Tax Planning 2026: Take Advantage of Canada’s 14% First Bracket Cut

What’s Changing

• The first federal income tax bracket rate has been lowered from 15% to 14%, effective July 1, 2025. (canada.ca)
• For the tax year 2025, because the rate change takes effect halfway through the year, the full-year rate will be 14.5%. From 2026 forward, full income in the first bracket will face 14%. (budget.canada.ca)
• Non-refundable tax credits are now valued using the new lower first-bracket rate starting July 1, 2025. (canada.ca)

Actionable Planning Strategies

• Adjust payroll withholding: Employers should update source deduction tables to reflect the 14% rate for salaries paid after July 1, 2025. For employees earning in the first bracket, reduce withholdings accordingly. (canada.ca)
• Optimize deductions and credits: Because non-refundable credits use first bracket rate, delaying expenses until after July 1 for credits (e.g., charitable gifts, medical expenses) may yield more tax savings. Example: A $1,000 medical expense gives $140 savings at 14% instead of $150 at 15%. Over multiple credits, this compounds.
• Income splitting and timing: If possible, defer income into 2026 (if you expect your bracket to be lower or income to drop) to lock in the 14% rate. Self-employment income or dividend timing may benefit.
• Investment gains and losses: Although this rate change doesn’t directly affect capital gains inclusion rates, the overall lower rate on credits helps net after-tax outcomes. Consult your accountant if you're selling investments or harvest losses.

Example Scenarios

Key Takeaways

• High impact for lower-income earners in first bracket (taxable income up to ~$57,375 federal)
• Savings begin with payroll deductions in July 2025, full benefit in tax year 2026
• Benefits also affect credits and trust distributions where non-refundable credit rate applies