The Fiscal Contract and Delivering the Canada Disability Benefit through the Income Tax System

Authors

Jinyan Li, Osgoode Hall Law School of York University

Document Type

Article

Abstract

This article argues that the Canada Disability Benefit should be delivered through the income tax system and designed based on the Canada Child Benefit. The income tax system has evolved for over one hundred years to reflect the give-and-take, or fiscal contract, reached by Canadians to raise revenues to fund social spending programs and deliver benefits to low-income Canadians in accordance with some fundamental principles and values. Being part of the income tax system can enhance the fiscal sustainability of and public support for the new program. Because the Canada Disability Benefit is available only to working-age individuals and is income-tested, its technical design is inherently intertwined with the income tax system. Placing it in the tax system helps technical design and subsequent modifications. Finally, the Canada Revenue Agency is better suited to administering the program in a fair and efficient manner.

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This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Citation Information

Li, Jinyan. "The Fiscal Contract and Delivering the Canada Disability Benefit through the Income Tax System." Osgoode Hall Law Journal 61.2 (2024) : 393-418.
DOI: https://doi.org/10.60082/2817-5069.4013
https://digitalcommons.osgoode.yorku.ca/ohlj/vol61/iss2/4

References

1 Professor, Osgoode Hall Law School. The author recognizes the funding support from SSHRC and research assistance by Osgoode JD students: Shelley Zhang, Zhongan Zhang, Michayla Wolf, Alex Qanbery and Luke Chao. She thanks Michael Prince for his comments on an earlier draft and the participants of the “Women with Disabilities: Income Security and Tax Policy” workshop for their illuminating discussions that enriched this article. The author remains responsible for all views and errors in this paper.

2 SC 2023, c 17 [CDBA].

3 See e.g. Canadian Broadcasting Corporation, “Canadians with disabilities waiting for Bill C-22” (22 October 2022), online: CBC News: The House [perma.cc/GYF3-W23A].

4 Supra note 2.

5 Employment and Social Development Canada, Opportunity for All – Canada’s First Poverty Reduction Strategy, Catalogue No SSD-212-08-18E (Employment and Social Development Canada, 2018).

6 Disability benefits are available to working-age Canadians under Employment Insurance Act, SC 1996, c 23, Canada Pension Plan, RSC 1985, c C-8, and Veterans Well-being Act, SC 2005, c 21.

7 Veterans’ disability benefits are available under the Veterans Well-being Act, ibid.

8 See Old Age Security Act, RSC 1985, c O-9. For House of Commons Debates, see 21-2, vol 1 (20 February 1950) at 60 (Mr St Laurent), online: [perma.cc/W9RA-WWK4].

9 See Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (UBC Press, 2017) at 304 [Tillotson, Give and Take], DOI: https://doi.org/10.59962/9780774836746; James G Snell, The Citizen’s Wage: The State and the Elderly in Canada, 1900-1951 (University of Toronto Press, 1996), DOI: https://doi.org/10.3138/9781487573966.

10 See Daniel Béland & Patrik Marier, “Universality and the Erosion of Old Age Security” in Daniel Béland, Gregory P Marchildon & Michael J Prince, eds, Universality and Social Policy in Canada (University of Toronto Press, 2019) 103 at 105 [Béland & Marier, “Universality”]. Initially, the OAS was financed by an earmarked tax levy. This tax was meant to “serve as a symbol of the cost of the pension and create an immediate awareness of that cost in the minds of all those who paid income tax” (ibid). The design of this tax was complex and collected revenues according to a “2-2-2” formula: “2 per cent on personal income, 2 per cent on corporate income, and 2 per cent from general budgetary revenue, all to be deposited in a special OAS fund” (ibid). It became too complex to administer and was eliminated in the 1970s. Since then, the OAS is funded by general revenue.

11 See House of Commons Debates, 27-1, vol 10 (5 December 1966) at 10707 (Hon E A MacEachen), online: [perma.cc/2UCD-XUVZ].

12 See Government of Canada, “Guaranteed Income Supplement: How much you could receive” (5 October 2023), online: Government of Canada [https://perma.cc/YH6F-NWP2].

13 Ken Battle, “Child Benefit Reform: A Case Study in Tax-Transfer Integration” (1999) 47 Can Tax J 1219 at 1222.

14 Felicite Stairs, “The Canada Child Tax Benefit: Income Support and the Tax System” (1999) 14 JL & Soc Pol’y 123 at 128, DOI: https://doi.org/10.60082/0829-3929.1071. See also Jinyan Li & Jacklyn Neborak,“Tax, Race and Child Poverty: Improving the Canada Child Benefit Program” (2018) 28 JL & Soc Pol’y 67, DOI: https://doi.org/10.60082/0829-3929.1345; Battle, ibid. Jonathan R Kesselman, “Credits, Exemptions, and Demogrants in Canadian Tax-Transfer Policy” (1979) 27 Can Tax J 653; Jonathan R Kesselman, “The Child Tax Benefit: Simple, Fair, Responsive?” (1993) 19 Can Pub Pol’y 109, DOI: https://doi.org/10.2307/3551677; Kevin Milligan, “The Tax Recognition of Children in Canada: Exemptions, Credits, and Cash Transfers” (2016) 64 Can Tax J 601 [Milligan, “The Tax Recognition of Children in Canada”].

15 See Tillotson, Give and Take, supra note 9 at 175. Tillotson states: “in the face of tax resistance and protest, changes in the law were meant to build consent to the new level of personal income taxation, mainly among working-class and modestly paid middle-class Canadians. A similar purpose was served by the Family Allowances Act of 1944.”

16 Ibid at 201. Tillotson states:

There are reasons to distinguish among methods of delivering social assistance, but in 1942-45, when these tax and welfare measures were being designed and first delivered, the tax dimension of the story indicates that personal income tax relief, inflation control, and social spending had common origins – the new ideology of social security.…The Liberals’ tax program connected social security and stabilization policy, and their response to lower-income Canadians’ tax resistance became an occasion to explain those connections.

17 RSC 1985, c 1 (5th Supp). Overall, the trend in the tax recognition of children is moving away from rewarding parents for their services of raising children or providing them with financial support towards investing in children on economic and social policy grounds. See Li & Neborak, supra note 14.

18 See Canada Revenue Agency, “Canada child benefit (CCB) – calculation sheet for the July 2021 to June 2022 payments (2020 base year)” (3 May 2021), online: [https://perma.cc/PM8Q-TMSE].

19 See Department of Finance Canada, Report on Federal Tax Expenditures: Concepts, Estimates and Evaluations 2022, Catalogue No F1-47E-PDF (Department of Finance Canada, 22 April 2022) [Report on Federal Tax Expenditures 2022] at 145. Other support measures in the Income Tax Act include: (a) Disability Supports Deduction to recognize the costs incurred by taxpayers with disabilities for disability supports required to enable them to earn business or employment income or to attend school; (b) preferential treatment of Registered Disability Savings Plans; (c) Medical Expense Tax Credit; (d) Infirm Dependent Credit; and additional amounts on account of disability in Child Care Expense deduction, Caregiver Credit, Canada Child Benefit, Canada Workers’ Benefit, First-time Home Buyers’ Tax Credit, and Home Accessibility Tax Credit. Government support outside the Income Tax Act includes Canada disability savings grants and Canada disability savings bonds under the Canada Disability Savings Act, SC 2007, c 35.

20 “Families caring for eligible children with severe and prolonged impairments may claim an additional amount [$5,053 in 2021] as a supplement to the [Disability Tax Credit].” This supplement amount “is reduced dollar-for-dollar by the amount of child care or attendant care expenses in excess of $2,959 (for 2021) that is claimed under…” section 63 for child care expenses and section 64 for disability supports or the medical expense tax credit under section 118.3. See Report on Federal Tax Expenditures 2022, ibid at 145.

21 Ibid.

22 See Statistics Canada, Disaggregated trends in poverty from the 2021 Census of Population, by André Bernard & Xuelin Zhang, Catalogue No 98-200 X, (Statistics Canada, 9 November 2022).

23 See Income Tax Act, supra note 17, ss 2, 3.

24 Richard M Bird & Eric M Zolt, “Taxation and Inequality in Canada and the United States: Two Stories or One?” (2015) 52 Osgoode Hall LJ 401 at 403, DOI: https://doi.org/10.60082/2817-5069.2815.

25 Ibid at 404.

26 Ibid.

27 For further discussion on fiscal contract and taxation, see e.g. James M Buchanan, “Taxation in Fiscal Exchange” (1976) 6 J Pub Econs 17, DOI: https://doi.org/10.1016/0047-2727(76)90038-4; Jeffrey F Timmons, “The Fiscal Contract: States, Taxes, and Public Services” (2005) 57 World Politics 530, DOI: https://doi.org/10.1353/wp.2006.0015; Commission on Taxation and Welfare, Foundations for the Future: Report of the Commission on Taxation and Welfare (Government of Ireland, 2022).

28 For further information, see Edward D Kleinbard, We Are Better than This: How Government Should Spend Our Money (Oxford University Press, 2014); Molly C Michelmore, Tax and Spend: The Welfare State, Tax Politics, and the Limits of American Liberalism (University of Pennsylvania Press, 2012), DOI: https://doi.org/10.9783/9780812206746.

29 See David Tough, The Terrific Engine: Income Taxation and the Modernization of the Canadian Political Imaginary (UBC Press, 2018) at 3-5, DOI: https://doi.org/10.59962/9780774836791.

30 See e.g. Shirley M Tillotson, Contributing Citizens: Modern Charitable Fundraising and the Making of the Welfare State, 1920-66 (UBC Press, 2008), DOI: https://doi.org/10.59962/9780774814751; Colin Campbell & Robert Raizenne, A History of Canadian Income Tax, Volume 1: The Income War Tax Act 1917-1948 (Canadian Tax Foundation & Osgoode Society for Canadian Legal History, 2022).

31 See ibid.

32 See Department of Finance Canada, Annual Financial Report of the Government of Canada 2019-2020, Catalogue No F1-25E-PDF (Department of Finance Canada, 1 March 2020) at 15.

33. Ibid at 17-18.

34 Tillotson, Give and Take, supra note 9 at 197-198.

35 Campbell & Raizenne, supra note 30 at 235.

36 Livio Di Matteo, A Federal Fiscal History: Canada, 1867-2017 (Fraser Institute, 2017) at 35.

37 Ibid at 48. See also Livio Di Matteo, “Major Changes to the Federal Personal Income Tax: 1917-2017” in William Watson & Jason Clemens, eds, Zero to 50 in 100 Years: The History and Development of Canada’s Personal Income Tax (Fraser Institute, 2017) 11 at 13 [Di Matteo, “Major Changes”].

38 Ibid at 47.

39 For the rate for 1971, see Harry Heward Stikeman, Stikeman Income Tax Act Annotated (Richard De Boo, 1971), s 32(1). For the rate for 1972, see Harry Heward Stikeman, Stikeman Income Tax Act Annotated: Tax Reform Edition (Richard De Boo, 1972), s 117. For the rate for 1987, see Department of Finance Canada, Income Tax Reform (Department of Finance Canada, 18 June 1987) at 5. For the rate for 1988 and 2016, see Richard W Pound, ed, Stikeman Income Tax Act Annotated, 72nd ed (Thomson Reuters, 2022), s 117(2). For an overview of the history of the personal income tax, see William Watson & Jason Clemens, eds, Zero to 50 in 100 Years: The History and Development of Canada’s Personal Income Tax (Fraser Institute, 2017).

40 See Di Matteo, “Major Changes,” supra note 37 at 13.

41 See Mark Milke, Who Pays Income Tax? (Canadian Taxpayers Federation, 2017) at 1, 7.

42 For the source of the majority of the data, see Report on Federal Tax Expenditures 2022, supra note 19.

43 Employment and Social Development Canada, Canada Pension Plan/Old Age Security Quarterly Report – Monthly Amounts and Related Figures From October to December 2019 (Employment and Social Development Canada, 30 September 2019) at 2. This value is for the number of benefits given out in July 2019.

44 Department of Finance Canada, Budget 2019: Investing in the Middle Class, Catalogue No F1-23/3E-PDF (Department of Finance Canada, 19 March 2019) at 289.

45 Department of Finance Canada, Budget 2022: A Plan to Grow Our Economy and Make Life More Affordable, Catalogue No F1-23/3E-PDF (Department of Finance Canada, 7 April 2022) at 188.

46 The Canada Workers Benefit provides income support to low-income workers as employees or self-employed individuals. The rationale was to “reward and strengthen incentives to work” and “help people over the welfare wall and help them achieve the dignity and independence that comes with a job.” House of Commons Debates, 39-1, No 124 (20 March 2007) at 1145, 1155 (Diane Albonczy), online: [perma.cc/6KDN-7A4G]. It was promised to help lift “tens of thousands of low-income workers out of poverty.” House of Commons Debates, 42-1, No 268 (28 February 2018) (Right Hon Justin Trudeau), online: [perma.cc/YRX9-DC3S]. Individuals aged nineteen or older not attending school full-time are eligible. In 2021, the benefit “is equal to 27% of each dollar of earned income in excess of $3,000 to a maximum amount of $1,395 for single individuals without dependents and $2,403 for families (couples and single parents). The CWB [benefit] is phased out at a rate of 15% of each dollar of adjusted net income above thresholds of $22,944 for single individuals without dependents and $26,177 for families.” See Report on Federal Tax Expenditures 2022, supra note 19 at 90.

47 Section 122.5 of the Income Tax Act provides income support to about 10.5 million individuals in the name of the GST–HST credit. It was introduced upon the introduction of the GST, a tax that is regressive by taxing goods and services consumed by low-income individuals. The GST credit helps reduce the regressivity of the GST by offsetting the GST paid by low-income individuals. This benefit is assessed by the CRA based on the information on the tax returns. For the 2021-2022 fiscal year, based on net family income reported for the 2020 taxation year, the amount of annual benefit is as follows: a basic adult credit of $299; a basic child credit of $157 for each child; and an additional credit of $157. The amount of benefit is reduced for individuals and families with annual incomes over $38,892. See Report on Federal Tax Expenditures 2022, supra note 19.

48 See Daniel Béland et al, Fiscal Federalism and Equalization Policy in Canada: Political and Economic Dimensions (University of Toronto Press, 2017).

49 Béland & Marier, “Universality,” supra note 10 at 104.

50 See Milligan, “The Tax Recognition of Children in Canada,” supra note 14 at 608-09.

51 Richard M Bird & J Scott Wilkie, “Tax Policy Objectives” in Heather Kerr, Ken McKenzie & Jack Mintz, eds, Tax Policy in Canada (Canadian Tax Foundation, 2012) 2:1 at 2:3. See also John Ralston Saul, A Fair Country: Telling Truths about Canada (Viking Canada, 2008) at 303. Saul states, “When Canadians are asked—as citizens, not as representatives of interest groups or as employees—what lies at the heart of their civilization, they are most likely to reply: fairness and inclusion.”

52 See Jinyan Li, Joanne Magee & J Scott Wilkie, Principles of Canadian Income Tax Law, 10th ed (Thomson Reuters, 2022) at 49-76.

53 Harvey J Krahn, Graham S Lowe & Karen D Hughes, Work, Industry & Canadian Society, 5th (Thomson Nelson, 2006) at xxi.

54 See Campbell & Raizenne, supra note 30.

55 In 2020, the aggregate total income of individuals was $1,609,095 million, the aggregate employment income was $1,053,178 million, and self-employment income was $57,173 million. See Statistics Canada, Income of individuals by age group, sex and income source, Canada, provinces and selected census metropolitan areas, (Statistics Canada, 2 May 2023) at Table 11-10-0239-01, online: www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110023901, DOI: https://doi.org/10.25318/1110023901-eng.

56 The minimum age for qualifying for the OAS–GIS (which is originally seventy years old and now sixty-five years old) coincides with the general age of retirement. For discussion on work disincentives, see e.g. George F Break, “Income Taxes and Incentives to Work: An Empirical Study” (1957) 47 Am Econ Rev 529; Thomas MaCurdy, “Work Disincentive Effects of Taxes: A Reexamination of Some Evidence” (1992) 82 Am Econ Rev 243.

57 See House of Commons Debates, 21-2, vol 4 (29 June 1950) at 4441 (Mr Drew), online: [https://perma.cc/JGY9-GTTJ].

58 See Tillotson, Give and Take, supra note 9 at 249.

59 Note, however, the clawback introduced in 1989 was defended on the ground of progressivity—saving money from the rich to pay benefits to the poor. Only a small portion of seniors are excluded from receiving the benefit due to their high income. See Béland & Marier, “Universality,” supra note 10 at 107.

60 See Kourtney Koebel & Dionne Pohler, “Expanding the Canada Workers Benefit to Design a Guaranteed Basic Income” (2019) 45 Can Pub Pol’y 283 at 287, DOI: https://doi.org/10.3138/cpp.2019-016.

61 Alison Dudu et al, “Is the Canada Child Benefit an effective policy? Impacts on earnings and incomes” (28 October 2021), online: [perma.cc/S2VX-4J3P]. For further discussion about work disincentives and child benefit, see Wanda A Wiegers, “The National Child Benefit: Social Inequality Under the New ‘Social Union’” (2001) 33 Ottawa L Rev 25.

62 See e.g. Tammy Schirle, “The Effect of Universal Child Benefits on Labour Supply” (2015) 48 Can J Econs 437, DOI: https://doi.org/10.1111/caje.12132; Kourtney Koebel & Tammy Schirle, “The Differential Impact of Universal Child Benefits on the Labour Supply of Married and Single Mothers” (2016) 42 Can Pub Pol’y 49, DOI: https://doi.org/10.3138/cpp.2015-049.

63 See e.g. Income Tax Act, supra note 17 at ss 56(2), 74.1-74.5, 75, 120.4. Section 56(2) corresponds to the indirect payment rules, ss 74.1-74.5 and s 75 are the attribution rules, and s 120.4 is the tax on shifted income rule.

64 For a summary of each, see Report on Federal Tax Expenditures 2022, supra note 19.

65 Income Tax Act, supra note 17.

66 Kevin Milligan, “All in the Family: Assessing Need in the Fiscal Unit” (2022) 70 Can Tax J 209 at 213-214, DOI: https://doi.org/10.32721/ctj.2022.70.supp.milligan [Milligan, “All in the Family”].

67 See 2006 TCC 198; Sookochoff v The Queen, 2020 TCC 131 [Sookochoff]. In respect of a married couple living separate and apart since their respective children did not get along, the Court in Sookochoff found that the taxpayers’ decision to maintain separate households was made to preserve their relationship, not because their relationship had broken down. Accordingly, the Court held that the taxpayers met the definition of “cohabiting spouse or common-law partner,” and that their income had to be pooled for purposes of computing the CCB.

68 (UK), 30 & 31 Vict, c 3, s 53, reprinted in RSC 1985, Appendix II, No 5.

69 Canada v Alta Energy Luxembourg SARL, 2021 SCC 49 [Alta Energy]; Inland Revenue Commissioners v Duke of Westminster, [1935] UKHL 4 (UKHL).

70 See e.g. Canada Trustco Mortgage Co v Canada, 2005 SCC 54; Alta Energy, ibid.

71 See Li, Magee & Wilkie, supra note 52 at 570-94.

72 Ibid at 581-82.

73 Richard M Bird, “Administrative Constraints on Tax Policy” in Cedric Sandford, ed, Further Key Issues in Tax Reform (Fiscal Publications, 1998) 183 at 183-84.

74 Jennifer Robson & Saul Schwartz, “Policy Forum: Should the Canada Revenue Agency Also Be a Social Benefits Agency?” (2021) 69 Can Tax J 87, DOI: https://doi.org/10.32721/ctj.2021.69.1.pf.editors; Marina Flaim, Gillan Petit & Lindsay M Tedds, “Canada Revenue Agency and Tax Administration: Re-envisioning Tax and Benefit Administration in the Age of Digitalization” (15 August 2021), online: [perma.cc/Y5FE-7PZT].

75 Supra note 2.

76 See e.g. Canada Transportation Act, SC 1996, c 10, ss 1, 2, 169.5; Accessible Canada Act, SC 2019, c 10, s 2; Pension Benefits Standards Act, 1985, RSC 1985, c 32 (2nd Supp), s 2; Canada Emergency Student Benefit Act, SC 2020, c 7, s 1; Canada Student Loans Act, RSC 1985, c S-23, s 2; Canada Student Financial Assistance Act, SC 1994, c 28, s 2; Pension Act, RSC 1985, c P-6, s 3; Veterans Well-being Act, supra note 6, s 2; Pooled Registered Pension Plans Act, SC 2012, c 16, s 35; Canadian Human Rights Act, RSC 1985, c H-6, s 25; Canada Pension Plan, supra note 6, s 42(2); Motor Vehicle Safety Act, SC 1993, c 16, s 2; Employment Equity Act, SC 1995, c 44, s 3.

77 Income Tax Act, supra note 17, s 118.3(1)(a.1).

78 See Radage v R, [1996] 3 CTC 2510 at 2525-28 (TCC). In Radage v R, the Tax Court of Canada stated that “[t]he court must, while recognizing the narrowness of the tests enumerated in sections 118.3 and 118.4, construe to the provisions liberally, humanely and compassionately and not narrowly and technically” (at 2528).

79 Accessible Canada Act, supra note 76 at s 2. This is similar to Article 1 of the United Nations Convention on the Rights of Persons with Disabilities, 12 December 2006, UNTS 2515.

80 The Quebec Basic Income Program is tied to a person’s “severely limited capacity for employment.” See Samuel Ragot, “The New Québec Basic Income Program: A Useful Set of Policy Directions for the Canadian Disability Benefit” (2024) 61 Osgoode Hall LJ at 513.

81 See Statistics Canada, National Household Survey Dictionary, 2011, Catalogue No 99-000-XWE, (Statistics Canada, 1 April 2016) at Market Basket Measure (MBM), online: www12.statcan.gc.ca/nhs-enm/2011/ref/dict/pop165-eng.cfm. According to Statistics Canada, “the Market Basket Measure (MBM) is a measure of low income based on the cost of a specified basket of goods and services representing a modest, basic standard of living.” A key feature of the MBM is that “it is more sensitive than other low-income measures to geographical variations in the cost of many typical items of expenditure” and “the MBM (Market Basket Measure) threshold recognizes differences in the cost of the basket between similar sized communities in different provinces and between different geographical regions within provinces.”

82 CDBA, supra note 2, s 11(1.1).

83 For a definition and discussion of the term “eligible spouse,” see Part II(D)(3), above.

84 Auditor General of Canada, 2021 Reports of the Auditor General of Canada to the Parliament of Canada: Report 6 – Canada Emergency Response Benefit, Catalogue No FA1-27/2021-1-6E-PDF (Reports of the Auditor General of Canada, 2021), online: www.oag-bvg.gc.ca/internet/English/parl_oag_202103_01_e_43783.html.