Individuals adversely affected by the Middle-Class Tax Cut

Summary

In response to parliamentary interest, this report provides an analysis of tax filers that are adversely affected by the reduction in the personal income tax rate from 15 per cent to 14 per cent.

On May 14, the Government announced its commitment to reduce the lowest federal personal income tax (PIT) rate from 15 per cent to 14 per cent, effective July 1, 2025. Despite the reduction in the lowest marginal PIT rate, there are two categories of taxpayers that will pay more federal personal income tax:

1. Tax filers subject to Alternative Minimum Tax (AMT); and

2. Tax filers with taxable income and the value of non-refundable tax credits above the first income threshold (projected to be $58,523 in 2026).

This adverse result is attributable to a corresponding reduction in the rate applicable to non-refundable tax credits.

We estimate that 19,690 single individuals and 19,420 couples—less than 1 per cent of all single tax filers and couples—will fall into these categories in 2026. Rather than save an average of $190 per tax filer that PBO previously estimated, adversely affected tax filers will pay an average of $141 more for single tax filers and $155 more per couple.

Adversely affected tax filers subject to AMT—a parallel tax calculation designed to ensure high income earners pay a minimum amount of income tax—will pay more in federal PIT compared to tax filers with taxable income and non-refundable tax credits above the first income threshold. For singles and couples, this difference is $34 and $58, respectively.

Having a value of tax credits that exceeds the first income threshold is uncommon. Many of the federal non-refundable tax credits have a maximum amount that increases with inflation. Two exceptions are the medical expense tax credit and the tuition tax credit, which are linked to actual eligible expenditures. Consequently, most adversely affected tax filers not subject to AMT claim large amounts of medical expenses.

We estimate that less than 1 per cent of tax filers claiming the disability tax credit will be adversely affected, representing 17 per cent of adversely affected single tax filers (35 per cent for couples) not subject to AMT.

Introduction

On May 14, the Government announced its commitment to reduce the lowest federal personal income tax (PIT) rate from 15 per cent to 14 per cent, effective July 1, 2025.[^1] In its June 2025 legislative costing note, PBO provided projections of the aggregate cost to Government and savings to tax filers. Despite the reduction in the lowest marginal PIT rate, there are two categories of taxpayers that will pay more federal personal income tax:

1. Tax filers subject to Alternative Minimum Tax (AMT); and

2. Tax filers with taxable income and the value of non-refundable tax credits above the first income threshold (projected to be $58,523 in 2026).[^2]

This adverse result is attributable to a corresponding reduction in the rate applicable to non-refundable tax credits. During testimonies at the House of Commons Standing Committee on Finance both the Minister of Finance and National Revenue and Department of Finance officials mentioned they were aware of unintended consequences of the tax cuts and were working on resolving them.[^3]

Tax filers adversely affected

PBO estimates that 19,690 individuals and 19,420 couples in 2026 will be adversely affected by this PIT rate reduction. Of those affected, 12,540 single tax filers and 12,290 couples are subject to AMT[^4] and 7,150 single tax-filers and 7,120 couples will have income and non-refundable tax credits exceeding the first income threshold (Table 1).[^5]

Those subject to AMT tend to have a much higher income but lower values of tax credits since the AMT is designed to limit tax credits, deductions and exemptions compared to the standard PIT structure.

While taxes in Canada are filed at the individual level (rather than the family), some credits or deductions can be transferred between family members to minimize taxes payable for the family. Consequently, couples in Table 1 are those where the sum of federal tax payable of both spouses increases because of the rate reduction.[^6]

Individuals subject to Alternative Minimum Tax

The AMT is a separate calculation allowing lower deductions, exemptions and credits and applies a flat tax rate (instead of the progressive rate) to income above an exempted amount. The individual pays the highest amount between the standard tax calculation and the AMT.

Specifically, an adjusted taxable income is calculated by subtracting lower deductions and exemptions and multiplying the resulting amount in excess of $181,440 by a flat rate of 20.5 per cent.[^7] Only half of the value of the non-refundable tax credits is then allowed to be subtracted from the AMT.

Since the tax reduction proposed applies to the 15 per cent rate (the lowest marginal rate), individuals subject to AMT will not benefit from the rate reduction since they face a flat rate of 20.5 per cent. However, because of the corresponding reduction in the rate applied to non-refundable tax credits (that will be lowered from 15 to 14 per cent), they will receive a lower value of non-refundable credits to subtract from their tax payable.

Individuals with taxable income and the value of non-refundable tax credits above the first income threshold

Tax filers with taxable income as well as non-refundable tax credits amounts above $58,523 will be adversely affected under the PIT rate reduction because only a portion of their taxable income is subject to the lower rate, whereas the entire portion of their non-refundable tax credits are subject to the lower rate, resulting in higher taxes payable.

Description of adversely affected tax filers that are not subject to Alternative Minimum Tax

Our calculations indicate that there are just over 7,150 individuals and 7,120 couples that are adversely affected and not subject to AMT in 2026.[^8] We estimate they will pay an average of $166 and $195 more, respectively, in federal PIT (Table 1).

Having an amount of tax credits that exceed the first income threshold is uncommon. Many of the federal non-refundable tax credits have a maximum amount that increase with inflation. Two exceptions are the medical expense tax credit and the tuition tax credit, which are linked to actual eligible expenditures. In addition to the medical expense tax credit not being capped, an individual can claim all the medical expenses of the family instead of each member claiming their own.

As a result, 81 per cent of these adversely affected single tax filers (66 per cent for couples) are those with claims for the medical expense tax credit. Moreover, many of these adversely affected tax filers have large claims where the medical expense tax credit represents more than half of the value of their total federal non-refundable tax credits.[^9]

The tuition tax credit, which is a transferrable credit, likewise reflects actual eligible expenditures and does not have a maximum amount. However, individual claimants of this tax credit make up only 18 per cent of adversely affected individual tax filers (14 per cent of couples).

PBO was also asked to consider tax filers claiming the disability tax credit (DTC). This tax credit, like most federal non-refundable tax credits, is a set amount that increases with inflation. The base amount for eligible adults and children is projected to be $10,341 in 2026, while the supplement available only for eligible children is $6,032. The DTC can be transferred and shared. While the DTC has a maximum amount well below the first income threshold, adversely affected DTC claimants not subject to AMT represent 17 per cent of these adversely affected single tax filers (35 per cent of couples). Their average DTC as a percentage of their total federal non-refundable tax credits is less than 20 per cent, and few DTC filers have multiple DTC claims. Similar to affected tuition tax filers, most adversely affected DTC filers are impacted due to a combination of the DTC and other tax credits.

Impacts on federal non-refundable tax credits

Parliamentarians also asked about the impact on the total value of federal non-refundable tax credits under the PIT rate reduction. Table 2 presents the value of each non-refundable tax credit by tax bracket for all filers, not just the adversely affected ones.

Table 3 presents the impact for tax filers claiming the disability amount. The loss in tax credit value is concentrated in the first two brackets, consistent with the concentration of the number of tax filers and with the results for all tax filers. This indicates that a sizeable share of the loss in caregiver and other infirm dependant tax credits amounts are attributable to DTC tax filers, who will see a decline of $10 million of the $23 million decline in the value of these tax credits.

However, consistent with this report and previous PBO analysis, the majority of tax filers will pay less federal income tax as a result of the PIT rate reduction despite a corresponding decrease to the non-refundable tax credit rate.