Federal Budget 2026: What It Means for Canada’s Railway Industry
Finance Minister Francois-Philippe Champagne tabled his second Federal Budget this afternoon titled “Masters of Our Destiny”. The document states that “uncertainty has become a defining feature of the global economy,” influencing the government to create conditions for a more certain economic future. The largest item in the Budget is the previously announced Productivity Mega Deduction, with additional investment measures to fulfill “Canada’s Investment Supercycle,” in which each investment strengthens the conditions for the next.
This year’s budget put a special emphasis on small businesses, self-employed workers, and growing the energy sector. The government did set aside funds to invest in passenger rail, and proposed modifications to GST/HST Rules, with no promise to invest in shortline railways.
Key Takeaways:
Investment incentives: Incorporates the previously announced Productivity Mega Deduction, advancing a major RAC advocacy priority on immediate expensing of railway capital investments.
Passenger rail: Proposes new VIA Rail operating funding and renews support for remote passenger services.
Harmonized System Codes: Intention to consult with stakeholders and table legislation to align existing tax codes with HS codes on cargo containers and railway equipment.
Shortline investment: No dedicated shortline investment measure announced. RAC will continue its advocacy work for a federal Shortline Investment Tax Credit.
Economic Outlook
Deficits are projected for every fiscal year through 2030-31. The deficit projection is $62.3 billion for 2026-27, $62.5 billion for 2027-28, and down to $57.6 billion in 2028-29. The federal debt to GDP ratio is forecasted to exceed 40% throughout the 5-year projection. Revenue from higher oil and energy prices has allowed this year’s deficit to be better than projected in the Spring Economic Statement. The deficit is projected to be fully accounted for by capital investments (as opposed to day-to-day operating spending) in 2027-28 and each subsequent year.
Canada is projected to grow at the second-fasted pace in the G7 next calendar year. However, Canada ranks first in the G7 for overall tax competitiveness with a score of 72.2, with the United States in second at 71.2.
Competition
The Budget mentions the Whole-of-Government Competition Plan, first introduced in the Spring Economic Update. The Plan will apply a competition lens across federal regulations, policies, and business support.
Trade Modernisation and Stronger Supply Chain Data
Budget 2026 proposes to provide $55.3 million over two years on a cash basis, starting in 2026-27, to Transport Canada to advance digital trade processes. This funding would bring government and industry together to guide the work, update legislation and regulations, test new digital tools, and help businesses adopt them for a more competitive and productive trading environment.
The government will also put $5 million toward strengthening supply chain data and analysis. This funding is proposed for TC to renew supply chain data and analysis used to identify bottlenecks, monitor disruptions, and inform decisions on trade diversification and economic sovereignty.
Investing in Railways
The Budget outlines large investments in passenger rail. For VIA Rail, Budget 2026 proposes $1.2 billion over three years beginning in 2027-28 for operations and maintenance. Additionally, the budget includes the more than $6.6 billion investment in the acquisition and maintenance of new rail cars and locomotives, first announced in September 2026.
The government will also renew the Remote Passenger Rail Program, investing $35.1 million in 2027-28 to Transport Canada to support the program. This renewal is intended to preserve essential transportation links for remote communities by supporting the continued deliver of services in Manitoba, Quebec and Newfoundland and Labrador.
The Canada Strong Pass will also be renewed for summer 2027, providing those under the age of 18 with a free VIA Rail trip, purchased in addition to an adult fare.
Other Mechanisms for Investment
The Productivity Mega Deduction, announced earlier in the fall, lets businesses of every size deduct the full cost of new investments. It reduces the tax burden on a new investment from 13.0% to 6.4%; which is less than half the U.S. rate of 16.9%, about one third of the OECD average (19.0%, excluding Canada), and about one quarter of the G7 average.
The Canada Strong Fund will invest $25 billion in nation-building projects and high-growth Canadian companies. The Fund will invest exclusively in Canada, alongside and on the same commercial terms as private partners. It will take minority ownership positions and operate independently from government.
The Canada Growth Incentive aims to help promising Canadian businesses attract investment and expand by exempting up to $15 million in capital gains from eligible investments and allowing investors to defer more capital gains taxes when reinvesting in another Canadian small business.
Updates to GST/HST Rules
The government intends to propose modifications to GST and HST Rules through legislation. The legislation, whose introduction date is not detailed in the budget, will require a consultation period.
The updates to the GST/HST relief have no direct policy implications, as they are measures to line up existing tax codes with HS codes for the purpose of customs. Modifications include:
- Railway equipment: Maintain existing GST/HST relief for locomotives, rolling stock and related equipment used in international service, while simplifying how partial relief is calculated for equipment temporarily diverted or entering domestic service.
- Cargo containers: Update eligibility for GST/HST relief to include containers with a minimum volume of 1 m³ exported within 365 days, replacing existing size requirements and the 30-day export limit. Related provisions for container use, repairs and storage would also be updated.
Conclusion
Budget 2026 emphasizes private-sector investment, productivity and trade diversification, all of which are critical to the long-term competitiveness of Canada’s railway industry. The Productivity Mega Deduction and other investment incentives present opportunities to encourage capital investment, while the government’s focus on expanding access to international markets reinforces the importance of reliable and efficient rail supply chains.
However, despite significant commitments to passenger rail, the Budget does not introduce dedicated support for shortline railways or new targeted investments in freight rail infrastructure. This represents a missed opportunity to strengthen key segments of the freight transportation network that underpin Canada’s economy and international trade.
As the government pursues its ambitious trade diversification and nation-building agenda, RAC will continue to advocate for policies that encourage private-sector rail investment, including a federal Shortline Railway Investment Tax Credit. Ensuring regulatory predictability and labour stability will also be essential to maintaining reliable supply chains. Canada cannot achieve its economic ambitions without a strong, competitive and resilient freight rail network.