One day into the 2021 federal election campaign, the Conservative Party of Canada released its full election platform. The Conservatives promised to convert the Child Care Expense Deduction (CCED) into a refundable tax credit (RTC). They also publicly stated that they would cancel the existing signed child care agreements negotiated by the Liberal government that expand child care supply and limit fees. Reminiscent of the 2006 federal election, differing approaches to addressing affordable child care have once again become an important topic for parents across Canada.
What exactly is being proposed by the Conservatives and what does it mean for child care affordability? How will it measure up to universal child care?
We have a vested interest ourselves. Like most working women, we are all mothers of children who are using or have used various forms of child care, including unlicensed care, non-profit licensed care and for-profit licensed care. We have navigated the child care system and, having also lived in various provinces across Canada, are familiar with the various supports for child care affordability from both a personal and professional perspective.
The proposed RTC is intended to replace the existing CCED tax deduction, which operates by lowering the taxable income for the individual claiming eligible child care expenses. The CCED has long been the subject of reform proposals because it is generally regarded as unresponsive, regressive and reinforcing patriarchal gender roles.
A refundable tax credit operates very similarly to a negative income tax system where those eligible receive a cash transfer instead of a reduction in taxable income. The rate at which an RTC pays a benefit is not tied to an individual’s marginal tax rate, but is instead set in the program details. Because it is like a negative income tax, an RTC provides a greater benefit to individuals or families with lower income, including those with zero income. A number of RTCs already exist in Canada’s personal income tax system, the largest being the Canada Child Benefit (CCB).
The RTC benefit proposed by the Conservatives has three important parameters: a maximum reimbursement amount, a tax credit rate and family income. Figure 1 shows the proposed benefit schedule.
There are two things to highlight in figure 1. First, for all families, child care expenses above $8,000 are not eligible for the tax credit. Second, while the family net income in figure 1 ends at $200,000 , there is no upper limit regarding income eligibility. All households who pay child care expenses will receive some amount from the proposed RTC.
Looking at the proposed benefit payment under the Conservative Party’s proposal, families with a net income below $36,570 would receive 75 per cent of their eligible child care expenses up to a maximum annual benefit of $6,000. The maximum benefit and tax credit rate fall in a stepwise fashion as family income rises. For example, households with family net income between $55,535 and $100,225 would receive 60 per cent of their eligible child care expenses, with a maximum benefit of $4,800 ($8,000 multiplied by 60 per cent). Families with net income between $100,225 and $143,884 would receive 57 per cent of their child care expenses with their benefit capped at $4,560. At the top threshold, families with net income of more than $162,975 would receive 26 per cent of their child care expenses, up to a maximum benefit of $2,080.
Does the proposed RTC address child care affordability? In figure 2, we illustrate how the RTC affects the affordability of child care for different families across Canada. Using information on median child care fees, we derive a rough affordability measure in each city represented as a proportion of a family’s income. To do so, we assumed that families have one child in care and pay the median cost of child care for an infant in their respective city.
Figure 2 shows child care affordability in select cities after the RTC is applied. The vertical axis is the per cent of income spent on child care after the benefit from the RTC is accounted for.
A family in Toronto with net income of $30,000 per year and one child, paying the median child care fee of $21,288 per year, would receive the maximum RTC benefit of $6,000 a year. Their net child care expenses are then $15,288, or about 51 per cent of their income.
By comparison, a similar family with net income of $60,000 annually receives the maximum RTC of $4,800, leaving $16,488 in child care fees or about 27 per cent of their income. Although the latter family’s income is two times more than the former’s, its child care expenses as a percentage of their family income is two times less.
There are three main points to take away from this analysis. First, the RTC is progressive in that households with higher incomes receive less of the credit. As a result, the policy change would improve affordability of child care more for lower than higher income families. However, this does not imply that the proposed RTC is superior to other design options. In fact, Jennifer Robson and Tammy Schirle have both provided other design options that they argue are superior to the Conservatives’ proposal.
Second, while the RTC improves on affordability, child care fees are still regressive, with lower income families continuing to pay a higher proportion of their income in child care expenses compared to higher income families. We have previously argued that that regressivity is difficult to address solely through the tax system. Instead, a universal model of child care, such as that being pursued by the Liberal government prior to this election, paired with progressive taxation is a better approach to addressing both regressivity and affordability.
Finally, what is clear from figure 2 is that the proposed RTC will make child care even more affordable in provinces that have already rolled out universal child care, assuming that expenses from provincially subsidized child care are eligible expenses, similar to the CCED. If the Conservatives instead intend to restrict the RTC, as Quebec does with its tax credit, to exclude child care expenses incurred when using a subsidized provider, then this should be made clear.
The provinces of Quebec and Manitoba both already heavily subsidize child care. In Montreal, parents now pay $8.50 a day in subsidized child care and the median cost is $179 a month. A Montreal family with one child and net income of $100,000 would receive $1,289 from the Conservatives’ RTC reducing their child care costs to $72 a month (about $3.60 a day).
The median child care fee for an infant in Winnipeg is $651 monthly. A Winnipeg family with net income of $100,000 would receive an RTC of $4,687 (less than the maximum) reducing their child care costs to $260 a month.
By contrast, the Toronto median child care cost is $1,774 a month. After applying the RTC, a family in Toronto would still pay $1,374 in net child care fees.
The proposed RTC is being presented as a better way to address affordable child care. However, it is clear those jurisdictions with universal child care offer families more affordable care. What we show here is that a universal child care system paired with an RTC would be an even more comprehensive approach to affordable child care across Canada.