(originally published on June 25, 2025 as a special to the Globe and Mail)

Bill C-4, the Liberal government’s legislation to reduce the tax rate for the lowest federal tax bracket, didn’t make it through the House of Commons before parliamentarians left for summer break. While this change will result in tax savings for many Canadians, not everyone will receive the same benefit. In some situations, this change could actually increase taxes payable.

The first federal tax bracket applies to taxable income up to $57,375. For the 2025 taxation year, the rate on this amount will decline temporarily to 14.5 per cent before fully making the transition to 14 per cent in 2026.

Income above that $57,375 threshold is subject to the following progressively higher federal rates:

  • 20.5 per cent on income from $57,376 to $114,750;
  • 26 per cent from $114,751 to $177,882;
  • 29 per cent from $177,883 to $253,414;
  • 33 per cent on income of more than $253,415.

The change introduced in Bill C-4 applies solely to the lowest federal tax bracket.

Also relevant is the basic personal amount (BPA), an annually indexed threshold representing the amount of income someone can receive without paying any federal taxes. For 2025, the BPA is $16,129 for individuals with income below the 29 per cent tax bracket. It’s reduced gradually to $14,538 for the top 33 per cent tax bracket.

To determine the value of the tax savings resulting from the Liberal government’s tax cut, we need to calculate how much taxable income falls above the BPA and below the next federal bracket. For most individuals, this will be: $57,375 – $16,129 = $41,246.

Multiplying that amount by the 0.5 per cent tax rate reduction for 2025 yields a savings of $206 per person. In 2026, once the full 1 per cent reduction is implemented, the savings would double to approximately $412 (subject to indexing). For couples, the combined savings could be about $824.

But, as with most tax changes, there’s a trade-off. Many federal tax credits are calculated using the lowest federal tax rate. So, for those eligible for credits such as the age amount, the disability tax credit (DTC), the pension income amount, eligible medical expenses or the Canada caregiver amount, the value of those credits will be slightly reduced because of the lower rate.

Consider a fictitious senior citizen named Mr. Walhout. His taxable and net income, inclusive of pension income, is $80,000, and he has $7,000 in medical expenses. He qualifies for:

  • the pension income amount credit ($2,000);
  • the eligible portion of the age amount ($5,172);
  • the eligible portion of medical expenses ($4,600).

That totals $11,772 in non-refundable federal credits. Under the old 15 per cent rate, these credits would have reduced his taxes by $1,766. At the new 14 per cent rate (as of 2026), they will save him $1,648 – or $118 less than before.

So, while Mr. Walhout will save approximately $412 from the lower tax bracket, he’ll lose $118 in reduced credit value, netting overall tax savings of $294. He’s still better off, but not as much as someone who didn’t rely on those tax credits.

However, let’s suppose Mr. Walhout is disabled and living in a high-cost attendant care facility (with those costs qualifying as medical expenses). It’s not uncommon for these facilities to cost several thousand dollars a month.

If the total of his qualifying credits (including the DTC, age amount, pension amount and medical expenses) exceeds $41,000, then the reduction in value of his credits could exceed the benefit gained from the lower tax rate, resulting in Mr. Walhout paying more taxes than before.

While the reduction of the lowest federal tax bracket will be a welcome change for many Canadians, the impact will vary depending on the specific situation.

Aaron Hector is founding partner and senior wealth advisor at TIER Wealth in Calgary. TIER Wealth is a partner of Q Wealth Partners.