Finance Committee on April 24th, 2018

[Pierre Leblanc]

The basic personal exemption in 2017 was $11,635. That person will be able to claim the Canada employment credit, so about $1,150, roughly; their CPP contributions; and their EI premiums. Probably they're not quite tax—it's pretty close. For a single parent, it would probably be a bit.... I think there would still be non-taxable.... It'll depend on the type. A single parent would be able to claim the eligible dependant credit, so...they'd have two basic personal amounts.

[The Vice-Chair, Conservative, Pierre Poilievre]

For someone who does have two basic personal amounts, does it start to phase out before they become taxable, or....

[Pierre Leblanc]

Yes, it does.

[The Vice-Chair, Conservative, Pierre Poilievre]

Does that phase-out then contribute to the marginal effective tax rate of the individual in the pre-tax share of their income?

[Pierre Leblanc]

It does.

When it's phasing in, it's reducing the marginal tax rate. When it's phasing out, it's increasing the marginal tax rate. When we design and enrich these programs, that's something we're always mindful of. That's one of the motivations for reducing the phase-out rate to 12%.

[The Vice-Chair, Conservative, Pierre Poilievre]

As I understand it, the earned income tax credit in the United States phases out at higher income levels and, therefore, has the effect of actually reducing the tax owed by the working person, rather than just giving them an increase in take-home pay before they reach a taxable level. Is that your understanding as well?

[Pierre Leblanc]

I think one of the interesting issues in comparing the earned income tax credit in the U.S. with the current working income tax benefit—which will become the Canada workers benefit—is that if you think of the delivery of child benefits in the U.S., a lot of it is done through the earned income tax credit. That means that their income tax credit is much more generous for families with children than it is for unattached individuals, whereas we have our child benefit system. It's a bit of a blend. Certainly, in the U.S., it's considered an important instrument for encouraging work, for supporting low-income families. It does have that families-with-children element. It's an interesting issue to think about when comparing the two.

[The Vice-Chair, Conservative, Pierre Poilievre]

If the phase-out were to start later in any jurisdiction, could it effectively reduce one's tax burden, rather than being just a refundable benefit?

[Pierre Leblanc]

It depends. You could think of it two ways. You could think of their total liability during the year. If I'm in one of those cases where I start to pay tax—I might owe this amount of tax and I received this amount of what will be the Canada workers benefit—it might be a net positive or net negative. In a lot of cases, we see that it ends up being a refund at the end of the year because, to the extent those individuals are paying some amount of tax, it's being withheld. Most of them have employment income, so it's withheld at source. It ends up being, to a significant extent, something they receive back at tax time because they have already—

[The Vice-Chair, Conservative, Pierre Poilievre]

I'm not so much interested in when they get it, but whether it's reducing their tax burden in some cases, versus providing a direct benefit. Do you understand the distinction I'm drawing?

[Pierre Leblanc]

Sure.

[The Vice-Chair, Conservative, Pierre Poilievre]

In the former, you're reducing the amount that the taxpayer would otherwise owe the government. In the latter, the government owes you something—

[Pierre Leblanc]

Yes.

[The Vice-Chair, Conservative, Pierre Poilievre]

—and there is an intersection point where one goes from workers benefit eligibility to tax-paying employee. At that intersection point, I'm trying to ascertain whether this transforms into a tax reduction, at the higher end.

[Pierre Leblanc]

It's an interesting way to think about it. There are basically two things. What we've just been talking about is more of an average tax rate. In net, are you paying something or are you receiving something? Then, it's a question of what's your tax rate on the margin? When I'm in a given range for an additional $100,000 of earnings, what am I paying on that, either to increases in taxes, or reductions in income-tested benefits?

[The Vice-Chair, Conservative, Pierre Poilievre]

In instances where the person is both eligible for the workers benefit and has exhausted all personal exemptions, does the phase-out rate compound the tax rate or does it subtract from the taxes owing?

[Pierre Leblanc]

It's going to depend on the situation. You can think of situations where it will take $1,000 more earnings, that they will owe.... Let's take your assumption that they have exhausted their taxable..., so their income is above the sum of their non-refundable credits. Then they are going to pay more tax, starting at a pretty low rate. For example, in Ontario it would be 15% federal and just above 5% provincial. If they are in the phase-out rate for the proposed Canada workers benefit, there will be a 12% reduction in their entitlement.

[The Vice-Chair, Conservative, Pierre Poilievre]

Does that raise their meter? What I'm really getting at here is does that raise—

[Pierre Leblanc]

It can.

[The Vice-Chair, Conservative, Pierre Poilievre]

If I could finish—

[Pierre Leblanc]

It can.

[The Vice-Chair, Conservative, Pierre Poilievre]

Let me finish. Does it raise their meter to 27%, or does it just have the effect of expanding the personal exemption for that person?

[Pierre Leblanc]

No, it can raise their effective marginal tax rate. I think in designing an income-tested benefit like this—especially something targeted at low-income workers—the idea is...there are trade-offs and you're trying to achieve the right balance. Research shows that individuals are particularly sensitive to incentives. We think that incentives matter in lots of cases, but certainly when it's a question of a discrete decision—do I work or not work?—it can matter a lot. There, enriching the Canada workers benefit just means work pays a bit more. But there is another decision that's important: given that I'm working do I work a bit more? In designing this, you take into account that it's going to be a lower phase-out rate over a slightly longer range. Those are the trade-offs. We think we're still in the spot where it's a net plus. We're quite confident of that. But it's certainly something to be mindful of when designing such a benefit.

[The Vice-Chair, Conservative, Pierre Poilievre]

I would think so, because the purpose of WITB originally—and, as I understand, the earned income tax credit south of the border—was not so much redistributional as it was a work incentive to help people get over the welfare wall, to ensure that wage increases and increased hours always pay more. The phase-out of some of these benefits has the opposite effect at certain income levels, as you've confirmed.

On the same subject of marginal effective tax rates, under the changes to the Canadian-controlled private corporations, when a company's passive income goes from $50,000 to $50,001, what will be the marginal effective tax rate on that additional dollar of passive income?

[Maude Lavoie]

Under the proposed measure, for each additional dollar that you earn above $50,000 of passive income, the eligibility for the small business deduction will be reduced on $5 of active income. On those $5 of active income, the tax rate at the federal level in 2009 is proposed to be 9%, so on that $5 of income, the rate will be increased to 15%. Under the proposed measure, the investment income is taxed under the current rules.