Canadian Families Facing High 'Tax Hurdles'
22 July 2013
Posted by: Author: Mike Godfrey
Author: Mike Godfrey
Canada's working families face high tax hurdles that could put them off attempting to earn extra income, the C.D. Howe Institute has claimed.
A new report from the Institute, "Treading Water: The Impact of High METRs on Working Families in Canada," addresses the impact of a system that reduces family benefits when personal incomes rise. It warns that because tax and "clawback" provisions overlap, the impact on take-home pay is likely to be substantial. A family's marginal effective tax rate (METRs) can therefore make taking on extra work less worthwhile than otherwise. This is particularly the case for those at very low employment income levels, who can face higher METRs than higher income families.
The Institute calculates a household's METR as the sum of the statutory income tax rate (federal and provincial) and payroll taxes, plus the tax-back or phase-out rates for each benefit program to which the household is entitled. It stresses that high METRs "matter because they reduce the gains for individuals from working or adding to their incomes, from saving, or from investing in training and education."
The "tax hurdle" is especially evident in the case of spouses working part-time and looking to increase their paid work hours, and those considering whether to re-enter the labor market after taking time out to look after their children. It is estimated that 40 percent of Canadian families have one spouse working full-time and one either not working or working part-time. The report claims that for these families, "taxes and benefit reductions on the incremental earnings of a part-time or inactive spouse can produce high METRs – meaning METRs at or above 50 percent."
At a provincial level, Quebec-based families with children have the highest METRs, especially those in the CAD35,000 (USD33,741)- CAD40,000 income range. Rates can hover around 80 percent for wage earners with two young children. Those in Ontario are also comparatively badly off, with METRs tending to exceed 50 percent on incomes from CAD25,000 - CAD45,000. The factors determining inter-provincial differences include diverse family benefits and income-tested phase-out rates, various provincial tax rate schedules, family composition and the distribution of family income.
The Institute found that 10 percent of Quebec families and 7 percent of those in Ontario have METRs above 60 percent on their next dollar of employment earnings, while 56 percent in Quebec and 31 percent in Ontario experience METRs above 45 percent. In the western provinces, only 5-9 percent have METRs in excess of 45 percent, and very few pay above 60 percent.
The report concludes that while "geared-to-income fiscal benefit programs provide valuable assistance to families with children," these benefits "come at the expense of high family METRs." The Government should therefore avoid any expansion of the targeted transfer system, and instead consider universal neighborhood and community-needs-based programs. These "may offer alternatives that support rather than suppress workforce participation," the Institute claims.