Finance Minister François-Philippe Champagne. The federal government has promised an income tax cut by July 1.Jeff McIntosh/The Canadian Press
The income-tax cut expected July 1 is not quite the gift it’s made out to be.
The federal government says reducing the rate on the lowest tax bracket by a percentage point, to 14 per cent, will save two-income families as much as $840 a year in 2026. But there are also some tax takeaways that may reduce the overall benefit for taxpayers.
Blame the inner workings of our tax system. The lowest tax rate is used not only to calculate tax owing but also the dollar amount of non-refundable tax credits such as the basic personal amount, the medical expense tax credit, the home buyers’ amount and the first $200 of charitable donations. Cut the lowest tax rate and you cut the rate on tax credits such as these.
The total cost to the federal government would be $5.8-billion in the 2026-27 fiscal year, which is considerable. “But, yes, it would have been even more valuable if the 15-per-cent rate had been maintained for tax credits, while the lowest tax rate was reduced,” said Brian Ernewein, a senior adviser at KPMG Canada’s national tax centre.
The basic personal amount, or BPA, offers a clear example of what happens when the rate for tax credits is lowered. Some quick background: You pay no federal income tax if your taxable income is less than the BPA, and you get a partial tax reduction if your taxable income is more than the BPA.
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The BPA for 2025 is $16,129 for people making $177,882 or less. With the lowest federal tax rate at 15 per cent, the BPA calculation is $16,129 times 0.15, for a $2,419.35 tax credit to be deducted from the amount of income tax you owe. At the new 14-per-cent tax rate, we end up with a BPA tax credit of $2,258.06 – $161.29 less.
The difference between a tax credit rate of 15 per cent and 14 per cent for someone using the medical expense tax credit for $10,000 in expenses amounts to $100, Mr. Ernewein said. With charitable donations, the difference on the first $200 is a mild $2. Note that donations above $200 generally qualify for a 29-per-cent tax credit, with a 33-per-cent credit for taxpayers at the highest personal tax rate.
The full-year lowest tax rate for 2025 will actually be 14.5 per cent – a blend of six months at the old, 15-per-cent rate and six months at the new, 14-per-cent rate. Enacting the tax cut will be one of the government’s first priorities when the new session of Parliament begins May 26. Employers should have the updated guidance they need from the Canada Revenue Agency to reduce withholding tax on employee paycheques as of July 1.
If you don’t receive income subject to deductions at source for tax, you’ll get your tax savings after you file your 2025 tax return next spring.
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A government news release about the tax cut last week confirmed the rate for most non-refundable tax credits will continue to be the same as the lowest personal income tax rate. Mr. Ernewein said aligning the lowest tax rate and the rate on non-refundable tax credits is required under the federal Income Tax Act. Non-refundable tax credits can only reduce your income until it reaches zero – they can’t generate a refund.
The new 14-per-cent lowest federal tax rate would apply to incomes of $57,375 or less in 2025. The other four tax brackets remain the same: 20.5 per cent on income between $57,375 and $114,750, 26 per cent between $114,750 and $177,882, 29 per cent between $117,882 and $253,414, and 33 per cent over $253,414.
At $840 annually, the coming tax cut amounts to a bit more than $32 per biweekly paycheque. Here, we run smack into the economics of tax cuts. The overall cost to the government is high, even as the practical impact at the household level is modest at best.
Suggestion for your tax savings: Set up an automatic transfer to your emergency fund every payday. The latest job market numbers say that’s a good thing to do.
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