A shift is coming to the federal tax landscape, potentially leaving more money in the pockets of Canadian workers starting in the new year. Changes currently navigating Parliament promise a subtle but significant adjustment to income tax rates, designed to ease the financial burden on those earning less.
The lowest income tax bracket will see a reduction, moving from 14.5% on income below $57,375 in 2025 to 14% on income below $58,523 in 2026. This builds on a previous reduction implemented earlier this year, a move already providing some relief to lower earners.
Beyond the lowest bracket, the income thresholds for each tax rate are also being adjusted upwards. This means individuals will be able to earn more before moving into a higher tax bracket, effectively stretching their income further. The 20.5% bracket, for example, will expand from $57,375 to $114,750 in 2025, and then to $58,523 to $117,045 in 2026.
Those earning between $114,750 and $177,882 currently face a 26% federal income tax. That bracket is slated to increase slightly to between $117,045 and $181,440 next year, offering a small degree of tax relief. The 29% bracket, applicable to incomes between $177,882 and $253,414 this year, is also expected to expand in 2026.
The Basic Personal Amount, a non-refundable credit for those earning $177,882 or less, is also receiving a boost. Starting January 1st, this amount will increase from $16,129 to $16,452, further reducing the tax burden for many Canadians.
These adjustments aren’t arbitrary; they’re tied to inflation, calculated at 2% to help preserve purchasing power in the face of rising costs. While this is a slight decrease from the 2.6% increase seen in 2025, it reflects a moderation in price increases this year.
To illustrate the impact, consider someone earning $65,000 in 2025. They currently pay $9,425 in taxes. In 2026, that same individual would pay $325 less in federal tax. The overall effect is that most Canadians earning under $181,000 will see a modest reduction in their federal income tax bill.
However, it’s not all tax reductions. Contributions to the Canada Pension Plan are increasing for the seventh consecutive year as part of a long-term plan to bolster retirement income. This increase is set at 2% in 2026, reflecting changes in the consumer price index.
Employment insurance premiums are also on the rise, increasing by 1.6% in 2026 on earnings up to $68,900. This will result in maximum annual contributions of $1,123 for most workers, with a slightly lower rate of 1.3% (or $895.70) in Quebec.
For those planning for retirement, the Registered Retirement Savings Plan (RRSP) contribution limit is increasing to 18% of the previous year’s income, up to a maximum of $32,490 in 2025 – a rise from $31,560 in 2024.
Tax-Free Savings Account (TFSA) contribution limits, however, will remain unchanged at $7,000 for both this year and 2026, offering a consistent avenue for tax-sheltered savings.
