Ottawa Should Soften Bite Of Benefit Clawbacks For Low-Income Families

Posted on November 30, 2022 in Policy Context

Source: — Authors: – media-release
November 30, 2022

Canada’s tax system has a punitive impact on lower income families with children hoping to earn more money, according to a new report from the C.D. Howe Institute. In “Softening the Bite: The Impact of Benefit Clawbacks on Low-Income Families and How to Reduce It,” authors Alex Laurin and Nicholas Dahir reveal how benefit reductions serve as hidden tax rates and reduce the effective gain from working to generate additional income.

The report presents illustrative estimates for both the “marginal” effective tax rate (METR) and the “participation” tax rate (PTR), which bite into any additional income discouraging work for lower-income families with children. The METR conveys the loss, through additional taxes and diminished benefits, associated with an extra dollar of earnings. For a working parent, it represents the financial penalty paid for working extra hours.  The PTR is the cumulative effect of all taxes and loss of fiscal benefits on the entire prospective earnings from work. For a stay-at-home parent, it represents the financial penalty paid out of the total income derived from getting a job.

There are five main factors that determine how much a family would lose through additional taxes and benefit clawbacks after taking on more paid work: the province of residence, the initial level of family income, the number of children, the number of earners in a family and how earnings are split among earners. Authors Laurin and Dahir show that working low-income families’ METRs are generally high compared to those of higher-income earners. This is mainly influenced by benefit programs that pile up at the lower end of the income scale.

“In Ontario, the family METR on extra earned income peaks at 79 percent for two-children two-parent families and at 96 percent for single-parent families. In Quebec, it peaks at 88 and 71 percent, respectively,” says Laurin and Dahir. “In other provinces, it tends to peak at around 60 to 70 percent. METRs reach their peak at relatively low levels of family income for two-parent families and at around average income levels for single-parent families.”

The paper recommends the federal government:

Read Full Report

For more information contact: Alex Laurin, Director of Research, C.D. Howe Institute; Nicholas Dahir, Research Assistant, C.D. Howe Institute; and Tafadzwa Ndlovu, Communications Officer, C.D. Howe Institute, 416-479-9520 Ext. 9520,

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