On May 14, 2025, the Department of Finance Canada announced a reduction in the lowest federal personal income tax rate. This tax cut is expected to benefit over 22 million taxpayers across the country. A two-income household could save up to $840 annually!
For salaried class, this change means increased take-home pay in the second half of 2025. Employers will begin applying the updated tax rate using the CRA’s new source deduction tables starting in July.
What Are the New Changes for Canada 2025?
Beginning July 1, 2025, the new 14% tax rate will apply to income in the lowest federal tax bracket. Due to its mid-year rollout, the effective tax rate for the 2025 tax year will be 14.5%. Starting in 2026, the full-year rate of 14% will be in effect permanently.
How Will the New Tax Cut Impact Canadians?
Middle-class Canadians can expect to pay slightly less federal income tax due to the reduction. The new rate applies to the first portion of an individual’s taxable income (up to $57,375 in 2025).
However, the bulk of the total tax relief goes to those with incomes in the two lowest tax brackets (those with taxable income under $114,750 in 2025).
This could result in maximum tax savings of up to $420 per individual (or $840 for a two-income couple) annually once the change is fully implemented in 2026.
Will These Tax Changes Affect My Eligibility for Government Benefits?
Your eligibility for government benefits like the Canada Child Benefit (CCB) or GST/HST credits is based on your net income, not the amount of tax you pay.
If the tax cut increases your net income slightly, it could marginally affect income-tested benefits. However, for most Canadians, the impact will be minimal.
How Will Self-Employed Canadians Be Affected by the New Federal Tax?
Self-employed individuals can expect a reduction in overall tax liability on their first income bracket. However, the impact will show up when filing your 2025 personal tax return, not through payroll.
This makes year-end tax planning even more valuable, especially when estimating instalments or deductions.
Get Expert Guidance with Legend Fusions
At Legend Fusions, we help Canadian businesses and individuals adapt quickly to federal tax changes. Let our experts help you update your payroll, optimize your deductions, and understand your revised tax position.
Book a consultation today to align your tax strategy with the latest federal updates..
Reviewed by:
Jeffrey Ross
Jeffrey Ross is an experienced tax accountant focused on US-Canada cross-border taxation, with over three years in the industry, including a key role as client manager at a Canadian tax firm. He provides expertise in corporate and personal tax planning, specializing in non-resident tax, capital gains, CRA and IRS compliance, and retirement planning. Known for his personalized approach, Jeffrey is dedicated to guiding clients with clear, practical advice tailored to complex tax scenarios, aligned with the evolving tax laws.