This post was written in 2013. It reflects on a timeless frustration for Canadians. Why does the government tax its benefit payments? Using examples like the Universal Child Care Benefit, it raises questions about policy design, fairness, and the cost of administration. While some programs have changed since then, the deeper issues around benefit taxation and clawbacks continue today.
TLDR: Governments tax federal benefits so they can exempt higher income folks from programs without explicitly saying it out loud.
This is an interesting topic for me. I am asking specifically, why does a Government tax Benefits that they pay?
An example is the Child Tax Benefit was not taxed (i.e. you don’t pay income tax on it), however the Universal Child Care Benefit was taxable income. The benefits themselves are quite similar. One is calculated based on your previous year’s income. It may (or may not) be paid to you tax-free on that basis. The other is a payment everyone gets. It is then clawed back. It is counted as part of your taxable income. If you make too much money, you don’t receive it at all. It’s no wonder folks make mistakes on their taxes with these seemingly similar systems with wildly different tax rules.
The Cost of Collection?
How much does the government spend on collecting these taxes? The CRA is one of the larger government departments. A significant amount of money must be spent on determining who owes what. There are also costs involved in collecting that money in most cases. But what if all government benefits were effectively tax-free?
It is already being done with some benefits, why are some taxed then? CPP payments and EI Payments contribute significantly to the Government's income stream. I realize if they were untaxed, it would take a big chunk out of this stream. However, if the Government simply paid less, would it not end up being the same thing? There must be a way to make this all a zero sum game (i.e. the Government gets to keep their money, but folks still get their benefits as well).
You give out money. Then you must figure out a way to retrieve it. You think the recipients didn't deserve that much. This seems a very odd way to do business (in my opinion), isn't it? Yes, I am being a little simplistic in my statements, but why must it be some complex argument?
Why Government Benefits are Taxed?
I’m very cynical. I think they like to announce how they are “giving” money to things like the Universal Child Care Benefit because it sounds good. Then they are quietly taxing it all back again.
It’s dangerous for someone with a good income to go off on maternity/parental leave mid-year or later, too. Because EI is taxable and not much is withheld at source some new parents find themselves having to pay tax unexpectedly when they file the following April.
Hi bigcajunman, I would like to share info about U.S tax…………… Many people think that government benefits are tax-free, but that isn’t necessarily the case. In fact, several of the most common benefits claimed by Americans – unemployment, Social Security, and disability – do generate a tax bill. If you receive government benefits, understanding and keeping track of what will be taxed is key to getting the most out of the program and not being in for any unpleasant surprises.
While I object to the idea that my mind may work in any fashion like yours does :), I’ve often wondered the same thing myself!
It probably has something to do with definitions of ‘income’ or perhaps different levels of government being taxed. And probably the fix to make this stuff work sensibly would be more expensive than just leaving it as it is.
I too find it disconcerting that we might find common ground on a topic, but I am sure it is a short lived situation 😉
That is very much government thinking, “… we can’t change things it might end up costing more…”, not sure if it is correct, but it is a common argument I hear these days (e.g. Tax reform will end up costing too much).