Tax Planning
How Canada’s Middle-Class Tax Cut Affects Low-Income Non-Refundable Credits
With the cut in the first personal income tax rate from 15% to 14% (effective July 1, 2025), non-refundable tax credits are being reshaped—and for many low-income residents, this means adjusting your tax planning and possibly claiming the new Top-Up Tax Credit.
By NomadicTax Research Team • 5-8 min read • April 27, 2026
## What’s Changed
- The **Making Life More Affordable for Canadians Act (Bill C-4)** received Royal Assent on March 12, 2026. Among its reforms is a reduction in the first federal personal income tax rate—from **15% down to 14%**, effective **July 1, 2025**.([canada.ca](https://www.canada.ca/en/department-finance/news/2026/03/legislation-to-make-life-more-affordable-receives-royal-assent.html?utm_source=openai))
- Concurrently, **non-refundable tax credits** that use the lowest tax rate for their calculation are impacted—those credits yield less when the applied rate is cut. To avoid potential adverse effects, the government is introducing a new **Top-Up Tax Credit** to protect those claiming large non-refundable credits exceeding the first bracket threshold.([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
## Who is Affected
This affects taxpayers who:
- Qualify for substantial non-refundable credits (e.g., tuition, medical expenses, disability or age amounts), especially if some credits are carried forward or combined across dependents.
- Have income near or above the first-bracket threshold ($57,375 for 2025) and thus have credits computed partly beyond the lowest rate. These individuals may find their credit value falls unless they receive the Top-Up Credit.([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
## What is the Top-Up Tax Credit
- A temporary credit functioning for **2025 through 2030**, designed to bridge the gap between the **old 15% rate** and the new **14% rate** for affected non-refundable credits over threshold amounts.([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
- Applies when non-refundable credits exceed the first personal tax bracket threshold; ensures taxpayers in those upper ranges aren’t worse off due to the rate change.([budget.canada.ca](https://www.budget.canada.ca/2025/report-rapport/tm-mf-en.html?utm_source=openai))
## Actionable Advice
- **Estimate your expected non-refundable credits** for 2025: Include tuition, medical, disability, pension income, and any carried-forward credits. If they significantly exceed the first bracket limit, plan accordingly.
- **Consider the timing of large expenses or donations**: Expenses that generate non-refundable credits may be more advantageous in years with lower income (under the threshold) or when you can optimize the benefit considering the Top-Up Credit.
- **For students and dependents**: If carrying forward tuition or other credits, ensure you understand how the expiry or usage aligns with threshold and rate changes.
- **Use tax software or a preparer familiar with the new credit** to ensure you get the Top-Up Credit if eligible.
## Example Scenario
Imagine Jane has **$70,000** in taxable income in 2025 and claims **$15,000** in tuition and other non-refundable credits. Under the old rate (15%), her credits reduce tax by about **$2,250**. Under the new 14% rate, that benefit falls to **$2,100**, a **$150 loss**. The Top-Up Credit is intended to compensate for that kind of shortfall for amounts over the threshold.
## Summary & Tips
- The tax rate cut brings relief for nearly **22 million Canadians**, including many middle-class taxpayers.([canada.ca](https://www.canada.ca/en/department-finance/news/2026/03/legislation-to-make-life-more-affordable-receives-royal-assent.html?utm_source=openai))
- But for those with **high non-refundable credits**, the rate change alters the value of these credits—prompting the need for the Top-Up Credit. Consider planning ahead and timing large expenses or maximizing credits wisely.
- As this Top-Up Credit is only temporary (2025-2030), long-term planning should aim to spread credit-generating activities or structure income so as to minimize any loss.