Federal Tax Cut
Canada has reduced the federal income tax rate for the first tax bracket from 15% to 14%, effective July 1, 2025.
Details of the Tax Cut
- Effective Date: The new 14% rate applies to income earned from July 1, 2025, onward.
- 2025 Blended Rate: For the 2025 tax year, a blended rate of 14.5% is used to account for the mid-year change.
- 2026 and Future Years: The full 14% rate will apply for the entire tax year in 2026 and subsequent years.
- Income Threshold (2025): The first federal tax bracket applies to taxable income of up to $57,375 for the 2025 tax year.
For practical purposes, the 2025 rate will be calculated on a full year basis at 14.5%.
Non-Refundable Top-Up Tax Credit
The 2025 Federal Budget introduced a non-refundable Top-Up Tax Credit for individuals to ensure that no one’s tax liability increases due to the reduction of the lowest federal personal income tax rate.
- Purpose: The federal government reduced the lowest marginal tax rate from 15% to 14% effective July 1, 2025. This also lowers the value of non-refundable tax credits, which are calculated at that lowest rate. The Top-Up Tax Credit is designed to offset this reduction in the value of non-refundable credits for some individuals.
- Eligibility: It applies in specific cases where a taxpayer has significant non-refundable tax credits (e.g., large medical expenses or tuition amounts) that exceed the first income tax bracket threshold ($57,375 for 2025).
- Effect: The credit effectively maintains the value of those excess non-refundable tax credits at the previous 15% rate, rather than the lower rate, ensuring a beneficial outcome for those affected.
- Timeline: The credit applies for the 2025 to 2030 taxation years.
Home Accessibility Tax Credit / Medical Expenses
The Home Accessibility Credit is a non-refundable tax credit of up to $20,000 of eligible home renovation expenses โ specifically to make improvements for a qualifying individual age 65 or older or an individual eligible for the Disability Tax Credit.
The Medical Expense Credit included certain expenses that include costs to renovate a home to improve access. Currently, both credits can be claimed for the same expense.
Budget 2025 proposes to change this credit to disallow double-claiming expenses under both the Home Accessibility Tax Credit (HATC) and the Medical Expense Tax Credit (METC).
Bare Trusts
The requirement to files T3 Bare Trust returns originally implemented for the 2022 tax year has been, once again, deferred for another year. Canadian taxpayers who would be required to file a 2025 are trust automatically receive administrative relief from filing unless CRA specifically requests a return be filed.
On August 15th, 2025, legislation was introduced outlining when a bare trust filing is required for the 2026 tax year.
2026 Tax Year and Future Changes
Personal Support Workers
Starting in 2026, the Canadian government will offer a new tax credit to help personal support workers (PSWs). This credit is part of the 2025 federal budget and aims to support the people who care for seniors and others needing daily help.
Key Features of the Tax Credit
- Refundable Tax Credit: Eligible PSWs can claim a refundable tax credit equal to 5% of their eligible earnings, up to a maximum of $1,100 per year.
- Eligibility Period: The credit will be available annually from 2026 through 2030, offering five years of support.
- Who Qualifies: To be eligible, a PSW must:
- Regularly provide direct personal care and essential support to individuals to improve their health, safety, autonomy, and comfort.Work for an eligible health care establishment, such as long-term care homes, home care agencies, or similar facilities.
Repealed Taxes
In its 2025 federal budget, the Canadian government announced it will repeal two controversial taxes โ the Underused Housing Tax (UHT) and the Luxury Tax on aircraft and boats โ starting immediately.
Underused Housing Tax (UHT) Repealed
- The UHT is eliminated starting in 2025. No UHT returns or payments will be required for 2025 or future years.
- However, UHT rules still apply for 2022 to 2024, including penalties for late or missing filings.
Luxury Tax on Aircraft and Boats Removed
- The Luxury Tax on planes and boats is also repealed, effective the day after Budget Day (November 5, 2025).
- This means:
- No more tax on sales, importations, or improvements to aircraft and vessels.
Qualified Investments for Registered Plans
The 2025 federal budget introduces changes to make it easier to understand and manage investments inside registered savings plans like RRSPs, TFSAs, RESPs, and FHSAs.
Whatโs Changing?
- Simplified Rules: The government is streamlining the rules for what counts as a โqualified investmentโ in registered plans. This helps reduce confusion and paperwork for investors and financial institutions.
- One Set of Rules: Instead of having different rules for each type of plan (like RRSPs vs. TFSAs), the government is moving toward a more unified system.
- Focus on Small Business Investments: The changes will make it easier to invest in small and medium-sized businesses through registered plans, while still protecting against risky or abusive investments.
The government will consult with stakeholders before finalizing the new rules. Implementation is expected to begin after 2025, once the details are confirmed.
Automatic Federal Benefits for Lower-Income Individuals
Beginning in the 2026 tax year, the Canada Revenue Agency (CRA) will begin automatic tax filing for lowerโincome individuals so they can receive federal benefits (like GST/HST Credit, Canada Child Benefit, and the new Canada Disability Benefit) without needing to file a return themselves. About 1 million Canadians will be included at first, expanding to 5.5 million by 2028.
Article originally posted at The Accounting Place โ https://theaccountingplace.ca/taxes/2025-tax-year-changes/ For further information regarding your personal situation, please contact your Financial Advisor.