Price of Earning More: The Hidden Tax on Parents and Senior Canadians

November 3, 2025 – For some parents and seniors, taking a second income, working more or drawing extra pension income can mean losing most of every extra dollar of income to taxes and benefit clawbacks. This can significantly weaken incentives to work or save, according to a C.D. Howe Institute report.

In “The Clawback Trap: How Canada’s Benefit System Can Undermine Work and Saving,” Alex Laurin and Nicholas Dahir warn of a hidden tax for Canadians: the reduction of income-tested benefits that can push effective tax rates very high. High effective tax rates can discourage work and reduce the incentive to save for retirement, particularly for those most affected by high effective tax rates – lower-income parents and seniors.

The authors compute marginal effective tax rates (METRs) – i.e. the loss from additional taxes and benefit reductions on each extra dollar of earnings – and participation tax rates (PTRs) – i.e. the cumulative effect of all taxes and lost cash benefits on a person’s total annual earnings from prospective work.

“For some seniors, working more or drawing extra pension income can mean losing much or even most of every extra dollar,” says Alex Laurin, Vice-President and Director of Research for the C.D. Howe Institute. “In some narrow income ranges, METRs may even exceed 100 percent on very modest pension income.”

High participation tax rates also make working less rewarding for a parent considering entering the workforce. In some provinces, particularly Quebec and Ontario, participation tax rates at low-income levels can be very high, meaning half or more than half of a second income is lost. Childcare costs compound the combined impact of taxes and benefit clawbacks, so childcare subsidies can make a significant difference.

“For Canadians, working less limits opportunities to gain experience and develop essential skills,” said Nicholas Dahir, Research Officer for the C.D. Howe Institute. “These effects compound over time, contributing to Canada’s already lagging productivity and persistent wage challenges.”

The report recommends that federal and provincial policymakers pay special attention to effective tax rates when they consider changes to the tax-and-transfer system. Any further expansion of the targeted transfer system should be approached with a broader analysis of the impact on parents’ and seniors’ work decisions. Income-averaging provisions for highly fluctuating incomes could be explored, as well as tax relief for childcare expenses – a key factor in family paid work decisions.

Read the Full Report

For more information, contact: Alexandre Laurin, Vice-President and Director of Research, C.D. Howe Institute; Nicholas Dahir, Research Officer, C.D. Howe Institute; and Raquel Schneider, Communications Officer, C.D. Howe Institute, 647-805-3918, rschneider@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

Want more insights like this? Subscribe to our newsletter for the latest research and expert commentary.