advantage it confers is huge.” The government estimates Canada’s marginal effective tax rate on new investment will fall from roughly 13% to 6.4%. That’s less than half the current U.S. rate.
This doesn’t make an investment free. It changes when businesses can recognize the tax deduction. Yet timing matters enormously when companies are spending billions on long-lived assets. Few Canadian companies understand that better than Canadian National Railway (TSX: CNR).
Why I’d buy CN
CN operates roughly 32,000 kilometres of track connecting Canada’s ports, cities and resource-producing regions with the United States. Keeping that network running requires an enormous amount of money.
CN plans to invest approximately $2.8 billion in its capital program during 2026. Spending covers its track network, equipment, technology, and other infrastructure required to move goods safely and efficiently. Rail track is specifically included among the assets Carney identified under the expanded deduction.
So, CN doesn’t need to dream up an entirely new investment strategy to potentially benefit. It already spends billions maintaining and expanding infrastructure every year. Meanwhile, the underlying business is moving nicely. Second-quarter revenue increased 11% to $4.75 billion, while adjusted earnings per share (EPS) rose 11% to $2.08. Free cash flow for the first half reached $1.84 billion, up 19%. Those results prompted CN to raise its 2026 outlook, with management now expecting mid- to high-single-digit adjusted EPS growth.
Considerations
CN shares recently traded around $167, or roughly 19.5 times forward earnings. That’s reasonable for a high-quality railway, although hardly screaming cheap. Investors also receive a quarterly dividend of $0.915 per share, or $3.66 annually, for a yield around 2.2%.
The risks aren’t complicated. Rail volumes depend on the economy, while enormous capital programs can pressure cash flow. A tax deduction also won’t make a bad investment suddenly attractive. Still, that’s precisely why I like CN for this policy.
Bottom line
CN already owns an irreplaceable transportation network, already generates billions in cash, and already needs to keep investing.
Carney wants corporate Canada to spend considerably more. CN was going to do that anyway. Now Ottawa is making the tax bill a little friendlier when it does.
