A new report from the C.D. Howe Institute, The Clawback Trap: How Canada’s Benefit System Can Undermine Work and Saving, notes that low-income earners, seniors in particular, are subject to such high effective tax rates that these can discourage any effort to earn extra income.

“Getting ahead by earning extra income can be a serious challenge for Canadian working families, particularly low-income earners. A young mother considering whether to work, a low-income worker looking to add extra hours or a senior looking for part-time work can all face benefit clawbacks, resulting in high effective tax rates that discourage those efforts,” the report states.

Marginal effective tax rates (METRs) are examined and discussed in depth using a number of scenarios. METRs measure the loss from additional taxes and benefit reductions on each dollar of earnings, reflecting the financial penalty on any small increase in income.

“METRs on each extra dollar of income for a working family with two children generally exceed 50 per cent in most provinces,” they write. “For seniors, METRs can exceed 75 per cent on employment income.” 

They say in all provinces, dual-parent families with two children generally experience METRs between 60 per cent and 70 per cent at incomes ranging between $45,000 and $65,000. “In Alberta, METRs exceed 70 per cent through much of this range. The span of high METRs (above 50 per cent) is broader in Ontario and Prince Edward Island, but Quebec stands out: METRs for dual-parent families exceed 50 per cent from roughly $38,000 to $80,000 of family income and again from about $115,000 to $140,000,” they write.

“In Ontario, the family METR on extra employment income peaks at 74 per cent for two-child, two-parent families and at 79 per cent for single-parent families. In Quebec, it peaks at 88 per cent and 71 per cent, respectively. In other provinces it tends to peak around 60 to 70 per cent.” 

The analysis also confirms that seniors face the highest effective tax rates, thanks mainly to the aggressive phase out of the guaranteed income supplement (GIS), alongside federal and provincial income-tested supports such as GIS top-ups and tax credits.

“These overlapping clawbacks compound each other, creating extremely high METRs,” they write. “In some provinces, the combined effect of federal and provincial benefits reductions leads to METRs on pension income approaching or exceeding 100 per cent in some narrow income ranges, effectively penalizing seniors for drawing additional tax deferred retirement income.”