Starting July 1, 2025, Canadians are set to get some much-needed relief thanks to a new federal tax cut. The government is lowering the lowest personal income tax rate from 15% to 14%, a move that could save two-income families up to $840 a year. This change is part of a broader effort to make life more affordable and help people hold on to more of their hard-earned money.
Nearly 22 million Canadians will benefit from this change, especially those earning under $114,750 a year. The savings will start showing up in paycheques during the second half of 2025 and will be fully realized in 2026. With the cost of living continuing to climb, this tax break aims to ease the pressure on household budgets.
From young professionals to working families and part-time students, this tax cut is expected to make a noticeable difference. While some experts are raising questions about long-term effects, most agree it’s a positive step toward putting more money back into Canadians’ pockets.
Canada Income Tax Cut 2025
Over the past few years, life in Canada has gotten a lot more expensive. Food prices, housing costs, and inflation have made it harder for many families to stay ahead. The federal government says it’s listening—and this tax cut is their answer to growing public frustration. Prime Minister Mark Carney and Finance Minister François-Philippe Champagne are framing this move as part of a broader plan to build a more affordable and financially stable Canada.
The big shift here is the drop in the lowest federal income tax rate—from 15% to 14%. This change kicks in on July 1, 2025. Since it starts mid-year, the average tax rate for the entire year will be 14.5%. Then, starting in 2026, it’ll stay at a flat 14%.
If you’re working and have taxes taken off your pay automatically, you’ll notice a little more money in your bank account starting that July. If you don’t have deductions taken at source, you’ll see the impact when you file your 2025 return.
Who Gets the Savings?
The tax cut focuses on Canadians earning in the two lowest income brackets:
- First bracket: up to $57,375
- Second bracket: between $57,375 and $114,750
If you fall in either group, you’ll benefit. In fact, about 22 million Canadians will see some level of tax relief. The biggest boost goes to families where both partners have incomes in those brackets.
Here’s what the savings might look like:
- Single individual: Up to $420/year
- Two-income household: Up to $840/year
Everyday Impact: A Few Examples
To help paint a clearer picture, here’s how the tax cut could affect real people:
- Sarah, retail worker: She earns $45,000 a year. She’ll save about $320 annually. She’s planning to put that money toward paying down her credit card and saving for a trip.
- The Patel family: With a combined income of $90,000, they’ll save around $640 a year. They’re planning to use that to grow their kids’ RESP and fix up their home.
- Michael, part-time student: He makes around $20,000. He’ll save roughly $70, which he’s hoping to use for school books and bus passes.
These aren’t life-changing amounts, but they can definitely take the edge off.
Why This Cut Matters
This isn’t just about individual savings. The government is banking on the idea that when people have more money to spend, the whole economy benefits. Here’s how:
- Spending goes up: More money in wallets means people are more likely to spend—on groceries, local services, or a night out.
- Middle class gets support: Most of the savings go to those earning under $114,750—people who often feel squeezed the most.
- Helps ease rising costs: With bills climbing every year, a few hundred bucks in savings can help families cover rent, bills, or groceries.
- Encourages saving and stability: For those who can afford it, this could be a good chance to build up some savings or reduce debt.
How to Make the Most of It
If you want to really take advantage of this tax cut, here are a few smart moves you can make:
- Look over your budget: Track your spending and figure out where the extra money can do the most good—whether that’s paying off debt, putting it in a savings account, or investing in an RRSP or TFSA.
- Check with your employer: Make sure your tax deductions reflect the new 14% rate starting July 1. It’s the easiest way to see those savings faster.
- Organize your taxes: Keep receipts and paperwork ready for your 2025 return so you don’t miss any credits or deductions.
- Learn more about finances: Look into tax-sheltered accounts like RRSPs or TFSAs. Read a good book or check out CRA’s free tools to get better at managing your money.
- Get advice if needed: If your taxes are a bit complicated or you’re unsure where to start, a financial advisor or tax expert can help you figure things out and plan better.
How It Stacks Up Against Older Tax Cuts
This isn’t Canada’s first round of tax relief—but it might be one of the most impactful for average families. Compared to earlier measures:
- 2016’s tax cut helped fewer people and saved up to $330 per year.
- 2019’s increase in the basic personal amount offered savings up to $300.
- The 2006 GST cut helped at the cash register, but didn’t boost take-home pay.
This 2025 tax cut is bigger, faster, and focused on people who could really use a break right now.
Some Criticism—And Fair Questions
Not everyone is cheering, of course. Here are a few concerns:
- Inflation: Some wonder if a 1% tax cut is enough when everything else keeps getting more expensive.
- Higher earners left out: If you make more than $114,750, you won’t benefit directly, and that’s sparking some debate about fairness.
- Cost to the government: Over five years, this move will cost $27 billion. Some experts worry that could lead to cuts in other areas or new taxes down the road.
Still, for many Canadians, any relief feels welcome—and the government says this is just the beginning.
What Else Is in the Works?
This tax cut is part of a larger push by the federal government to make life more affordable. Other plans on the table include:
- More support for first-time homebuyers
- Expansion of $10-a-day childcare
- Green home upgrade incentives to help cut utility bills
It’s all aimed at building a country where more people can afford to live well—not just scrape by.
For Canadian Businesses: Time to Get Ready
Small and mid-sized businesses should also prepare for this shift. Here’s how:
- Update payroll: Make sure employees start seeing the 14% rate in their July pay.
- Expect a sales bump: More take-home pay means people might spend more—especially locally.
- Support your staff: Offering budgeting tips or access to financial literacy tools can help employees make smart choices with their extra cash.
Looking Globally
Canada isn’t the only country trying to tackle rising living costs, but it’s leading in some ways:
- US: Some states are trimming taxes, but no major national cuts.
- UK: They’ve focused on national insurance, not income tax.
- Australia: Recent cuts there helped the middle class, but Canada’s reach is wider.
Canada’s approach is direct, broad, and designed to put money into people’s hands quickly.
Save up $840 a year
This 2025 tax cut is more than just a policy change—it’s a signal that the government is trying to help Canadians stay afloat in tough times. With up to $840 a year in savings for families, it’s a step toward making everyday life a little more manageable.
If you want to make the most of this opportunity, start planning now. Whether you use the extra cash to pay off debt, save for something big, or just breathe a little easier each month, it’s a win. And with more affordability-focused policies on the way, there’s reason to feel a bit more optimistic about what’s ahead.
