Budget 2025 proposes a temporary top-up tax credit for taxpayers if their non-refundable tax credit amounts exceed the first income tax bracket threshold.
In May, the government announced a one-percentage-point cut to the lowest federal tax bracket — to 14%. The measure, which is included in Bill C-4 currently before Parliament, proposes a rate of 14.5% for the second half of 2025 and 14% for subsequent years.
But the reduced rate also applies to most non-refundable tax credits, making them worth less. An analysis by the C.D. Howe Institute shows that this reduced value is significant. For example, under the 14% rate, tax filers would save an average of $402 before tax credits but lose $215 in non-refundable credits.
On Tuesday, the budget said that “in very rare cases where an individual’s non-refundable tax credit amounts exceed the first income tax bracket threshold ($57,375 in 2025), the decrease in the value of these credits may exceed their tax savings from the rate reduction.”
That could happen when an individual claims a large one-time expense, such as amounts for high tuition — particularly foreign tuition amounts or professional program tuition — or medical expenses, or claims a combination of large tax credits. In some cases, these claims are for both themselves and a dependant, or include amounts carried forward from previous years.
“Depending on the value of your non-refundable credits, the value of this tax cut may not be what it seems,” Jamie Golombek, managing director and head of tax and estate planning with CIBC Private Wealth in Toronto, said. “In extreme cases, in fact it can be a tax increase.”
The new non-refundable top-up tax credit would effectively maintain the current 15% rate for non-refundable tax credits claimed on amounts in excess of the first income tax bracket threshold.
In those rare cases where taxpayers have significant non-refundable tax credits, “this new measure will ensure that those people are not worse off by having the value of those credits decreased under [the proposed tax cut],” Golombek said.
In addition to managing a policy point, the top-up tax credit manages “the political issue that there weren’t losers coming out of what was meant to be a beneficial change,” Brian Ernewein, senior advisor, national tax, with KPMG LLP in Ottawa, said.
The top-up tax credit would apply on a transitional basis, for the 2025 to 2030 taxation years, the budget said. Seniors are expected to receive a relatively higher share of the measure’s benefits.
The top-up tax credit is projected to cost $70 million over the five years.