Tax and ‘clawback’ provisions have substantial impact on take-home pay
Working families with children in Canada face high tax hurdles that could dissuade them from earning extra income, according to Toronto-based public policy think tank C.D. Howe Institute.
In its report, Treading Water: The Impact of High METRs on Working Families in Canada, the Institute claims low-to- mid-income households face taxes on incremental income generally higher than those faced by high-income families.
The Institute calculates a household's marginal effective tax rate (METR) as the sum of the statutory income tax rate (federal and provincial) and payroll taxes, in addition to the tax-back or phase-out rates for each benefit program to which the household is entitled.
“Getting ahead by earning extra income can be very hard for Canadian working families with children, in particular low-income earners,” said Alexandre Laurin, co-author of the report. “The reason — as personal incomes rise above prescribed thresholds, most benefits paid by governments are reduced… at various rates. These include the Working Income Tax Benefit, the GST/HST Credit, and the Canada Child Tax Benefit.”
Tax and "clawback" provisions overlap in Canada, which can have a substantial impact on take-home pay, the Institute says. A family's METRs may make taking on extra work less unfavourable. In many situations, families at very low employment income levels may face higher METRs than higher income families, the report says.
For example, METRs on each extra dollar of income for a working family with two children can be as high as 80 per cent in Quebec, and higher than 60 per cent in most provinces, the Institute says.
“The dilemma cautions against further expansion of the targeted transfer system,” said Finn Poschmann, co-author of the report. “There are better alternatives aimed at supporting low-income earners, including universal, in-kind programs, such as neighbourhood facilities and services aimed at target communities, rather than at families or individuals.”
By avoiding an expansion of the targeted transfer system and considering alternatives, Canadians may be in a position “that support rather than suppress workforce participation,” the Institute says.
