Corporate Canada just received something close to a very large coupon.
At the Canada Investment Summit, Prime Minister Mark Carney announced the Productivity Mega Deduction, permanently expanding immediate tax write-offs for new business investment. Roughly two-thirds of capital investment can now qualify, compared with about 15% previously.
The change includes machinery, manufacturing equipment, software, pipelines, fibre, and rail infrastructure. Instead of gradually claiming deductions over many years, companies can deduct eligible investments when those assets become available for use.
Carney’s pitch was simple. “Your investment dollars will go a lot further in Canada than anywhere else in the advanced world.”
Source: Getty Images
Why investors should care
Finance Canada estimates the policy will slash Canada’s marginal effective tax rate on new investment from roughly 13% to 6.4%. That’s less than half the current U.S. rate.
The government expects the measure to cost roughly $36 billion over five years, essentially trading tax revenue today for the hope of considerably more private investment tomorrow.
That timing can matter enormously to capital-intensive companies. Earlier deductions can improve near-term cash flow and potentially increase the return on projects companies were already considering.
Carney called it the Productivity Mega Deduction “because the advantage it confers is huge.” Yet one industry specifically named in the policy caught my attention: rail.
That brings me to Canadian Pacific Kansas City (TSX: CP).
Why CPKC could benefit
CPKC operates the only single-line railway network connecting Canada, the United States, and Mexico. That gives it exposure to grain, potash, automotive products, energy, industrial goods, and cross-border trade. Yet running thousands of kilometres of railway also requires something less glamorous, which is constant spending.
CPKC plans to invest approximately $2.7 billion in capital programs during 2026. That money supports track, locomotives, technology, safety, and network capacity. Eligible new Canadian rail assets can now potentially receive immediate expensing under the new deduction.
CPKC was already going to invest heavily. Ottawa has simply made some of that Canadian investment more attractive.
Into earnings
Second-quarter revenue climbed 13% year over year to $4.2 billion, while core adjusted earnings per share (EPS) reached $1.27. Management continues to expect low-double-digit core adjusted earnings-per-share growth for 2026.
There’s another reason I like CPKC here. Canada’s wider investment push targets mines, ports, manufacturing, energy, and critical minerals. If those industries expand, somebody eventually has to move the additional potash, copper, grain, vehicles, and industrial equipment.
CPKC can benefit both from investing in its own network and from customers investing in theirs. That’s a useful double exposure.
Considerations
Now, is CPKC cheap? Not particularly. CPKC recently closed around $122, giving it a forward price-to-earnings ratio near 22. That’s a reasonable price for a high-quality railway with a unique Canada-U.S.-Mexico network, but investors aren’t uncovering an abandoned caboose full of bargains.
The bigger risk is the economy. Freight volumes can weaken during recessions, while tariffs and trade disputes could disrupt the cross-border traffic that makes CPKC’s network so valuable.
The tax policy itself is also only a tailwind. Immediate expensing won’t make an uneconomic project suddenly brilliant.
Bottom line
Still, that’s why I prefer CPKC for this announcement. Canada doesn’t need to convince the company to start investing. CPKC already plans to spend billions maintaining and growing its network.
Now Ottawa has made putting some of that money to work in Canada cheaper. For a railway already connecting three countries, that’s a pretty useful ticket.
