Reducing the lowest federal personal income tax rate to 14 per cent
This note summarizes the impact of reducing the lowest federal marginal tax rate over a five-year period.
On May 14, 2025, the government announced a plan to reduce the lowest federal marginal personal income tax (PIT) rate from 15 per cent to 14 per cent, effective July 1, 2025.[^1] This PIT rate is also the rate for most federal non-refundable tax credits.[^2]
This note summarizes the impact of reducing the lowest federal marginal tax rate over a five-year period. The analysis covers the cost to the government, savings for tax filers and a detailed breakdown by income.
While reducing the lowest federal marginal PIT rate offers relief to taxpayers, it also affects federal revenue. The Parliamentary Budget Office (PBO) estimates this PIT rate change will cost the government $4.2 billion in 2025-26, saving tax filers an average of $90. The cost will gradually increase to $6.4 billion in 2029-30, saving tax filers an average of $200.[^3]
The isolated impact of reducing the lowest marginal PIT rate, an estimated $9.5 billion cost to the government in 2025-26, is partially offset by an associated $4.2 billion in savings to the government in 2025-26 due to the reduction in value of federal tax credits.
The decrease in the value of federal non-refundable tax credits is a universal 1 per cent of their amount. However, the aggregate decrease in the value of these credits is also proportionate to their use. As well, Canada’s personal income tax (PIT) system is progressive, meaning individuals pay a higher percentage of tax as their income increases. This structure remains unchanged even after the PIT rate reduction. In 2026-27, the average estimated savings is $90 for lower-income individuals (tax filers in the lowest tax bracket), compared to $330 for all other tax filers. The savings generally represent a higher share of income for individuals in the first tax bracket compared with those in the other brackets, thus maintaining the progressivity of the tax system.
Furthermore, the basic personal amount and age amount, as well as other tax credits, are means-tested. As a result, the savings realized from this PIT rate decrease can vary depending on income.
To demonstrate this, PBO calculated the maximum savings an employee and a retired senior could obtain in 2026 assuming eligibility for certain means-tested tax credits, by income.[^4] In general, the greater the income, the greater the savings in dollars, but the lower as a share of income for individuals in the second tax bracket and above. For example, in 2026 an employee will only start paying federal income tax when earning more than $19,127 (because of the basic personal amount of $16,389, plus contributions to the Canada pension plan and employment insurance premiums being eligible for a non-refundable tax credit). As employment income increases, the savings will culminate at the end of the threshold for the second tax bracket ($58,299). Any additional income would be taxed at the next rate of 20.5 per cent which is not modified by the proposed tax cut.
In the case of someone aged 65 or more, because of the age amount, they would only start paying federal income tax when their taxable income is above $25,562. The age amount is means-tested, gradually phasing out between $46,255 and $107,411.
When looking at the various forms of census families, the average savings range from $50 for a low-income single senior, to $750 for high-income couples with children. The average savings for a single low-income senior is much lower than the maximum possible because of the progressive nature of the PIT and the average income of these individuals. The average savings for high-income couples with no children appear to align more closely with the estimated maximum savings.[^5]
Even with the reduction in the value of non-refundable tax credits, no family will see an increase to their federal taxes payable.[^6]
Tax filers in Quebec get 16.5 per cent less tax savings from the proposed rate reduction than residents in the rest of Canada as Quebec residents benefit from a reduction of 16.5 percentage points of federal personal income tax through the Quebec Abatement.[^7]
| Federal tax credits† |
|---|
| Basic personal tax credit |
| Age tax credit |
| Spouse / Eligible Dependent tax credit |
| Caregiver and other infirm dependant tax credit |
| CPP contributions tax credit |
| EI premiums tax credit |
| Federal volunteer firefighters' amount |
| Search and rescue volunteers’ amount |
| Canada Employment Credit |
| Federal Home Buyers' Amount Credit |
| Home Accessibility Expenses Tax Credit |
| Adoption expenses |
| Digital news subscription expenses |
| Pension income tax credit |
| Disability tax credit |
| Federal interest on student loans tax credit |
| Tuition, education and textbook tax credit |
| Medical expenses allowed tax credit |
| Charitable donations tax credit |
| Multigenerational Home Renovation Tax Credit |
| Minimum Amount due to the Alternative Minimum Tax†† |
† Only federal credits that indicate use of the appropriate percentage in the _Income Tax Act._
†† The Federal Minimum Tax is not a tax credit but is linked to the appropriate percentage in the _Income Tax Act._ It ensures high income earners pay a minimum amount of tax, despite the use of tax credits and deductions that would otherwise reduce their taxes payable below this minimum.
SPSD/M[^8] was used to estimate the static impact of a 1-percentage point decrease (0.5 percentage point in 2025) in the federal personal income tax rate and associated federal tax credits, and a rate of 0.5 for the capital gains inclusion rate, adjusted using PBO’s 2025 Election Proposal Costing Baseline.
Decreasing the tax rate would also induce a behavioural response, growing the tax base and offsetting some of the decrease in revenues from the lower marginal effective tax rate. This impact was estimated using an elasticity of taxable income (ETI) of 0.1.[^9]
The main sources of uncertainty relate to the projected income tax base used to estimate the static impact and the assumed elasticity of income underlying the behavioural response.