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Taxing Government Benefits

in CRA, Government

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 is not taxed (i.e. you don’t pay income tax on it), however the Universal Child Care Benefit is taxable  income. The benefits themselves are quite similar, yet one is calculated on the basis of your previous year income and may (or may not) be paid to you on that basis, tax-free because the other is a payment everyone gets that is then clawed back as it is counted as part of your taxable income (unless you make too much money, in which case 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.

Taxable all of them

Taxable all of them

How much does the government spend on collecting these taxes? The CRA is one of the larger government departments, and there must be a great amount of money spent on calculation of who owes what and collection of 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? I realize things like CPP payments, EI Payments and such being untaxed would take a big chunk out of the Government’s income stream, but 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, and then you must figure out a way to take it back because you think the recipients didn’t deserve that much, 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 an argument?

{ 4 comments }

  • Bet Crooks July 29, 2013, 4:27 PM

    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.

    Reply
  • small business loan MinD July 29, 2013, 2:21 PM

    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.

    Reply
  • LifeInsuranceCanada.com July 29, 2013, 7:46 AM

    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.

    Reply
    • bigcajunman July 29, 2013, 8:14 AM

      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).

      Reply

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