What Changed in the Personal Income Tax Rates
Bill C-4 (“Making Life More Affordable for Canadians Act”) reduced Canada’s lowest marginal personal income tax rate from 15% to 14.5% in 2025, then to 14% starting July 1, 2025. For 2026 and future tax years, 14% applies to taxable income up to the first bracket threshold. (canada.ca)
How Non-Refundable Tax Credits Are Affected
Non-refundable credits (e.g., Basic Personal Amount, Canada Employment Credit, Medical Expense, Disability Credit) are multiplied by the lowest tax rate to determine their value. Lowering this rate scales down the dollar value of those credits. For example, a credit worth $1,000 would reduce tax by $140 in 2026 instead of $150 under the old 15% rate. (canada.ca)
Who Gains or Loses—and Why
Gainers:
- Taxpayers in low to middle income brackets: pay less federal tax on each dollar in the lowest bracket.
- Individuals claiming fewer non-refundable credits: they benefit more from rate cut than are impacted by lower credit value.
Potential downside:
- Those with large non-refundable credits: they may see smaller deductions in tax savings because the credits are worth less.
Planning Moves You Can Consider
- Accelerate income or deductions into years with higher rates if that makes sense for your bracket.
- Review your expected non-refundable credits to project any drop in value and weigh against rate benefits.
- Consider RRSP contributions—since they reduce taxable income in high marginal brackets, whose savings are unaffected by lower rate in first bracket.
- Charitable giving timing: if you make a major donation, combining donations in a year with higher rates might yield bigger benefit.
Simple Numeric Examples
- Scenario A: Jane has $50,000 taxable income and claims $1,000 in non-refundable credits. Under 15% rate, she’d save $150 via the credit; under 14%, $140—a $10 difference—but she also pays lower rate on her first bracket income, yielding savings.
- Scenario B: Mark uses many credits (medical, caregiver, volunteer) totalling $5,000. The drop in value across all those credits could be $50 under the new rate. But his overall federal tax savings may still be positive given the lowered bracket rate.
What You Should Do Now
- Update your tax-projections for 2025 and 2026 with the lower lowest rate.
- When estimating refunds or taxes payable, expect non-refundable credit values to decrease by about 6-7% relative to previous values (from 15% to 14%)—adjust budgeting.
- If entering into major expenses or investments that produce credits, check whether waiting or prepaying makes sense.
- Ensure your payroll and withholding (if paid by employer) reflects changed rates so errors or surprises at filing are minimized.
Long-Term Implications
Over time, adjustments may be required in legislation to rebalance revenue from credit-rich provisions. Some credits may be revised by Parliament. Stay current, especially if you rely on credits like Medical Expense, Volunteer Firefighter, Disability.
Bottom line: Lowering the lowest tax rate benefits nearly all Canadians by reducing tax payable in the first bracket—but changes to credit valuation mean planning, especially around deductions, has a fresh twist. Understand the trade-off to make sure your annual tax strategy maximizes what you keep, not just what you pay.