Tax Planning
Tax Planning under Canada’s New Lowest Rate: Strategies for 2025-2026
With Canada’s federal lowest tax rate dropping from 15% to 14% (effective mid-2025), taxpayers can adjust deductions, credits and withholding to maximise savings.
By NomadicTax Research Team • 5-8 min read • February 26, 2026
## What’s Changed
- As of **July 1, 2025**, the **lowest federal personal income tax rate** dropped from **15% to 14%**, with **full-year 2025 rate** being **14.5%**, and **14%** beginning in **2026**. ([canada.ca](https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents/5013-g/guide-non-residents-deemed-residents-canada-completing-your-return.html?utm_source=openai))
- The **rate used to calculate most non-refundable federal tax credits** will also follow this lowest tax rate. ([canada.ca](https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents/5013-g/guide-non-residents-deemed-residents-canada-completing-your-return.html?utm_source=openai))
## Key Planning Actions to Take Now
| Goal | Strategy | Example |
|------|----------|---------|
| **Reduce withholdings / overpayment risk in 2025** | If your employment income is subject to source deductions, check whether your withholding tables reflect the new rate; you may request adjustments with your employer. | Someone earning $50,000 will benefit immediately from lower withholding; they might adjust by submitting TD1 updates or similar payroll forms. |
| **Maximize use of non-refundable credits** | Because many credits are multiplied by the lowest rate, large credits (tuition, medical expenses) will deliver slightly less savings. Consider timing deductions to avoid “wasting” high credit amounts above first bracket thresholds. | If you incur $20,000 in medical expenses, spreading them over two taxation years instead of one could reduce exposure to the top edge of the lowest rate in 2025. |
| **Forecast your 2026 tax bill** | Since the full-year lowest rate in 2026 is 14%, adjust your estimated tax instalments or withholdings now if you expect high income. | If income spikes (e.g., bonuses or self-employment), model your 2026 liability using 14% for lowest bracket rather than 15%. |
## Pitfalls & What to Avoid
- **Assuming full-year savings in 2025**: Because the 14% rate only applies from July 1, 2025, for half the year you’ll still pay 15% on income earned before then. Watch for prorated effects. ([canada.ca](https://www.canada.ca/en/revenue-agency/services/forms-publications/tax-packages-years/general-income-tax-benefit-package/non-residents/5013-g/guide-non-residents-deemed-residents-canada-completing-your-return.html?utm_source=openai))
- **Don’t let withholding shortfalls sneak up**: Under-withholding could lead to owing at tax time. Review pay stubs or CPP/EI contributions and compare against estimated annual income.
- **Large one-off items**: High expenses eligible for non-refundable credits (tuition, donations etc.) that push you over the first bracket threshold may yield less benefit under the new structure. Time them appropriately.
## Sample Calculation: 2025 vs 2026
- **2025**: First $57,375 taxed at **14.5%** (due to prorated rate), amounts over that move into higher brackets.
- **2026**: First $58,523 taxed at **14%**. Slightly higher threshold also helps.
If you earn $60,000 in both years and have $5,000 in tuition credits:
- In 2025, part of that tuition credit may be multiplied by 14.5% up to $57,375 and by a higher rate on the rest.
- In 2026, you’ll get 14% on the entire credit (if all used in the lowest bracket).
## Action Plan for Individuals
1. Update your payroll withholding if your employer processes source deductions based on tables using the new lowest rate.
2. Review major deductions & credits: medical, tuition, donations—time when possible across two years.
3. Estimate your full-year income early (especially if bonus, commissions, contracts) to avoid surprises.
4. Use CRA tools or consult with a tax professional to run simulations under both brackets.
**Bottom line**: The reduction in the lowest tax rate is a welcome change—but its full benefit depends on timing and careful planning. Those who act proactively today will maximize savings and avoid unexpected liabilities.