In this week’s budget, the federal government announced plans to fund the Canada Disability Benefit, which they say will help to reduce poverty among disabled Canadians.
Disability groups have raised concerns with the amount of the proposed benefit. However, the structure of the benefit highlights a broader problem with the design and administration of Canada’s income support system.
Benefits such as the Canada Disability Benefit, the carbon tax rebate, the GST/HST rebate and various provincial benefits, which exist in large part to support low-income Canadians, ignore the reality that many low-income Canadians do not file their taxes.
The numbers are astonishing.
A 2023 research paper shows that somewhere between 10 and 12 per cent of Canadians don’t file their taxes. Those who do not file are disproportionately low-income Canadians, the paper says.
What this means in practice is many of the Canadians who are in greatest need of receiving government support, such as the disability benefit or carbon tax rebate, don’t receive it.
The tax system’s mix of refundable tax credits, non-refundable tax credits, means-tested benefits and tax-deductible spending creates a witch’s brew of complexity that favours the informed and educated. And it deters Canadians of lesser means — who are more likely to misunderstand or be overwhelmed by government forms — from taking advantage of the system’s supports.
There is no need for the system to be administered in this way.
Some of these benefits, such as the carbon tax rebate, are not means-tested, meaning the government does not need to assess your income to determine how much you receive. There is thus no need for receipt of the benefit to be tied to a person’s income tax filing.
For non-means-tested benefits, what the Canada Revenue Agency could do instead is adopt an approach similar to that taken by Elections Canada, which administers voting. Canadians can elect to have their personal information automatically forwarded to Elections Canada by the Canada Revenue Agency. But those who don’t complete this election can also sign up to vote directly without having to complete a tax return.
Applying this example to the tax system, a Canadian who failed to file their taxes could have the alternative option of completing a simple, standalone form that entitled them to receive the carbon tax rebate directly.
Other benefits, such as the HST/GST rebate and Canada Workers Benefit, are means-tested. But these have their own problems.
A 2022 C.D. Howe paper entitled “Softening the Bite: The Impact of Benefit Clawbacks on Low-Income Families and How to Reduce It” showed that means-testing raises marginal effective tax rates, which creates a disincentive to work. Low to moderate-income Canadians who collect benefits often face higher marginal effective tax rates than the very wealthy, due to benefit clawbacks.
For example, a single parent in Newfoundland who earns about $50,000 is subject to a nearly 90 per cent marginal tax rate when benefit clawbacks are factored in, the paper shows. This is an outside case but not anomalous. Most provinces have a 70 per cent marginal effective tax rate for some middle-income families when benefit clawbacks are accounted for.
For these benefits, the obvious solution would be for the government to decrease the number that are means-tested. Benefits should instead be treated like regular taxable income, to alleviate the high tax rates that exist at lower incomes and remove disincentives to work.
If it is a core goal of government to provide a social safety net for those who need it most, it’s imperative to make it possible for those Canadians to access assistance. One has to question the value of all these social programs if they don’t actually reach the people they are meant to help.
Ridiculously high combined marginal effective tax rates are nothing new, and highlight the advantage of a basic income which is integrated with the tax system so that clawback and tax rates do not overlap. This can be easily accomplished with a basic income that is NOT a livable income. e.g. a 10K basic income per single (no kids, no disability, not a senior) with a 40% clawback rate is fully clawed back at income of 25K, after which a 40% tax rate kicks in with a 25K basic personal amount. These numbers are used to simply illustrate the concept, but workable numbers are actually not that far off.