Federal Tax Rate and Bracket Changes in 2025

Reduction of the Lowest Tax Rate

The federal government has implemented a “middle-class tax cut” by reducing the lowest marginal personal income tax rate. Effective July 1, 2025, the rate on the first tax bracket drops from 15% to 14%[1]. Because this change takes effect halfway through the year, the blended rate for the entire 2025 tax year is 14.5% (essentially an average of 15% for January–June and 14% for July–December)[2]. Starting in 2026, the full-year lowest rate will be 14% going forward[2].

· Who benefits? Nearly 22 million Canadians will see tax relief from this measure[3]. The tax cut applies to the first portion of your taxable income (up to the first bracket threshold, regardless of your total income). All taxpayers with taxable income will benefit on that first slice of income, with the greatest proportionate relief going to those in lower brackets[4].

· Tax Savings: The government estimates a maximum savings of about $420 per person (or $840 per couple) in 2026 once the full 14% rate is in place[5]. For 2025, the savings will be slightly lower because the cut is in effect for half the year.

Inflation-Indexed Bracket Thresholds

Aside from the rate cut, federal tax bracket thresholds have risen for 2025 due to inflation indexing. Canada adjusts the income thresholds for each tax bracket annually to preserve buying power and prevent “bracket creep.” For the 2025 tax year, the indexing factor was 2.7%[6]. As a result, each bracket’s upper limit is higher than it was in 2024[7]:

· 15% bracket: Now applies to taxable income up to $57,375 (was $55,867 in 2024)[7]. With the mid-year change, income in this range is effectively taxed at 14.5% for 2025[2].

· 20.5% bracket: Begins above $57,375 and extends up to $114,750 (was $111,733 in 2024)[8].

· 26% bracket: Income over $114,750 up to $177,882 (was $173,205 in 2024)[7].

· 29% bracket: Income over $177,882 up to $253,414 (was $246,752 in 2024)[7].

· 33% bracket: Income over $253,414 (was $246,752 in 2024) is taxed at the top rate of 33%[7].

These higher thresholds mean you can earn a bit more in each lower bracket before moving into the next higher tax rate. In practical terms, slightly less income will be taxed at higher rates in 2025 compared to last year, which should reduce federal tax for most people even before accounting for the rate cut.

Basic Personal Amount Increase

The Basic Personal Amount (BPA) – the amount of income every Canadian can earn tax-free federally – has also increased with indexation. For 2025, the maximum BPA is $16,129 for individuals with net income up to $177,882[9]. This is an increase from a $15,705 maximum BPA in 2024[10].

· For higher-income individuals, the BPA is gradually reduced. At incomes above $177,882, the additional enhanced portion of the BPA is clawed back, reaching a minimum BPA of $14,538 for incomes $253,414 and over[9]. (These thresholds align with the 26% and 33% bracket cut-offs, respectively.)

· Impact: The raised BPA shields more of your income from tax. At the 15% credit rate, a $16,129 BPA translates to about $2,419 in federal tax credit for low- and middle-income earners. (Note: Although the lowest bracket rate is effectively 14.5% for 2025, the government has introduced measures to keep credit values at 15% – this is covered in the next blog post on credits.)

What This Means for You

In summary, federal taxes on 2025 income will generally be lower than in 2024 for most individuals. The combination of the 1% rate drop in the lowest bracket and higher bracket limits means tax savings across various income levels:

· Lower-income earners: Benefit primarily from the rate cut on the first $57,375 of income and an increased Basic Personal Amount, resulting in less tax withheld and potentially larger refunds or reduced owing.

· Middle-income earners: Will see the above benefits and also gain from more income being taxed at 20.5% instead of 26%, etc., due to bracket threshold increases.

· Higher-income earners: Even those in the top bracket save on the first portion of their income and get a slightly larger BPA than last year. However, amounts above $253,414 remain taxed at 33% as before.

All these changes are enshrined in legislation or official policy. The Department of Finance confirmed the rate reduction plan in May 2025[1], and the Canada Revenue Agency (CRA) has updated its tax tables to reflect the new rates and thresholds[11][12]. For taxpayers, the key takeaway is to ensure your 2025 tax planning and withholdings reflect these updates. (For example, employers will adjust payroll tax withholding to 14% on the first bracket starting July 1, 2025[13], so take note of changes in your take-home pay in the latter half of the year.)

Stay tuned for our next post, where we delve into federal tax credits and benefit changes for 2025 – including a special Top-Up Tax Credit introduced to guarantee you fully benefit from the new lower tax rates without unintended consequences.

Sources: Federal Department of Finance backgrounder[1][2]; CRA indexing and tax rate tables[11][7]; Advisor.ca tax figures[9].