Report Finds Lower Income Canadians Experience Highest Marginal Effective Tax Rates

Marginal effective tax rate (METR) measures the personal income taxes paid both federally and provincially as well as the reductions in government benefits linked to income.

Households earning $30,000 to $60,000 face marginal effective tax rates near or above 50 per cent, said the report published by the Fraser Institute.

A household’s effective tax rate is the combination of taxes paid and benefits lost as income increases. The monthly Canada Child Benefit, for example, 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.

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Families earning $60,000 a year were subject to an effective tax rate of 50 percent or more in every province, the report found. The rate is particularly high in Quebec, coming in at 67 percent.

Quebec also had the highest average marginal effective tax rates in 2023 for households earning between $30,000 and $60,000, coming in at 57 percent.

The rates for the other provinces sat at 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 marginal effective tax rates for households pulling in $300,000 or more each year compared to those in the $30,000 and $60,000 range.

In Ontario, for example, families making $300,000 or more each year have a 44 percent METR compared to the 50 percent rate 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 said. “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.”