Canada’s Tax Cut — Buy Now Pay Later
- Olu Olu
- May 27
- 3 min read
Updated: Jun 26
The Canadian government is working on a tax relief to benefit nearly 22 million Canadians, saving two-income families up to $840 a year in 2026. But some critics are asking an important question: How will this tax cut be funded? The answer—likely through borrowing—has implications for both today’s wallets and tomorrow’s economy.
How the Tax Cut Works
The plan reduces the federal tax rate on the lowest bracket (income up to $57,375) from 15% to 14%, effective July 2025. For a two-income household earning $114,750, this means $825–$840 in annual savings. If all goes as planned, this is expected to stimulate consumer spending and ease cost-of-living pressures.
Funding the Cut: Borrowing Today, Paying Tomorrow
There are currently no specific funding mechanisms for this tax cut, but with the ongoing tariff wars and current deficits projected to rise, borrowing is the likely path. This will create a similar scenairo to many Buy-Now-Pay-Later plans where you are allowed to enjoy some free benefits today while a steep price awaits in the future. For the Canadian tax cut, here’s what that means:
Short-Term Benefits
Immediate Relief: More disposable income for households, potentially boosting consumer spending.
Economic Stimulus: Increased demand could temporarily spur growth, as seen after the 2008 crisis when deficit spending helped avert deeper recession.
Long-Term Risks
Debt Servicing Costs: Canada’s federal debt interest payments already cost $60 billion annually (Fraser Institute). More borrowing could inflate this figure, diverting funds from healthcare, education, or future tax relief.
Future Tax Hikes: Historically, debt accumulation often leads to higher taxes. For example, in the 1990s, Canada’s debt crisis forced Jean Chrétien’s government to slash spending and raise taxes to stabilize finances.
Economic Drag: High debt can suppress growth. A 2025 study found a 10% rise in debt-to-GDP cuts per-capita GDP growth by 0.2% (Bank of Canada).
Historical Lessons
1995 Canadian Deficit Crisis
Debt reached 67% of GDP. The government implemented austerity measures, cutting spending and raising taxes, which restored fiscal health but caused short-term pain.
Post-2008 Global Borrowing
Countries like Greece and Italy faced austerity mandates after debt-fueled stimulus led to unsustainable burdens. Canada avoided this fate by maintaining lower debt pre-pandemic.
While tax cuts offer immediate relief, funding them through borrowing risks passing the bill to future taxpayers. As the Fraser Institute warns, unchecked debt could force Ottawa to choose between raising taxes or cutting services down the line. For now, Canadians get a temporary boost—but the long-term tab remains unsettled.
What Should You Do?
✅ Stay Disciplined: Create a budget, stick to it and avoid impulse purchases. Focus on buying only what is necessary and within your financial means. That way, you can have surplus funds left for investments and opportunities that are coming up in 2025 and beyond.
✅ Review Your Debt: Tax saving opportunities present a good time to use the extra cash to pay up your debts faster. You can also seek financial advice to decide which debts to pay first.
✅ Build Emergency Funds: Plan ahead and ensure you have an adequate emergency fund in a high-interest savings account or Tax-Free Savings Account (TFSA) to cover unexpected expenses.
✅ Stay Informed: Keep an eye on economic trends and adjust your strategy as needed. Consulting with a financial advisor can provide personalized insights and help you navigate changing economic conditions.
Contact us today for a tailored strategy to fit your personal financial realities and to make sure you are always ready for whatever the future brings!
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