Men benefit most from tax breaks in Canada, study shows. But does it matter?
Men capture the vast majority of the benefits from federal income tax breaks, according to a new report by the Canadian Centre for Policy Alternatives.
The study looked at 45 measures that currently allow Canadians to lower their federal tax bill and found that for over 80 per cent of them, the payout is larger for men than for women.
The analysis is a “first stab” at examining the impact of tax breaks, which usually receive little public scrutiny compared to programs that result in government spending, author David Macdonald said.
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But what the report shows is that the federal income tax systems tends to reproduce differences that already exist, such as the fact that women tend to have lower lifetime earnings and live longer than men. It stops short of showing that taxes make things worse.
For example, among the larger tax breaks that mostly benefit men are the employee stock option deduction and the foreign tax credit for individuals. The first is a tax break for employees who are given the option of buying shares of their employer at a preferential price. Because stock options are a common form of compensation for executives of public companies, who are mostly men, 77 per cent of this $755-million tax break flows to men, the report finds.
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Something similar holds for the foreign tax credit, which allows Canadians working abroad to deduct income taxes paid in other countries from their Canadian tax toll. Almost 80 per cent of the benefits of this tax break, which costs $1.49 billion a year in foregone government revenue, is claimed by men, the study shows.
Macdonald said this is probably because men are more likely to be occupying the higher-paying jobs that lead to corporate transfer abroad. It may also reflect the fact that Canadian spouses may have more difficulty working and earning income in an another country.
But among the tax breaks with the heaviest gender imbalance were Registered Retirement Savings Plans (RRSPs) and pension-income splitting.
“The RRSP system in 2018 was costing women more in taxes upon withdrawal than they were saving in refunds from RRSP contributions,” the report reads.
Canadians can use their RRSP contributions to lower their taxable income. In general, the more money you put into an RRSP (up to a cap) and the higher your tax bracket, the bigger the tax benefit. Since men tend to earn more than women, they are both more likely to have extra income to stash into their RRSPs and more likely to reap the larger tax savings that come with being in a higher tax bracket. Overall, men receive 70 per cent of the benefit of the tax deduction on RRSP contributions, according to the report.
But Canadians usually have to pay tax when they withdraw from the money that’s been growing in an RRSP. Macdonald found that men absorbed only 57 per cent of that tax burden.
“This could be because women live longer than men and are therefore paying taxes on retirement income, some of it transferred to them on the death of their spouse, for a longer period.” he wrote. “It may also be more beneficial for couples in retirement to have the lower income earner, usually a woman, withdrawing spousal retirement funds so that they are taxed at a lower rate.”
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Pension-income splitting allows older couples in different tax brackets to save tax dollars by shifting income from one spouse to the other. Since women are usually the lower income earners, they are on the receiving end of the income split, which raises their taxes.
“Based on this paper’s metric, 100 per cent of the benefit from pension income-splitting goes to men,” the report reads.
But does that hurt women in practice?
For couples, “individual taxation often takes a backseat to family taxation,” said Rona Birenbaum, president of financial planning firm Caring for Clients.
Most families are focused on lowering the overall family tax bills rather than which individual tax breaks flow to whom, Birenbaum added.
While it’s true that if a woman outlives her husband and inherits his registered savings, she’ll have to pay more tax on the withdrawals as a result of living longer, “I’m not sure that this is a problematic outcome,” she said.
And the real-life impact of pension-income splitting has little to do with the potential impact of the Harper-era family tax cut, which allowed parents with children under 18 to split their income to save on taxes. The tax break, which was later scrapped, effectively provided an incentive for lower-income spouses — most likely to be women — to stop working, a report by the Parliamentary Budget Officer found.
Still, Macdonald argues that the tax system could do better than just reflect pre-existing socio-economic gender gaps.
Indeed, some of the current federal tax breaks actively reduce those imbalances.
The eligible dependent tax credit, for example, is a big help to single-parent families, which tend to be headed by women. The credit allows taxpayers to claim a tax break usually reserved to couples for a dependent child, in the absence of a spouse. Women receive 78 per cent of the $960 million that this credit costs the government every year.
The results of the study may also suggest that women aren’t getting enough financial and tax planning advice during their working year, said Birenbaum.
“The financial industry is still trying to figure out how to attract and serve the female demographic, which suggests that women have been under-served from an advisory standpoint, historically,” she said.