Income and wealth inequality is a persistent and growing challenge in Canada. This is occurring at a time when the cost of living has risen sharply and the lowest-income households find themselves without adequate income or savings to afford basic necessities.

Action is urgently needed. To reduce widening disparities and alleviate pressure on the lowest-income households, governments should expand and target income supports to those who need them most, make the tax system more progressive, enhance social-assistance programs and remove systemic barriers that prevent people from accessing these programs.

A growing income and wealth divide

The gap between higher-income and lower-income households has widened. In the fourth quarter of 2023, the top 40 per cent of earners held 64.8 per cent of total disposable income in Canada while the bottom 40 per cent of earners held 18.8 per cent of all disposable income in Canada, a difference of 46 percentage points according to recent data from Statistics Canada. That is a 1.4-percentage-point increase in the gap from the same quarter in the previous year.

On the one hand, the wealthiest Canadians are seeing their incomes grow. The richest 20 per cent of households saw their average disposable income increase from 2022 to 2023 by $11,266, or 6 per cent. This boost came from higher wages and higher returns on investments.

On the other hand, during that quarter, the lowest 20 per cent of households experienced an increase in disposable income between 2022 and 2023 of $93 or 0.3 per cent. Despite increased wages and salaries, lower-income households saw declines in investment income and transfer income: they did not benefit from higher interest rates because they have lower levels of investment and higher levels of debt.

The disparity in levels of wealth is even more pronounced. The richest 20 per cent of Canadians owned 67.7 per cent of the country’s total wealth in the fourth quarter of 2023, an average of $3.3 million per household. Most of this wealth was held in financial assets.

In stark contrast, the bottom 40 per cent of households held only 2.7 per cent of total wealth, an average of $67,038 per household. The gap between the wealthiest 20 per cent and the poorest 40 per cent was 65 percentage points in the fourth quarter of 2023, an increase of 0.4 percentage points from the same quarter a year earlier.

The top one per cent of Canadians control an astounding 26 per cent of the country’s wealth, according to one report.

Low-income households are falling farther behind

There are other troubling trends. The most recently available Canada Income Survey, from 2022, reveals an increase in the poverty rate to 9.9 per cent in 2022 from 7.4 per cent in 2021. Food insecurity was up to 22.9 per cent in 2023 from 18.5 per cent in 2022.

Moreover, a recent report from Food Banks Canada suggests that 25 per cent of Canadians have a poverty-level standard of living when measured by a “material deprivation index” — that is, they are unable to afford two or more goods, services or activities considered necessary to lead an adequate life. They include food, clothing, dental care, and heat in home.

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Rising living costs, especially for essentials like food, energy and housing, along with high levels of household debt are squeezing lower-income and the most vulnerable groups more than ever before. Very low-income households spend more than 100 per cent of their disposable income (before government transfers) on necessities including food, shelter, energy and transportation, forcing them to make very tough choices about which bills to pay.

Income inequality has broad societal and economic consequences. Higher levels of income inequality are associated with poorer health, reduced social cohesion and declining trust, possibly leading to greater societal fragmentation and lower civic engagement. It is also associated with lower GDP per capita in high-income countries like Canada, and it affects long-term economic mobility and opportunities.

We should also care from a humanitarian perspective: we live in a society where mutual support is essential. Canadians’ perception of the growing economic divide in Canada is significant. Sixty per cent of Canadians believe income inequality is too high, an OECD study from 2021 suggests.

Understanding the root causes

The roots of rising income inequality can be traced back to the 1980s. Our economic policies and market changes have disproportionately benefited high-income households and negatively impacted lower-income households.

One reason is that Canada’s social-assistance programs have failed to keep up with the needs of low-income individuals. Welfare incomes are often inadequate, below the poverty line or not indexed to inflation.

For instance, in provinces such as Nova Scotia and Alberta, the welfare income for a single adult in 2022 was only about one-third of the market basket measure, meaning recipients cannot afford even the most basic necessities such as food, shelter and clothing. Ontario Works benefits have not been adjusted to keep pace with inflation. The maximum monthly benefit for a single person is $733, which is far below what is needed to cover basic living expenses in most parts of the province.

Another factor is Canada’s tax system, which has become more regressive over time. Tax reforms enacted between 2004 and 2022 have reduced the overall progressivity of the tax system, according to an analysis by the Canadian Centre for Policy Alternatives and Canadians for Tax Fairness.

The top one per cent tax rate increased due to a new federal bracket and overall tax rates remained stable for the middle-income group. Federal tax cuts, such as the GST reductions, were generally offset by higher provincial tax rates for all income groups. Greater regressivity was observed at the bottom 30 per cent of income levels. This has increased the relative tax burden on lower-income households and made the system less progressive overall. *

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A third cause is systemic barriers that are deeply rooted in outdated policies and institutional practices that continue to limit economic opportunities for marginalized groups, including Indigenous communities, immigrants, newcomers and racialized people. These groups face higher unemployment rates, earn lower wages and have more limited access to quality education, health care and employment opportunities. Such systemic inequities perpetuate cycles of poverty and hinder economic and income mobility.

Energy retrofit programs, intended to lower utility bills and improve home efficiency, are more accessible to higher-income households but not designed for the financial, language, and accessibility needs of the lower-income groups. Despite contributing through taxes, these families encounter barriers such as upfront costs and complex applications, leaving them with high utility bills, unheated homes and financial distress.

How can we build a more equitable future?

To address income and wealth inequality effectively, we need a comprehensive and co-ordinated approach that targets the root causes of economic disparity and provides sustainable solutions. Here are some key strategies that governments in Canada should consider:

• Income supports should be improved and retargeted to ensure that they benefit the lowest-income households. This may include re-targeting the Canada Child Benefit so that high income households no longer receive it. The savings could be transferred to lower-income households in the form of tax benefits such as the proposed Groceries and Essentials Benefit. Re-considering the Greener Homes Program can also support lower-income households in energy poverty by enhancing programs such as Alberta’s Home Upgrades Program offering free home retrofits. These programs should be better targeted and be accessible to those who need it most.
• The tax system should be made more progressive. Introducing a wealth tax or changing the capital gains inclusion rate are potential tools, among others, to ensure those with the highest income are paying their fair share into the system.
• Provincial social assistance should be enhanced. This would require provinces and territorial governments, at a minimum, to annually increase benefit rates in line with inflation. The adequacy of social-assistance benefits should also be improved so that those with no other sources of income can lead a dignified life.
• Systemic barriers to applying for and accessing social assistance and other income supports should be removed. Among other things, the timeline for introducing automatic tax filing and providing tax documents in languages other than English and French should be accelerated. This would ensure that non-filers would receive the benefits to which they are entitled. With respect to social assistance, governments should remove asset tests, keep field offices open and adequately staffed, and eliminate adverse interactions between programs that reduce overall benefit levels (for instance, by ensuring that provincial income assistance benefits are not scaled back when the Canada Disability Benefit is launched in 2025).

Canada is facing a widening divide between its wealthiest and its most vulnerable citizens. The escalation of income and wealth inequality poses significant risks to economic stability and social cohesion. To forge a more equitable future, immediate and targeted policy interventions are essential. It is imperative that policymakers act decisively to ensure a just and inclusive Canada where the benefits of prosperity are accessible to everyone.

* EDITOR’S NOTE: A previous version of this paragraph misstated the study’s findings on the effects of tax changes on some high- and middle-income earners. A clarification has been made.