Compliance
Compliance Alert: Changes to Non-Refundable Tax Credit Rates & Top-Up Credit
Budget 2025 lowers the first marginal rate and adjusts non-refundable credit rates – here’s what taxpayers must know to avoid unexpected tax outcomes.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What changed to credit rates?
Budget 2025 includes a **middle-class tax cut**, lowering the first federal marginal personal income tax rate from **15% to 14%**, effective **July 1, 2025**. For the 2025 taxation year, this means a blended full-year rate of **14.5%** due to the change happening mid-year. From 2026 onward, the rate remains **14%**. ([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/chap3-en.html?utm_source=openai))
Correspondingly, the rate applied to **most non-refundable personal tax credits** (e.g., basic personal amount, age amount) will mirror this lowest rate—dropping to 14.5% for 2025 and 14% in 2026+. ([canada.ca](https://www.canada.ca/en/department-finance/corporate/transparency/2025/senate-cow-c4-2025-06-17.html?utm_source=openai))
## Why a Top-Up Tax Credit was proposed
Some taxpayers claimed costs or credits resulting in large non-refundable credits **exceeding** the first bracket threshold (in 2025: $57,375). In these cases, the drop in credit rate could result in **higher tax payable**, offsetting relief gained by the rate change. To prevent unintended penalties, Budget 2025 introduces a **Top-Up Tax Credit** which maintains the **15% rate** on amounts of non-refundable tax credits exceeding that bracket threshold. ([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
## Compliance implications for taxpayers
- **Income reporting matters**: If you have large tuition, medical, or donations expenses triggering big non-refundable credits, check whether your claims cross the $57,375 threshold.
- **Tax software and withholding**: Employers might need to adjust source deduction rates after July 1, 2025. Ensure employer or payroll provider updates withholding tables accordingly.
- **Planning deductions and timing**: If facing large deductible expenses in 2025, consider whether deferring some might help avoid crossing thresholds and making the Top-Up necessary.
## Practical examples
- *Case A*: John, a single individual, incurred $60,000 in medical expenses and tuition combined in 2025. His non-refundable credits exceed the $57,375 threshold. For the $57,375 portion, credits are calculated at 15%, for the excess ($2,625), the rate drops to 14.5% unless he qualifies for the Top-Up. The new Top-Up Credit will make up the shortfall by allowing the excess to still be treated at 15% for 2025.
- *Case B*: Maria has modest credits below that threshold; all her non-refundable credits will be subject to the new 14.5% rate in 2025—no top-up needed. From 2026 onward, math shifts to 14%.
## What must taxpayers do
- Review expected deductions/credits for 2025. If expecting large expenses, plan whether to claim in full or split across years.
- Confirm whether your employer updated withholding after July 1, 2025—if not, you may have been over-withheld (and refund due) or under-withheld (liability ahead).
- Keep receipts and documentation—especially for major expenses like medical/donation/tuition—for accurate credit calculations.
- Use updated tax software—ensure it incorporates changes to marginal rates and the Top-Up credit once legislation passes.
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These changes mean overall relief for many Canadians—but with nuances. If your non-refundable credits and taxable income structure are unusual, or if you expect large deductible/creditable amounts, consultation with a tax professional could save surprises.