MiAccounting Tax Update: What the New 2025/2026 CRA Tax Brackets Mean for You
The federal government has officially reduced the lowest personal income tax rate — a change that affects nearly every Canadian taxpayer. This is one of the most meaningful adjustments to personal tax in years, and it’s important to understand what it means for individuals, households, and business owners.
Below is a simple breakdown of the new rules and how to make the most of them.
1. The New Tax Brackets: What Changed
Federal change:
- The lowest federal tax rate dropped from 15% → 14%.
- Because the change applies mid-year, the 2025 effective rate is 14.5%, and 2026 onward is 14% for the full year.
- The first bracket applies to taxable income up to $57,375 (indexed annually).
Provincial layer still applies
Federal tax is only half the story — your province will continue indexing its own brackets for inflation. Combined federal + provincial savings vary by province.
2. What This Means for Canadians
This reduction lowers tax on the first portion of income. That means:
- Most taxpayers will see modest tax relief.
- The benefit is strongest for low-to-middle income earners.
- Non-refundable credits (Basic Personal Amount, Spousal, Disability, Tuition, etc.) are also affected because their value is tied to the lowest federal rate.
- Some taxpayers will see slightly smaller refund values on credits due to the reduced rate, even though they still benefit overall.
3. Savings: What You Can Expect
Here are approximate federal savings based on the new rates:
Household view
A two-income household each earning ~$55K could see $550 in 2025 or $1,100 in 2026 in combined annual savings.
4. Payroll & Withholding (Important for Employees & Employers)
Starting July 2025:
- Payroll software will adjust the lower tax rate automatically.
- Net pay may increase slightly.
- Employers may want to review payroll budgets, sources deductions, and bonus timing.
- Employees who changed TD1 forms earlier in the year may need to review withholding to avoid year-end surprises.
5. Planning Considerations for Individuals & Families
This is a great time to revisit:
- RRSP contribution strategy
- Timing of income and deductions
- Spousal amount eligibility
- Income splitting where applicable
- Installment payments
- Tax credits relying on the lowest rate
Families will feel this change most clearly, especially dual-earner households.
6. Business Owners: Salary vs Dividends in Light of the New Brackets
This change does influence compensation planning — not dramatically, but enough to rethink your approach.
Salary gains a slight advantage
Because the lowest federal rate is lower, salary taken within the first bracket becomes cheaper than before.
Dividends do not get the same benefit
Dividend taxation uses gross-up and dividend tax credits, so the lower bracket rate does not flow through proportionately.
Practical implications:
- Owners who pay themselves only dividends may benefit from introducing some salary.
- Owners with a mixed strategy may want to shift slightly toward salary for 2025/2026.
- Salary creates CPP contributions and RRSP room, which may be desirable depending on long-term planning.
- The right mix depends on your corporate income, household income, cash flow, and retirement goals.
In short:
Salary becomes mildly more favourable. Dividends stay about the same. This is the right time to fine-tune your compensation strategy.
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