Canadian families with modest incomes face the highest marginal effective tax rates, with those earning between $30,000 and $60,000 hit the hardest, according to a new report.
The marginal effective tax rate (METR) measures the personal income taxes paid both federally and provincially along with the reductions in government benefits resulting from extra income earned.
Households earning $30,000 to $60,000 face METRs near or above 50 percent, said the report published by the Fraser Institute.
“Families with modest income brackets consistently face disproportionately high METRs, raising questions of fairness and efficiency in the tax and transfer system,” Fraser Institute senior fellow Philip Bazel said in an April 23 news release.
“These findings highlight the need to prioritize METR reductions for low-income families.”
The monthly Canada Child Benefit is an example of a government benefit that is decreased when a family’s income grows.
“Many [low-income families] in Canada take home only 40 cents or less on each additional dollar earned, because of the combination of higher taxes and loss of federal and provincial transfer benefits,” Mr. Bazel said in the report’s executive summary.
Families earning $60,000 a year were subject to a METR of 50 percent or more in every province, the report found. The rate at this income level is particularly high in Quebec, at 67 percent, as shown in an infographic accompanying the report. That means a Quebec family loses $67 in taxes and in benefits that are clawed back when they earn an extra $100.
Quebec also had the highest average METRs in 2023 for households earning between $30,000 and $60,000, at 57 percent. In contrast, Quebec households earning over $300,000 had an average METR of just 46 percent in 2023.
The marginal effective tax rates for the other nine provinces in the $30,000-to-$60,000 income range were 41 percent in Saskatchewan, 42 percent in Manitoba, 44 percent in New Brunswick, 46 percent in Alberta, 49 percent in Newfoundland and Labrador, and 50 percent in Ontario, Nova Scotia and, Prince Edward Island. British Columbia had the lowest average rate, at 38 percent.
Only two provinces—B.C. and Manitoba—had higher METRs for households pulling in over $300,000 a year compared to those in the $30,000-to-$60,000 range. In B.C., this is 41 percent versus 38 percent. In Manitoba, it is 44 percent versus 42 percent.
In Ontario, families making over $300,000 have a 44 percent METR compared to 50 percent for those earning between $30,000 and $60,000.
Drawbacks and Solutions
Setting higher rates for more modest incomes creates a “disincentive for earning additional income” because the financial benefits are “significantly offset by increased taxes and/or reduced government benefits,” the report said.“Many families for whom additional income would translate to a tangible increase in welfare will see among the lowest returns for their efforts,” the report added.
“When considered in the context of inflation and the emerging struggle for affordable housing witnessed across Canada in recent years it is easy to imagine that the pressure on families struggling to generate sufficient income has only increased.”
Solutions to address disparity under the marginal effective tax rate all come with “corresponding trade-offs,” Mr. Bazel wrote. “There is no obvious win-win solution to the problem.”
He suggested lowering clawback rates on income-tested benefits, increasing the basic exemption amount on earned income, and reducing statutory tax rates on employment income.
Prioritizing METR reductions for low-income families and individuals in future development of the Canadian tax-and-transfer system is crucial, he said, if Canada hopes to have a fair and efficient system that focuses on “dignity and income sufficiency.”
