Canadian Prime Minister Mark Carney announced on 30 June 2025 that the government's middle-class tax cut would enter into effect on 1 July 2025.
This tax cut will save a two-income family up to CAD 840 a year and generate tax savings for 22 million Canadians. Canada’s personal income tax (PIT) system is progressive, meaning that individuals pay a higher percentage of tax as their income increases. This structure remains unchanged after the PIT rate reduction. The bulk of tax relief will go to those with incomes in the two lowest tax brackets -- those with taxable income under CAD 114,750 in 2025 -- including nearly half to those in the first bracket (CAD 57,375 and below in 2025).
As of 1 July 2025, there will be a one percentage point cut in the lowest federal marginal tax rate, from 15% to 14%.
In Canada, income is reported and tax is calculated on an annual calendar-year basis. Because this tax cut is starting halfway through the year, the full-year federal tax rate for 2025 will be 14.5%, but the full-year rate for 2026 and future tax years will be 14%.
Historically, Canada's lowest federal tax rate was 16%, a rate that held through 2004. In 2005, the rate was reduced from 16% to 15%, remaining at that level ever since.
The Canada Revenue Agency has updated its source deduction tables for the July to December 2025 period, which means employers and pay administrators are able to reduce tax withholdings as of 1 July.
Accordingly, effective 1 July, individuals with employment income and other income subject to source deductions can have tax withheld at 14%. Otherwise, individuals will realise this tax relief when they file their 2025 tax returns in spring 2026.
The rate applying to most nonrefundable tax credits will continue to be the same as the lowest personal income tax rate. Thus, the tax rate reduction also reduces tax credits.
Some common tax credits that are based on the lowest tax rate include the basic personal amount, the spouse or common-law partner amount, the eligible dependent tax credit, the caregiver tax credit, and the medical expense tax credit.
No, each province and territory determines its own income tax rates. Provincial or territorial income tax rates apply in addition to federal income tax rates. This article does not address any tax rate changes for the provinces and territories, if any.
Should you have any questions about this personal tax cut and how it may impact your employee's employment income, their payroll source deductions, and tax equalisation policies, please contact us.
Debra Moses
Lilian Zheng
BDO in Canada
How Much Will Canadians Save?
This tax cut will save a two-income family up to CAD 840 a year and generate tax savings for 22 million Canadians. Canada’s personal income tax (PIT) system is progressive, meaning that individuals pay a higher percentage of tax as their income increases. This structure remains unchanged after the PIT rate reduction. The bulk of tax relief will go to those with incomes in the two lowest tax brackets -- those with taxable income under CAD 114,750 in 2025 -- including nearly half to those in the first bracket (CAD 57,375 and below in 2025).
What is the New Tax Rate?
As of 1 July 2025, there will be a one percentage point cut in the lowest federal marginal tax rate, from 15% to 14%.In Canada, income is reported and tax is calculated on an annual calendar-year basis. Because this tax cut is starting halfway through the year, the full-year federal tax rate for 2025 will be 14.5%, but the full-year rate for 2026 and future tax years will be 14%.
Historically, Canada's lowest federal tax rate was 16%, a rate that held through 2004. In 2005, the rate was reduced from 16% to 15%, remaining at that level ever since.
What are the Key Considerations for Employers and Employees?
The Canada Revenue Agency has updated its source deduction tables for the July to December 2025 period, which means employers and pay administrators are able to reduce tax withholdings as of 1 July.Accordingly, effective 1 July, individuals with employment income and other income subject to source deductions can have tax withheld at 14%. Otherwise, individuals will realise this tax relief when they file their 2025 tax returns in spring 2026.
Will this Impact Personal Tax Credits?
The rate applying to most nonrefundable tax credits will continue to be the same as the lowest personal income tax rate. Thus, the tax rate reduction also reduces tax credits.Some common tax credits that are based on the lowest tax rate include the basic personal amount, the spouse or common-law partner amount, the eligible dependent tax credit, the caregiver tax credit, and the medical expense tax credit.
Does the Federal Tax Cut Impact Province and Territory Tax Rates?
No, each province and territory determines its own income tax rates. Provincial or territorial income tax rates apply in addition to federal income tax rates. This article does not address any tax rate changes for the provinces and territories, if any.
How Can BDO Help?
Should you have any questions about this personal tax cut and how it may impact your employee's employment income, their payroll source deductions, and tax equalisation policies, please contact us.Debra Moses
Lilian Zheng
BDO in Canada