INDEPTH: PERSONAL FINANCE
Clawbacks: How governments give and take
CBC News Online | May 5, 2006
Over the years, Ottawa and the provinces have developed a variety of programs designed to put more money into the hands of citizens in targeted groups. Old Age Security payments, the Guaranteed Income Supplement, the National Child Care Benefit supplement and some federal and provincial tax credits are deliberately aimed at
boosting the after-tax incomes of specific members of society.
But the extra money from these and other programs usually come with serious strings and conditions attached. These footnotes often have the effect of requiring people to pay back government payments they've already received. They may also have to watch the "benefit"
get reduced or eliminated when another benefit program is applied for – even when the other benefit comes from a different level of government.
Welcome to the world of the clawback. It's a place many Canadians have journeyed to. Some know they're about to make the trip and plan accordingly. But others suddenly find themselves facing an unexpected surprise.
The following are clawbacks that affect eligibility for some of the best-known social programs in Canada:
National Child Care Benefit supplement
Ottawa provides parents with money to help them raise their kids. The main federal programs are the Canada Child Tax Benefit (CCTB) and the National Child Benefit Supplement, which is part of the CCTB. About 40 per cent of Canadian families receive the supplement, which is aimed at those with lower incomes.
But most provinces and territories claw back part, or all, of the supplement from welfare families by reducing welfare or similar social assistance payments. The money clawed back is usually redirected to other programs and services that benefit low-income families with children, but not specifically families on welfare. Ontario Premier Dalton McGuinty has promised to end the supplement clawback in that province, but has so far just "capped" it at the 2003 rate.
In December 2004, three families launched a Charter challenge of the supplement clawback, claiming that it violates fundamental rights of equality and security since low-income working families don't have their supplements clawed back – only those on welfare.
The Conservatives are launching a national child-care allowance on July 1, 2006, that will give families $1,200 a year per child under the age of six. It will be taxed in the hands of the parent with the lower income.
Ottawa says the new payments won't trigger a clawback from modest-income parents receiving such income-tested federal-funded benefits as the Child Tax Benefit or the GST credit. The new allowance also won't affect deductions for child-care expenses.
What isn't yet clear is whether this allowance, like the National Child Care Benefit supplement, might result in a clawback of welfare benefits by some provinces.
Old Age Security payments
There was a time when every Canadians 65 or older could look forward to a monthly Old Age Security cheque. It's now worth a maximum of $485 a month. But for seniors lucky enough to have a better-than-average income in retirement, the OAS cheques get smaller.
OAS payments are clawed back when individual net income is greater than $60,806 (as of 2005). The clawback amounts to 15 per cent of the amount of net income over the $60,806 threshold. So old age security payments would cease altogether at about $100,000 of income.
That's why senior couples may wish to explore income-splitting strategies. For instance, couples can arrange to split Canada Pension Plan retirement payments equally, even if only one spouse worked outside the home and paid into the CPP. More information on pension sharing is available from Social Development Canada. (A link is at the right.) Younger couples (where one earns considerably more than the other) can also use spousal RRSPs to try to keep both retirement incomes below the clawback threshold.
Guaranteed Income Supplement
The federal Guaranteed Income Supplement (GIS) is paid to individual Canadians who generally have no other income beyond their Old Age Security payments and perhaps a small pension. For a single retiree, annual income cannot exceed $14,256 (2005) and the maximum GIS benefit is $593 a month. For couples, all GIS benefits stop at a combined annual income of $34,368. For those eligible for the GIS, each dollar of additional income reduces GIS payments by 50 cents. What many people don't realize is that payments from a matured RRSP, either through a RRIF or annuity, are fully taxable.
Since about half of GIS recipients pay income tax, the combined effect of paying tax on the RRSP payments and the reduction of GIS benefits results in an unexpectedly horrendous situation – an effective marginal tax rate of 75 per cent on those RRSP benefits. Call it a clawback by another name.
Little wonder that a 2003 study by the C.D. Howe Institute called RRSPs a "poor investment" for those at the lowest end of the income spectrum. Many groups are calling for Ottawa to bring in Tax Prepaid Savings Plans (TPSPs) as one solution to the GIS/RRSP clawback. Under TPSPs, contributions are not tax deductible. But when money is eventually withdrawn from these plans in retirement, it is tax-free.
People should also be aware that once the GIS disappears, so do some other benefits like drug and rent subsidies and provincial aid programs. For example, the one-time federal Energy Cost Benefit of $125 was sent to eligible seniors in early 2006 – but only to those who qualified for the GIS.
Employment Insurance payments
Most insurance pays off regardless of one's income. Not EI. For those who received regular EI benefits but managed to work for most of the year, some or all of the benefits may have to be repaid.
For those whose net income is above $48,750 (2005), they'll have to give back 30 per cent of the lesser of either 1) their net income in excess of $48,750; or 2) the total regular benefits paid in the taxation year. So if they made $55,000 and received $4,000 in EI benefits, $1,200 would be clawed back (30 per cent of $4,000).
Special situations
Can one level of government claw back another? Sure. Equalization payments and other transfer payments made by Ottawa to the provinces can be adjusted to reflect changing circumstances at the provincial level.
Under the current equalization formula, so-called "have-not" provinces get less equalization money if revenues from their non-renewable natural resources increase. There are proposals to address what some have called a clawback for success.
The Conservatives proposed during the election campaign to not count resource revenues in the equalization calculation – something that would help resource-rich but otherwise not-so-rich Saskatchewan.
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