Taxing employer-provided health and dental benefits shrink the disposable income of middle-income earners across the country by hundreds of dollars every year, while boosting the federal net balance by $3.8 billion.
The figures come from the Parliamentary Budget Officer (PBO), which did the math at the request of two parliamentarians. The Liberal government of Prime Minister Justin Trudeau appeared to flirt with the idea of introducing a new tax on health and dental benefits in late 2016, only to rule out the option in 2017. There was no mention of such a measure in either the 2017 or the 2018 federal budget.
Still, the Liberals remain committed to a broad review of so-called tax expenditures, which carve out exemptions, deductions or credits for specific groups of taxpayers and lower government revenues. Unlike other types of employee benefits, health and dental contributions paid by employers aren’t computed as part of an individual’s taxable income and thus constitute a tax expenditure.
Some 13.5 million people currently enjoy the health and dental benefits tax exemption. Another 3.5 million live in Quebec, where the benefits are taxable.
Lifting the exemption on health and dental benefits for all Canadians would generally increase the amount they pay in personal tax and decrease what they receive in federal benefits. This holds for both employees and retirees who receive health and dental benefits along with their employer pension.
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Here’s what the report shows:
Changes to disposable income
The vast majority of employees would see their disposable income decrease if the taxman started including their health benefits in their taxable income, a chart in the report suggests. The graphic, which shows what could happen to the average single, 30-year-old Ontarian with 100 per cent employer-paid health benefits, reveals the disposable income dip is between $200 and $450 a year for earnings of, roughly, $30,000 and up.
High-income Canadians would shoulder the majority of the costs, the PBO noted. But even those with middling and low incomes would take a hit through a combination of higher personal income taxes, Canada Pension Plan (CPP) contributions and lower federal government benefits, such as the Canada Child Benefit (CCB) and Old Age Security (OAS) payments.
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An employee with the average extended healthcare plan paid entirely by the employers, for example, would pay $70 more a year for CPP, according to the report. But the measure would make no difference for Canadians earning more than the $55,900 a year, at which CPP contributions are currently capped.
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Canada Child Benefit
Another example of how the measure would affect low and middle-income families but not the country’s highest earners is the federal child benefit. Since wealthy households are already excluded from the benefit, nothing would change for them in this regard. Less affluent households, however, would see their CCB trimmed back as the inclusion of employer benefits boosts their taxable income levels and triggers a reduction in federal transfers.
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“Depending on the number of children and the family’s income, including employer-paid benefits in net income could decrease the next year’s CCB annual payment by as much as $100 per child,” the PBO said.
Old Age Security
Since some retirees also receive employer-provided health and dental benefits, some of them, too, would likely see a reduction in federal benefits, according to the PBO.
OAS is a federal transfer of up to $880 a month available to all Canadians aged 65 and over, regardless of whether or not they’ve worked through their lives. But the government demands a gradual repayment starting when senior’s annual incomes surpass $74,788. Therefore, including employer-paid healthcare contributions in retirees income would trigger the claw-back for some that currently don’t have to repay any portion of their OAS benefits, the PBO noted.
Still, the increase in OAS repayments would be “relatively small,” adding a mere $47 million to the federal balance, according to the PBO.
Any taxable income boost from counting employer benefits would also trim the Guaranteed Income Supplement (GIS) benefit for low-income seniors, the report noted. However, older Canadians who receive the GIS are less likely to have employer-paid benefits, since these generally come with employer pensions.
Overall impact on government coffers
Taxing health and dental benefits would raise the federal government’s bottom line by $3.8 billion, thanks to a mix of larger inflows from higher taxes and lower outflows due to smaller federal benefit payments. Federal revenues in fiscal year 2017, by comparison, amounted to $293.5 billion.