Low- and middle-income Canadians hit hardest by high marginal effective tax rates

Marginal Effective Tax Rates for Working Families in Canada

• This report provides a cross-provincial analysis of the marginal effective tax rates (METRs) faced by working families across Canada, highlighting the significant impact these rates have on low- to middle-income earners.
• Individuals and families with modest incomes, particularly those earning between $30,000 and $60,000, face the highest METRs. In Quebec, for example, the METR for a representative family within this income range is as high as 53%.
• The structure of METRs across provinces results in very low net-of-tax returns for earnings in the low- to middle-income range for Canadians. This creates a disincentive for earning additional income, as the financial benefits are significantly offset by increased taxes and reduced transfer benefits.
• Low-income families in Canada are particularly hard-hit by high effective tax rates. Many 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.
• Solutions include lowering clawback rates on income-tested benefits, increasing the basic exemption amount on earned income, and reducing statutory tax rates on employment income. However, these options come with corresponding trade-offs and there is no obvious win-win solution to the problem.