Canadian Tax Brackets and Indexation

Federal Rates, Bracket Creep and Frozen Amounts

Published October 20, 2026

WHAT'S IN THIS ARTICLE
Introduction | Where Do You Want to Start? | Terms Used | Who is This Article For? | What You'll Find | FAQ | Want to Understand the Why? | Indexation - What It Is and What Is Frozen | What's New | Federal Tax Brackets | Provincial Bracket Creep | Solo CEO Move

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RELATED >> T1 & T2 Income Tax Deadlines | T2125 Tax Schedule

Introduction

Which federal tax bracket are you in? This article shows you how your 2026 income is taxed. It also explains why your tax can rise even when no rate changes.

The reason is inflation. Most (not all) Canadian tax and benefit amounts rise each year to keep pace with it. This is called indexation.

When a government stops indexing (freezes tax brackets), taxpayers face 'bracket creep'. Incomes rise, but the brackets stay put. More of your income is then taxed at higher rates. It works like a ‘silent’ tax hike. 

Why would a government decide to de-index? Large deficits are the usual reason. Freezing the brackets raises tax revenue without announcing a rate increase.

In this article, I look at where bracket creep and frozen amounts still appear. As always, I will update this article when rules, rates, or thresholds change.

Would you like to follow along with your own tax numbers?

Get the last T1 Income Tax and Benefit Return you filed so you can compare your numbers. At the end, you’ll write down a few numbers to see where you stand.

Who Is This Article For?

This article is for Canadian sole proprietors, freelancers, the self-employed, and home-based business owners. If you report your business income on your personal tax return, the federal tax brackets apply to you. You do not need to be a tax expert to understand how they work. Your last T1 return has the numbers you need.

You will see mention of some amounts that have nothing to do with your business. That is on purpose. Self-employed owners have families too. You may have children, a parent who gets OAS, or a relative with a disability. Frozen amounts and bracket creep reach all of them, so I include the ones that touch your household. 

This article can help you:

• Find out which federal tax bracket your taxable income falls into.
• Understand how indexation changes the thresholds each year.
• Learn why your tax bill can increase even when tax rates stay the same.
• Find out which provinces have stopped adjusting their brackets for inflation.

FAQ

Want to Understand the Why?

Keep reading to learn how indexation works, why it matters, and what happens when thresholds and benefit amounts do not keep pace with inflation.

A. Indexation

How Indexation Adjustments Work

As mentioned, most tax brackets and benefits amounts in Canada are indexed to inflation. This means the income thresholds and benefit limits are adjusted annually to keep pace with rising prices. Why? It helps prevent inflation from quietly increasing your tax bill.

Section 117.1 of the Income Tax Act (ITA) lays out the indexation calculation for the Canadian personal income tax system. The calculation compares the CPI (Consumer Price Index) all-items average for the 12 months ending September 30 to the same average for the preceding 12 months. The percentage increase determines the indexation rate applied for the following tax year.

For example, indexation affects your personal tax bracket thresholds, CPP contributions and EI premiums, TFSA and RRSP limits, and Old Age Security (OAS) payments.

Effective Dates
Tax brackets and non-refundable tax credit adjustments take effect on January 1 each year. Most benefits are income-tested with the inflation adjustments taking effect July 1 as they are tied to the filing of your prior year return.

More >> General tax and benefit filing deadlines 

How Personal Tax Brackets Are Indexed - 2025 & 2026

On November 24th, 2025, CRA (Canada Revenue Agency) released its 2026 indexation adjustment for personal income tax and benefit amounts in a fact sheet.

The federal indexation rate for 2026 is 2.0%, down from 2.7% in 2025. The CRA table shows how the indexed amounts have changed from 2023 to 2026.

Federal Amounts That Have Never Kept Pace With Inflation

Not all federal tax amounts are indexed to inflation. Some have never been indexed, while others have remained unchanged for many years. As prices rise, the value of these fixed amounts decline in real terms. The federal government is also running a large deficit so freezing some amounts helps their bottom line.

Amounts that have remained unchanged for years:

• 1991 - GST/HST small supplier threshold $30,000 (2026 value* $60,000)
• 1996 - CPP basic exemption $3,500 (2026 value* $6,500)
• 1998 - Foreign asset reporting thresholds $100,000 (2026 value* $180,000)
• 2006 - Pension income amount $2,000 (2026 value* $3,000)
• 2008 - RDSP (Registered Disability Savings Plan) maximum lifetime personal contribution limit $200,000 (2026 value* $290,000)
• 2009 - Corporate small business limit $500,000 (2026 value* $730,000)
• 2015 - Child care expense limits $8,000 for under age 7 and $5,000 between ages 7 and 16. (2026 values* $10,400 and $6,500 respectively) 

Amounts that have never been indexed:

• Charitable donation threshold ($200)
• Tuition maximum transfer amount ($5,000)

These amounts illustrate how inflation can gradually reduce the value of tax thresholds, credits, and contribution limits that remain fixed.

Could the Fall 2026 Federal Budget bring changes? I'm watching for the November federal budget to see if it proposes changes to the frozen thresholds and limits.

The CPP basic exemption, for example, has remained at $3,500 since 1996. It has not increased with inflation. That means more of a low-income worker's earnings are now exposed to CPP contributions each year. Doane Grant Thornton LLP reported that pre-budget submissions indicate the following may be reviewed and changed:

• The Small Business Deduction (SBD) limit,
• Passive income & taxable capital thresholds, and
• Excess Interest and Financing Expenses Limitation (EIFEL).

It is my understanding that these changes are anticipated because the Fall 2026 Budget will focus on boosting domestic investment and productivity. From that perspective, reviewing frozen thresholds could be part of a broader discussion about helping domestic businesses retain capital and grow in Canada.

These are areas to watch. I'll update this section if the Fall 2026 budget announces relevant changes.

Sources: Knowledge Bureau, Year-End Tax Planning 2026: What Tax-Saving Opportunities Are Clients Missing? (October 14, 2026), Doane Grant Thornton LLP, Federal Budget 2026: Pre-budget submission highlights (October 1, 2026)

* Conservative illustrative estimates only, calculated by Claude from Statistics Canada annual average CPI. The comparison shows purchasing power equivalents, not proposed thresholds.

B. Tax Brackets

Everyone in Canada pays federal income tax using the same tax brackets. Your province adds its own tax on top. That means where you live changes how much tax you pay on your next dollar of income.

The two maps below illustrate this using $65,000 of taxable income. This is an example of a modest income for a self-employed worker, not a target or an average.

Step 1: How Much Tax Does Your Province Add?

At $65,000 in taxable income, combined federal and provincial income tax on your next dollar ranges from about 28 cents to 37 cents, depending on where you live.

Imagine you earn one more dollar on top of $65,000. This is not the top rate you often see quoted in articles and maps. It is the rate at a modest income. On this map, federal tax and provincial tax are added together. The darker the shading, the more of that dollar goes to tax.

For example, the combined marginal tax rate is about 31% in Alberta and 37% in Nova Scotia. On an extra $1,000 of income, that difference amounts to about $60 more tax paid in Nova Scotia.

Step 2: Which Provinces Are Allowing Bracket Creep?

The second map shows the same combined marginal tax rates, with an overlay. The overlay outlines provinces that are not fully adjusting their tax brackets for inflation. In other words, they are not keeping their brackets in step with prices:

• Solid outline: Manitoba and Prince Edward Island are not currently indexing their brackets to inflation.
• Dashed outline: British Columbia is pausing indexing for 2027 through 2030.
• Cross-hatching: Alberta has partial indexation. Its annual adjustment is limited to the lesser of 2% or Alberta’s inflation rate.

When tax brackets are not fully adjusted for inflation, bracket creep follows. Your income rises with prices but the tax brackets don't keep pace. As a result, more of your income is taxed at higher rates.

The sections below show how the federal brackets work first. Then you will see which provinces have stopped or limited indexing, and what a freeze could cost you.

Graphics: Map Images by S.A. Kenway

Federal Tax Brackets - 2025 & 2026

These are federal personal income tax amounts. If you are a sole proprietor, your net business income is reported on your personal T1 return and is calculated on your T2125 tax schedule. It is subject to personal tax rates, not corporate tax rates.

Related >> How Are Sole Proprietors Taxed?

The image below shows the federal tax brackets and federal tax calculation on page 5 of your 2025 T1 jacket. Your taxable income on Line 26000 runs through the brackets until it tops out.

The basic personal amount (BPA) also changes for higher-income earners. If your income falls in the 33% bracket, you receive the lower, or base, BPA. I'll explain how this works below.

Example: Federal tax on $90,000 of taxable income in 2026

You'll find your taxable income on line 26000 of your T1 return. Let's use $90,000 to see how the federal tax brackets work. For simplicity, I’m ignoring your provincial tax burden in this example.

Step 1: Apply 14% to the first $58,523
     $58,523 × 14% = $8,193

Step 2: Apply 20.5% to the remaining income
     $90,000 − $58,523 = $31,477
     $31,477 × 20.5% = $6,453

Step 3: Add the two amounts
     $8,193 + $6,453 = $14,646 

Your federal tax on $90,000 of taxable income is approximately $14,646 before credits. Credits, such as the basic personal amount, then reduce it.

Step 4: Subtract the BPA credit
     $16,452 × 14% = $2,303
     $14,646 − $2,303 = $12,343 federal tax payable

Other credits could lower your federal tax payable further.

Notice what did not happen. Your whole $90,000 was not taxed at 20.5%. Only the $31,477 above $58,523 was. Your first $58,523 is still taxed at 14%. This is why Canada's tax system is called progressive. The more you earn, the higher the rate on each additional step of income.

We've been looking at marginal tax rates. Let's look at your average tax rate now. Notice how it differs from your marginal tax rate.

• Average federal tax rate (13.7%) - Your overall federal tax burden is based on your current income ($12,343 tax after BPA / $90,000 taxable income).
• Marginal federal tax rate (20.5%) - Your actual tax bracket, which represents the rate you will pay on your next dollar of taxable income.

Provincial Bracket Creep

Not every province and territory indexes. Several provinces have paused or stopped indexing their tax brackets and non-refundable credits to help with budget deficits.

'Bracket creep' is a 'silent' tax hike. As your income increases, more of your income is pushed into higher tax brackets because the brackets did not move with it.

This list is not exhaustive.

• British Columbia is the latest province to pull back on inflation protection. It is pausing indexing for 2027 to 2030. Indexation is expected to return in 2031.
  
  This creates a double whammy, as the province increased the lowest personal income tax rate for 2026 as well. To be fair, the government did increase the B.C. Tax Reduction Credit to offset it for the lowest earners.
  
  However, Persons with Disabilities (PWD) will be hit hard ... because the government has not raised the $16,200 Annual Earnings Exemption (AEE) since 2024. This means their income no longer keeps up with inflation. Since 2024, prices have risen roughly 5%. That $16,200 now buys about $800 less. That is about 6 weeks of groceries for one adult.
• Manitoba  stopped indexation in 2025 and kept the freeze for 2026. No date has been given for indexation to return.
• Alberta paused indexation in 2020 and 2021. Beginning in 2025, Alberta adjusts tax brackets based on the new 'Alberta Escalator' framework. It is the lesser of 2% or the Alberta CPI.
• Saskatchewan paused indexation in 2018 and 2019.
• Ontario has partial de-indexing. The two top tax brackets were introduced in 2014 with the legislation stating they would not be indexed to inflation.
• Prince Edward Island did not index its tax brackets between 2008 and 2026. Instead, it chose annual reviews. These resulted in (a) annual adjustments to the BPA beginning in 2019, and (b) a 1.8% increase to the bracket thresholds in 2026. A review is not indexing, and 1.8% does not close the gap. Prices are up about 44% since 2008.
• Nova Scotia did not index its brackets from 2000-2024. In 2025, the government began re-indexing them.

Bracket Creep in Action: A B.C. Example

Here is what a freeze looks like with real numbers.

Imagine you live and operate your self-employed business in British Columbia. In 2026, your taxable income is $65,000. Prices rise about 2% a year, so you raise your rates 2% a year to keep up. You are no better off. You are just keeping pace.

B.C.’s first bracket ends at $50,363 in 2026. Income up to that amount is taxed at 5.6%. Income above it is taxed at 7.7%.

Now the pause begins. From 2027 to 2030, B.C. will stop adjusting that threshold. It stays at $50,363.

If indexing had continued, the threshold would rise 2% a year. By 2030, it would be about $54,500. That would keep about $4,150 more of your income in the 5.6% bracket. With the freeze, that income is taxed at 7.7% instead.

The orange area shows income that would still be taxed at 5.6% if B.C.’s bracket had kept up with prices. Because the bracket is frozen, it will be taxed at 7.7%. Each year, the orange slice grows. So does your extra tax:

• 2026: $0
• 2027: about $21
• 2028: about $43
• 2029: about $65
• 2030: about $87

That adds up to about $216 over four years. Now picture every B.C. taxpayer in a similar position.

B.C.’s budget puts a number on the freeze. It expects about $60 million in 2027, $309 million in 2028, and $590 million in 2029. That adds up to almost a billion dollars in three years. That covers every bracket and credit, not only the first bracket in my example.

The amount grows each year, because the gap between the frozen brackets and indexed brackets keeps widening. The freeze runs through 2030, and B.C.’s plan stops at 2029. The total will be higher still. That is B.C.'s 2026 budget plan. A future budget could change it.

Sources: B.C. Budget and Fiscal Plan 2026/27 to 2028/29, Table 2.1. B.C.'s fiscal year runs April 1 to March 31. Bracket creep chart by Claude.

Notice the amounts for individuals are small in any one year. That is why this is called a 'silent tax' hike. No rate changed. Nothing on your return says you are paying more. The threshold stood still while your prices and income moved on. Across the province, the small amounts add up. B.C.’s budget will be counting on this revenue to help protect services and improve its finances.

Three points about this example:

• It counts the bracket only. Other amounts may also be affected, so your real cost could be higher.
• It uses B.C. tax only. Federal brackets are still indexed, so they do not add to the creep.
• If you earned $75,000 instead, you would pay about the same extra tax. The cost comes from the frozen threshold, not from the size of your income.

Want to see where you stand? The Solo CEO Move below shows you which lines on your return to check.

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