Mid-year payroll alert: Navigating the CRA July 1 tax changes

Last Updated Jun 15, 2026

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As a business owner or HR leader, “mid-year tax changes” might be a phrase that makes you sweat just a little bit. But don’t worry – we’ve got your back.

On May 21, 2026, the Canada Revenue Agency (CRA) released its T4127 – July Payroll Deductions Formulas Guide (123rd Edition). This update introduces specific provincial tax changes that take effect on July 1, 2026.

If you have employees in British Columbia, Newfoundland and Labrador or Prince Edward Island, these adjustments may impact their payroll deductions and take-home pay for the rest of the year.

The best news? If you’re using Employment Hero, you can breathe easy. Our software is automatically updated with these new formulas. The changes will apply on your first payroll run in July – zero manual calculations or stressful adjustments required on your end.

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Here is a quick breakdown of exactly what is changing, who is affected, and how you can communicate this to your team.

What’s changing and who is affected?

Because these tax changes take effect halfway through the year, the CRA is applying prorated (catch-up) rates for the remaining six months (July to December 2026) to ensure the correct amount of tax is collected by the end of the year.

If your employees work in any other province or territory, they aren’t affected by this update. But if you have team members in BC, NL or PEI, here is what’s happening:

1. British Columbia (BC)

The change: BC’s lowest personal income tax rate increased from 5.06% to 5.60% effective January 1, 2026. Because the lower rate was applied for the first six months of the year, a prorated rate of 6.14% will apply from July to December 2026 to capture the required annual tax amount.

The basic tax reduction amount has increased from $562 to $690 for 2026 (originally indexed to $575 as of January 1). A prorated basic reduction of $805 will apply for the remaining six months beginning in July.
Impact on net pay: Most affected employees will see a modest decrease in their net take-home pay due to the higher prorated tax rate.

2. Newfoundland and Labrador (NL)

The change: The Basic Personal Amount (BPA)—the amount an employee can earn before they start paying provincial tax—increased from $11,188 to $13,094 for 2026. Because the lower BPA was used for the first half of the year, a prorated BPA of $15,000 will apply for the rest of the year.
Impact on net pay: Employees may see a modest increase in their net take-home pay, as less provincial tax will be deducted.

3. Prince Edward Island (PEI)

The change: A new top income tax bracket of 20% now applies to taxable income over $200,000. To catch up for the first half of the year, a prorated rate of 21% will apply to income above this threshold from July onward.
Impact on net pay: This only impacts high earners making over $200,000 annually, who may see a modest decrease in net pay. Employees earning under this threshold will see no change.

Your 2-Step Employer Checklist

Here are two quick steps to ensure your team’s pay is accurate and clearly communicated:

Verify your payroll setup: Verify with your payroll provider that the newly updated basic personal exemption amounts and income tax rates have been applied to your system. If you are using our platform, relax—we automate this entirely.
Communicate early: Because take-home pay might change slightly with the new rates, proactively letting your team know keeps things transparent. A quick heads-up prevents a flood of panicked messages on payday.

To make your life easier, we’ve put together three email templates below. Just copy, paste, fill in the brackets and send them out to your affected team members before your first July pay run!

Employee Communication Templates

For employees in British Columbia

Subject: Notice of CRA Provincial Tax Adjustments Starting July 2026

Hi [Employee Name],

We want to give you a heads-up that your net pay may look slightly different starting with your first paycheque in July 2026.

The Canada Revenue Agency (CRA) has updated provincial tax rates for British Columbia mid-year. As a result, a slightly higher provincial tax rate will apply to your pay for the remainder of 2026 (July–December). This adjustment is designed to catch up on a tax rate increase that took effect January 1, 2026, but was phased in gradually across the year.

What this means for you: You may see a modest decrease in your net (take-home) pay starting in July. The exact amount will depend on your income level, but this is a normal, expected adjustment in line with CRA requirements — not an error.

If you have any questions, please reach out to your payroll or HR contact.

For employees in Newfoundland and Labrador

Subject: Notice of CRA Provincial Tax Adjustments Starting July 2026

Hi [Employee Name],

We want to give you a heads-up that your net pay may look a little different starting with your first paycheque in July 2026.

The Canada Revenue Agency (CRA) has updated the Basic Personal Amount (BPA) for Newfoundland and Labrador mid-year. The BPA is the amount of income you can earn before provincial tax applies. Because a lower BPA was used for the first half of 2026, a higher prorated BPA will be applied from July onward to balance things out for the full year.

What this means for you: You may see a modest increase in your net (take-home) pay starting in July, as a higher personal amount means slightly less provincial tax deducted from each paycheque for the rest of the year.

If you have any questions, please reach out to your payroll or HR contact.

For employees in Prince Edward Island

Subject: Notice of CRA Provincial Tax Adjustments Starting July 2026

Hi [Employee Name],

We want to give you a heads-up that your provincial tax deductions may change starting with your first paycheque in July 2026.

The Canada Revenue Agency (CRA) has introduced a new top income tax bracket for Prince Edward Island, applying to taxable income above $200,000. Because a lower rate was used for the first half of the year, a prorated higher rate will apply from July through December 2026.

What this means for you: This change only affects employees earning taxable income above $200,000 annually. If your income is below this threshold, you will not see any change to your net pay.

If you are in the higher income bracket, you may notice a modest decrease in your net (take-home) pay from July onward as the prorated rate is applied for the remainder of the year.

If you have any questions, please reach out to your payroll or HR contact.

Let Employment Hero do the compliance heavy-lifting

Mid-year tax updates used to mean manually recalculating spreadsheets or double-checking payroll formulas to avoid costly compliance errors.

With Employment Hero, those days are over. Our payroll platform automatically integrates the latest CRA T4127 formulas directly into the system. When July 1 rolls around, the software will handle the heavy lifting seamlessly, ensuring your business stays compliant and your team is paid accurately.

Not using Employment Hero yet? Learn how we automate payroll compliance and take the stress out of tax season by booking a demo with our team today.

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