Seniors and low-income families trying to save or work more are being hit with a “hidden tax” that’s stripping as much as 75 per cent off every dollar gained, says a new report.

Clawbacks of government benefits for low-to-middle income Canadians can create high effective tax rates that discourage them from taking on a job or saving more for retirement, said

researchers with the C.D. Howe Institute.  As personal incomes rise above the threshold of income-tested benefits whether from taking on more work or drawing more savings, not only are benefits clawed back, but income taxes also rise. The overlap can deliver a substantial hit to actual take-home pay.

“The incomes of Canadian families affect their taxes in two ways: the more they make, the more tax they may owe, and the more they make, the less they may receive in income-tested cash benefits,” said the report, written by C.D. Howe’s director of research Alexandre Laurin and Nicholas Dahir.

These effective tax rates on every extra dollar a working family with two children makes generally exceeds 50 per cent in most provinces, when their income is between $45,000 and $65,000, said the report. That tax rate can top 75 per cent for seniors with employment income between $13,000 and $24,000.

The study gives the example of an Alberta family with a combined income of $70,000, receiving Canada Child Benefits and the Canada Carbon Rebate. If the mother in the household considers working overtime for one month to earn an extra $500, the family’s benefits would decrease and their taxes would increase, reducing her take-home pay to just $280, an effective tax rate of 44 per cent.

Seniors are the hardest hit. Canadians with a modest pension income that includes the Quebec or Canada Pension Plan, as well as Old Age Security and Guaranteed Income Supplement , face some of the highest effective tax rates, often exceeding 75 per cent, said the report.

In some provinces the combined effect of federal and provincial benefit reductions creates effective tax rates near or exceeding 100 per cent, penalizing seniors for drawing on tax-deferred retirement income.

In Saskatchewan, for example, the phase-out of the provincial Seniors Income Plan on top of the GIS clawback, creates a marginal effective tax rate of over 145 per cent on the first $2,000 of taxable income and over 218 per cent on the next $1,580.

The percentage of seniors facing very high effective tax rates on pension income has climbed from 20 per cent in 2010 to more than 40 per cent today, the report said.

“This increase is largely driven by the introduction of the GIS top-up in 2011, which was increased in 2016, and is clawed back at a rate of 25 per cent for a combined 75 per cent GIS clawback rate,” it said.

To address the “clawback trap,” federal and provincial governments need to pay attention to effective tax rates when changing or introducing new benefits, said Laurin and Dahir.

Income-tested programs from both levels of government should be better integrated so they don’t “pile up on top on one another,” pushing the effective tax rate even higher.

“For some seniors, working more or drawing extra pension income can mean losing much or even most of every extra dollar,” said Laurin. “In some narrow income ranges, METRs may even exceed 100 per cent on very modest pension income.”

READ OUR RED INK SERIES

Governments around the world are awash in debt, and Canada is no exception. But just how severe is the problem and what will the consequences be? With the federal deficit in the spotlight ahead of the Nov. 4 budget, the Financial Post is exploring the state of sovereign debt in Canada and beyond in a weeklong series called Red Ink. From a primer on Canadian indebtedness to the consequences of a U.S. default, we’ll explore some major questions about government debt and the looming deficit.

  • Owe Canada: Everything you need to know about Canada’s $1.28 trillion (and counting) federal debt
  • How soaring government debt could play a starring role in the next great financial crisis
  • Canada is in a small club of countries with a AAA credit rating. How long can it last?
  • Danielle Smith: Balancing the budget gets a lot easier if you build a pipeline
  • Ottawa’s new budget framework is stirring controversy. Here’s what you need to know about it

Check back here every day for more from the series.  Sign up here to get Posthaste delivered straight to your inbox.

Gold and silver prices have soared so high that they are transforming Canada’s trade landscape.

Canadian exports of the precious metals have caught up to exports of cars and light trucks, reaching just over $58 billion in the past 12 months, said BMO Capital Markets.

Exports of gold, silver and platinum have also shot past lumber, pulp and paper and farm and fish products.

Twenty-five years ago at the turn of the century, vehicle exports were about 20 times the level of gold exports, while forestry products were about 15 times as large, said BMO.

“That means that after crude oil, gold is thus about to become Canada’s second biggest export — assuming the recent gold price correction doesn’t turn into a free fall,” said BMO chief economist Douglas Porter.

Spot gold was hovering around US$4,000 an ounce today, down from the record highs of over US$4,300 hit in October, but still up more than 50 per cent year to date. Analysts say many of the fundamentals that have fuelled the rally, such as central bank buying and haven demand, are expected to remain in place.

  • Canada’s Finance Minister Francois-Philippe Champagne delivers the federal budget today in Ottawa at about 4 p.m.
  • Earnings: Shopify Inc., Thomson Reuters Corp., Air Canada, MEG Energy Corp., IamGold Corp., CargoJet Inc., Intact Financial Corp., Suncor Energy Inc.
  • Canada’s first battery plant in Windsor will produce energy storage batteries as EV sales slump persists
  • The pain underlying U.S. GDP numbers goes beyond potential stock market effects
  • Coeur to take over Canada’s New Gold in $7 billion all-stock deal

Emotions and behavioral biases always exert a huge influence on investors’ decisions. Perhaps one of the most common among these is fear of missing out (FOMO). FOMO can be irrational and lead to poor decisions and results, but it can also be a positive force, spurring investors to act in ways that can bolster returns, writes chief investment officer Noah Solomon.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at wealth@postmedia.com with your contact info and the gist of your problem and we’ll find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course).

McLister on mortgages

Find out if now is the time to embrace your FOMO. Want to learn more about mortgages? Mortgage strategist Robert McLister’s

Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his

Financial Post on YouTube

mortgage rate page for Canada’s lowest national mortgage rates, updated daily. Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at 

  • Cracks are appearing around the edges of Canada’s credit world
  • Here’s how Canada’s pension system ranks against the rest of the world’s

posthaste@postmedia.com . Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here