In an election focused on families, an ‘implicit tax’ on parents is under the radar

Parents who work while on maternity or parental leave lose 50 cents worth of benefits for every $1 they earn. Getty Images

Families have emerged as a key target in the federal election, with all major parties vying for the vote of parents who feel squeezed by high living costs.

Less than two weeks into the campaign, every major contender has unveiled a long list of election promises aimed at households with kids.

The Liberals have, among other things, vowed to boost the Canada child benefit (CCB) — a signature policy of the Trudeau government.

The Conservatives have promised the return of the popular Harper-era tax credits for children’s sports and arts programs and said they would increase the government’s top-up for parents saving to send their children to college or university.

The New Democratic Party wants to eliminate the interest rate on federal student loans and give out more grants, while the Green Party of Canada would make tuition free.

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When it comes to maternity and parental leave, the NDP is promising, among other things, to raise the standard income replacement rate to 60 per cent and introduce the option of taking a shorter leave at a higher rate. The Green Party, for its part, has put forth its Guaranteed Livable Income proposal. And both the Conservatives and the Liberals say they want to make maternity and parental leave benefits tax free.

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But there is one idea that no one has touched yet: dialing back the clawback that parents face when they work to supplement their income while they are on leave.

Currently, the standard rule for parents — as for unemployed workers, who collect benefits under the same Employment Insurance (EI) system — is that the government withholds 50 cents for every dollar earned, up to 90 per cent of your regular weekly earnings. After that threshold, the benefits are deducted dollar for dollar.

The rolling back of the benefits is like “an implicit tax,” said David Gray, a professor of economics at the University of Ottawa.

Most labour economists would probably favour a lower clawback, he said.

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The trimming back of the benefits is meant to discourage people from falling back onto the safety net when they could stand on their own two feet and earn a living on their own, said Jennifer Robson, a professor of public policy at Carleton University.

But, she added, it’s not that simple when the benefits go to a parent who is caring for a new child.

“You can’t quite work full time but maybe you can work a little bit sometimes.”

Being able to squeeze in a bit of paid work here and there, perhaps when the baby is asleep, can be an important way for parents to make ends meet. EI maternity and parental benefits cover only up to 55 per cent of regular earnings. For those who choose to extend parental leave to 69 weeks — or almost 18 months — the rate is even lower, at 33 per cent.

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But the current system creates “all kinds of crazy inequities,” Robson said.

Workers who receive a benefits top-up from their employer, for example, aren’t subject to the clawback. Parents who are collecting rent, cashing in investments or receiving other forms of income that aren’t considered wages are also exempt from the rollback.

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Part of the problem is that parental leave benefits have been lumped into the EI system even though they have very little to do with wage support for unemployed workers.

“Because these benefits are delivered through EI, it’s like one size fits — not parents,” Robson said.

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Gray agrees. The only reason why parental benefits are included in the EI regime, he said, is administrative convenience.

“There should be a separate fund for parental benefits.”

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Parental leave benefits are usually seen as a replacement for earnings forgone by the parent who takes leave. But a better way to think about them is as “the entitlement of the child,” Robson argues.

“That really changes your perspective in terms of, do you need to police whether or not parents are working?” she said.

Transferring parental benefits outside the EI program would allow Canada to move toward the kind of approach adopted by Sweden, where parents have a lot of leeway in how to use an allotted amount of leave time, Robson wrote in a 2017 paper for the Institute on Research for Public Policy.

Parents can take paid time off in blocks of weeks or days or even parts of a day. If mom wants to work for an afternoon, for example, she can choose to claim just the morning.

And making it easier for parents to work part-time while on leave might cost taxpayers less than eliminating the tax on EI benefits, Robson said. That’s because, while reducing the clawback would increase spending on benefits, the income earned by parents would be taxed.

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“Depending on how you design all these things, could it end up being cheaper than, for example, the non-refundable tax credit or even just a blanket tax exemption? It might,” Robson said.

The Liberals, who are proposing to nix federal taxes from parents’ EI cheques, say the policy, combined with the proposed increase to the CCB and other proposed measures, would cost $800 million in 2020-21, rising to $1.2 billion in 2023-24. The Parliamentary Budget Officer (PBO) has not yet released its independent estimate.

The Conservatives have pledged to make parental benefits tax-free by giving parents a non-refundable tax credit of 15 per cent on EI income.

Party Leader Andrew Scheer has said a person earning a salary of $50,000 who then goes on EI benefits after a birth would save about $4,000. The PBO has estimated this proposed tax credit would cost $600 million in lost revenue in the first year alone.

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What it would cost to scale back the clawback for parents who work part-time on leave is trickier to calculate, according to Gray. The impact on government coffers would depend not just on how the policy is designed but how people react to the new incentives.

And even a system that makes it easier for parents to make a few bucks on the side while on leave isn’t, in and of itself, a complete solution, Robson said.

I am a fan of systems that don’t necessarily discourage new parents from working if and when they want to,” she said.

But a regime in which many families have to juggle part-time work with breastfeeding and changing diapers to pay the bills is far from ideal.

If we’re saying that, in order to make ends meet, I’m sorry, you’re going to have to work, then that’s not actually paid leave.”

With files from Global News’ Andrew Russell

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