Tax Planning
Tax Planning in Canada: Leveraging the Middle-Class Tax Cut and Non-Refundable Tax Credits
Explore how the 2025-26 tax shifts—especially the drop in the first personal tax rate and introduction of a top-up credit—can reshape your tax planning strategy.
By NomadicTax Research Team • 5-8 min read • July 9, 2026
## Understanding the Changes
Starting **July 1, 2025**, Canada reduced its **first (lowest) marginal personal income tax rate** from **15% to 14%**, affecting individuals whose taxable income falls in the lowest bracket. ([canada.ca](https://www.canada.ca/en/department-finance/corporate/transparency/briefing-materials/2026/c15-eng.html?utm_source=openai)) This change also applies to the rate used when valuing **non-refundable tax credits** (such as the basic personal amount, spousal amounts, etc.). ([canada.ca](https://www.canada.ca/en/department-finance/corporate/transparency/briefing-materials/2026/c15-eng.html?utm_source=openai))
However, a side effect is that for taxpayers who claim non-refundable tax credits in amounts **exceeding** the first tax bracket threshold (about **$57,375** in 2025), the drop in rate might reduce the benefit of those credits more than the tax saved from the lower marginal rate. To offset this, a **temporary “Top-Up Tax Credit”** was introduced for the years **2025 through 2030** to maintain effective value of such credit claims. ([canada.ca](https://www.canada.ca/en/department-finance/corporate/transparency/briefing-materials/2026/c15-eng.html?utm_source=openai))
## What This Means in Practice
| Scenario | Without Planning | With Strategic Planning |
|---|---|---|
| Individual earning $60,000 with non-refundable credits over threshold | Lower income tax due to rate drop, but credits lose more value, reducing net benefit | Use Top-Up credit where eligible; shift or accelerate some non-refundable credit claims into years when threshold impact is less sharp (if possible) |
| Two-income family near tax bracket boundary | Both benefit from lower rate; limited downside if credits are modest | Consider joint planning—one partner with fewer credits might absorb more deductions or credits |
## Actionable Planning Tips
- **Estimate your non-refundable credit claims**: List out all credits you’ll claim—charity, medical, tuition, etc. See if they're likely to exceed $57,375. If yes, assess whether the Top-Up credit applies.
- **Timing matters**: If you expect to make large non-refundable credit claims, see if delaying certain expenses or accelerating others might help in years when you're under the threshold (e.g. prepaying deductible eligible expenses, or timing charitable giving).
- **Check eligibility annually**: Since the Top-Up Tax Credit is temporary (2025-2030), make sure you’re tracking each year so you don’t miss your window.
- **Corporate/Investing Holders**: If you hold investment income or corporate dividends, be aware that changes to credit valuation may affect your net benefit.
## Examples
- **Example 1**: Jane has taxable income of $60,000. She claims $5,000 in non-refundable credits (charity, medical). Without the Top-Up credit, the drop in rate reduces her tax but reduces the credited value more — net could be slightly less benefit. With Top-Up, she’s made whole for the over-threshold amount, so she effectively retains the benefit of the credits.
- **Example 2**: John and Maria, a married couple, each earns $50,000. Maria has many eligible medical expenses. If Maria takes full medical claims this year, she might be over threshold. Perhaps John could claim certain shared expenses and reduce Maria’s over-threshold exposure.
## Key Takeaways
- The **rate drop from 15% to 14%** is a real win for nearly all taxpayers. However,
- The effective value of non-refundable tax credits is aligned to this lowest rate—if your credit claims exceed the first tax bracket threshold, the value drop can offset some of your tax savings.
- The **Top-Up Tax Credit (2025-2030)** helps mitigate that. Plan around it.
- Review your tax profile each year: income, credits, deductions—to maximize benefit.
By being proactive—reviewing your income vs credit claims, timing deductions, and using the Top-Up credit—you can make the rate change work in your favor.