Statistics Canada
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Income in Canada

2005

75-202-XWE


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Analysis

After-tax income: Median for Canadian families up slightly to $56,000.

The 2005 median after-tax income for Canadian families with two or more people rose 1.6% to $56,000, after adjusting for inflation, according to new SLID data. This slight increase in after-tax income came on the heels of a 1.3% gain in 2004.

Though most family types shared in the increase in after-tax income, this was not the case for senior families and unattached individuals. Among senior families – those in which the main income earner was aged 65 and over – median after-tax income remained virtually unchanged at $40,400 in 2005. However, this represented a 15% increase in real terms relative to 1996 – mostly the result of a five year upward trend that started in 1997.

Median after-tax income of “unattached individuals” or singles remained stable at $21,400 in 2005. During the last two decades, the proportion of Canadians who live as “unattached individuals” increased from 11% of the population in 1985 to 14% of the population in 2005.

Seniors living on their own received a median after-tax income of $19,600 in 2005. These figures were virtually unchanged from 2004.

Chart 1 Median after-tax income by family types, Canada, 1980 to 2005

Provincial family income: Alberta families had highest median income for the second consecutive year

For the second consecutive year, Alberta families with two or more people had the highest median after-tax income. After tying with Ontario families in 2003, Alberta families took the lead in 2004 and saw their lead increase in 2005. Alberta families took home a median of $64,700 versus $61,000 for Ontario families while the national median settled at $56,000.

Quebec families saw a 3.5% increase of their after-tax income to a level of $50,400 in 2005. After-tax income was virtually unchanged in all other provinces. After-tax income for British Columbian families, at $57,100, overtook the national median in 2005. Newfoundland and Labrador families had the lowest after-tax income at $43,100.

Chart 2 Median after-tax income, families of two persons or more, Canada and provinces, 2005

Market income: Lion’s share of income for families

Canadian families earned the lion’s share of their total income 1  from market income. Market income is the sum of earnings from employment, investment income and private retirement income.

In 2005, market income made up nearly $90 out of every $100 of total income. The remaining $10 came from government transfers.

These proportions varied among different families, especially between senior families and non-senior families.

Among non-senior families, earnings made up the largest share of total income. For every $100 of total income, non-senior families received $93 in market income, and the remaining $7 from government transfers. The $93 of market income comprised $85 from earnings, $3 from investment income, $3 from private pensions and $2 from other income.

In comparison, senior families relied less on earnings, receiving almost six times as much of their total income from government transfers compared to non-seniors families. For every $100 of total income in 2005, they received $40 from government transfers and only $60 from market income. The $60 of market income is broken down into $14 of earnings, $11 of investment income, $33 of private pensions and $2 in other sources of income.

Chart 3 Median market and after-tax income by family types, Canada, 2005

Market income remained virtually unchanged

At the Canada level, median market income of both families and singles remained virtually unchanged between 2004 and 2005. In 2005, families received median market income of $57,700 while singles received $18,100.

The level of market income of non-senior families continued to vary by family type. In 2005, the median market income of two parent families with children was $72,800; couples without children received $63,700; while other families received $48,600.

The median market income of female lone-parent families, at $22,200, remained virtually unchanged from 2004. However, this group saw a significant increase in their market income compared to their 25-year low of $8,600 received in 1996. Much of the gain experienced in the last decade reflects higher earnings and a larger proportion of working mothers.

Senior families received a median of $22,100 in market income in 2005, showing little change from 2004. Between 1996 and 2005, the market income of the average senior family rose 30% after adjusting for inflation. This reflects, in part, growth in employment during this period among seniors aged 65 to 69. According to the Labour Force Survey, in 2005, employment rose faster for seniors in this age group than for any other age group continuing a trend that started in 2001.

Stability in taxes and transfers

In 2005, Canadian families and unattached individuals saw little change in their median taxes and government transfers as compared to 2004. However, there were noticeable changes over the 25 year period from 1980 to 2005, reflecting economic recessions and booms, changes in tax and transfer programs, and changes in demographic factors such as family composition, student status, and population aging.

In the 1980s, the Canadian economy experienced a brief recession early in the decade and major federal tax reforms in 1987 which broadened the tax base, reduced full-inflation indexation to indexation only in excess of 3%, and reduced the number of tax brackets from 10 to 3. The early 1990s brought another recession leading to a fall in implicit taxes and a rise in implicit government transfers. During this decade, Canadian governments also moved from universal transfers to more targeted income-based transfers. The 2000s saw in 2001 a mild recession, and another major federal tax reform with reductions in all tax brackets, increases in the income thresholds at which the tax brackets apply, a return to full-inflation indexation of the tax system, and more generous tax credits aimed at particular groups, such as students and persons with disabilities.

For Canadian families, average personal income taxes as a share of average total income – the implicit tax rate – rose during the 1980s, stabilized during the 1990s, and fell during the 2000s. The implicit government transfer rate – the average government transfer as a share of average total income – rose during the first few years of each decade, stabilized, then fell towards the end of the decade.

By 2005, for every $100 in total income received by Canadian families, an average of $10 came from government transfers compared to the 25-year low of $8 in 1980 and highs of $13 in the early 1990s. Canadian families paid $17 of every $100 in personal income taxes in 2005, compared to a low of $15 in 1980 and a high of $20 in 1998.

Chart 4 Implicit income tax and government transfer rates for families, Canada, 1980 to 2005

Unattached Canadians saw relatively stable implicit tax rates during the 25-year period from 1980 to 2005. By contrast, their implicit government transfer rate rose from 1980 to a peak in 1994, and fell afterwards.

By 2005, for every $100 in total income received by unattached individuals, this group received an average of about $16 in government transfers and paid about $16 in personal income taxes, compared to a receipt of about $14 in transfers and payment of about $14 in income taxes in 1980. The equality of implicit tax and transfer rates in 1980 and 2005 largely reflected income redistribution within this group from non-seniors to seniors without earnings. During much of the 1990s, however, unattached Canadians received as a group more in transfers than they paid in taxes.

Unattached Canadians received a higher share of their total income from government transfers, and paid a smaller share of this income in income taxes, largely because they earn lower incomes than Canadian families. These lower earnings arise in part because this group includes a higher proportion of seniors, students, and young workers at the early stage of their careers.

Chart 5 Implicit income tax and government transfer rates for individuals, Canada, 1980 to 2005

Share of highest income quintile has risen in the last 25 years – mostly in the 1990’s

Throughout the last 25 years, families in the top income quintile received between 40% and 46% of aggregate market income; between 38% and 42% of total (pre-tax) income; and between 37% and 40% of after-tax income. The shares of family income received by this group generally rose during this quarter century. The share of the fourth quintile remained relatively constant at between 23% and 24% throughout the period, while the shares received by each of the three remaining quintiles fell, but by less than 2% each.

During the same 1980 to 2005 period, unattached in the top quintile received between 50% and 56% of market income; between 45% and 48% of total income; and between 42% and 44% of after-tax income. Both unattached Canadians and Canadian families experienced a growth in income inequality between 1980 and 2005.

Income inequality rises: Gap widens between the lowest- and the highest-income families

The increase of the shares in highest quintiles contributed to an increase in the average income gap, after-taxes, between the lowest- and highest-income families. In the study of income inequality, studies typically examine average income within a quintile and the income gaps, or differences, between these quintiles.

The income gap between the top and bottom quintiles started at $83,800 in 1980, fluctuated between $79,500 and $84,500 till 1996, then grew over $20,000 to $105,400 in 2005. By 2005, average after-tax income was $128,200 for the highest quintile and $22,800 for the lowest.

The percentage increase in the after-tax income gap over the 1980 to 2005 period was slightly lower for unattached individuals, at 21%, than it was for families, at 26%.

Chart 6 Share of after-tax income for families by after-tax income quintiles, Canada, 1980 to 2005

Though all quintiles benefited from the positive economic conditions that prevailed since the early 1990s, families in the top quintile gained the most. Between 1996 and 2005, the top quintile saw a 24% increase in their average after-tax income, while the other quintiles saw 18% increases, apart from the third quintile, which saw a 17% increase.

Unattached individuals also experienced gains in their after-tax income between 1996 and 2005. Generally, these were not as large as they were for families. While unattached individuals in the third quintile and the highest quintile enjoyed fairly substantial increases, 19% and 24%, respectively, those in the first, second and fourth quintiles realised more modest gains, at 9.5%, 12% and 16% over the period.

Tax-transfer system continues to reduce income inequality

Government transfers and federal-provincial-territorial income tax systems help redistribute income from higher income Canadians to lower income Canadians – hence reducing income inequality.

The ratio of average income earned by the top quintile to the average income earned by the bottom is another measure of income inequality.

In 2005, the average market income for families in the highest quintile was 12.8 times higher than those in the lowest quintile. However, once all government transfers are distributed, this ratio fell to 6.9 times higher. After taxes the average market income for families in the highest quintile was 5.6 times higher than their counterparts in the lowest. This clearly demonstrates how the government transfers and tax system decrease the inequality between the highest and the lowest income families.

This measure also shows growth in income inequality between 1980 and 2005. In 1980 the average after-tax income for families in the highest quintile was 5.1 times higher than those in the lowest quintile. This ratio rose to about 5.6 times higher in 1997, and remained at or close to that level up to 2005.

Chart 7 Ratio of average income of the highest quintile families to the lowest, Canada, 1980 to 2005

Highest 20% of income recipients pay almost 60% of personal income taxes

The 20% of Canadian families and unattached who took home the largest amount of after-tax income in 2005 collectively paid almost 60% of all personal income taxes that year, up from 50% in 1980. This change in tax share reflects, in part, increases in their share of total after-tax income and the redistributive nature of Canada’s personal income tax systems.

Chart 8 Share of income tax by after-tax income quintiles, families and unattached individuals, Canada, 1980 to 2005
Chart 9 Share of government transfers by after-tax income quintiles, families and unattached individuals, Canada, 1980 to 2005

During the 25-year period from 1980 to 2005, the income tax share paid by the middle 60% of income recipients fell steadily from about 49% of the total to just under 40%, while their share of government transfers rose from 60% to 68%. The higher share of government transfers received by the middle quintile reflects in part their larger family size, number of children and number of seniors in these families. By contrast, the lowest quintile received a lower share of government transfers in part because they disproportionately reflect the young working age group.

The implicit tax rate – the share of total income paid in income taxes - rose for the top two quintiles between 1980 and 1990, remained relatively stable till 2000, and fell afterwards. All quintiles experienced a fall in their implicit tax rate after 2000, in part due to federal income tax cuts introduced in 2001. Budgets and budget updates in 2000 reduced all marginal income tax rates, reintroduced full-inflation indexation of income tax thresholds, and enriched tax credits to various groups including students and people with disabilities.

Low income rate for families remained unchanged in 2005

In 2005, an estimated 655,000 Canadian families were below the low-income cut-off (LICO) after taxes, representing 7.4% of all families, a proportion unchanged from 2004. The families in low income faced an average gap of $7,900, which represents the amount of income they required to bring their income above the cut-off.

Statistics Canada’s low-income rate measures the percentage of families below the low-income cutoff (LICO). The LICO is a statistical measure of the income threshold below which Canadians likely devote a larger share of income than average to the necessities of food, shelter and clothing.

Low income varies across family types

Among non-senior families the incidence of low income was virtually unchanged at 8.4% in 2005. Senior families saw their low income rate remained relatively stable at around 2%.

Married couples with two earners experienced the lowest incidence of low income, at 3.0%, while two-parent families with children and no earners experienced the highest incidence, at 83.9%.

Of the 2 million families and unattached individuals in low-income, more than half were unattached individuals. In 2005, 30.4% of unattached individuals experienced low income. The low income rate was higher for the non-senior singles at 34.3%.

Chart 10 Incidence of low income among different family types, Canada, 2005
Chart 11 Incidence of low income among individuals, Canada, 1980 to 2005

Low-income rate for single mother families declines

Female lone-parent families saw a decrease in their low income rate, which fell from 36.0% in 2004 to 29.1% in 2005. This reflects an upward trend in market income in recent years driven by higher earnings and a larger proportion of earners. Although this decrease continued a four-year downward trend, the incidence of low income for female lone-parent families remained more than four times as high as that of two-parent family with children.

Chart 12 Incidence of low income among children, Canada, 1980 to 2005

Little change in the proportion of Canadians in low income

After climbing throughout the early 1990s, the prevalence of low income among all Canadians peaked at 15.7% in 1996, declined to 11.2% in 2001 and remained at or close to that level till 2005. In 2005, about 3.4 million people, or 10.8% of the population, were in low.

Children in low income

About 788,000 children under 18 years of age lived in low-income families in 2005, down from 1.3 million in 1996. The proportion of children in low-income families fell from its peak of 18.6% in 1996 to its current level of about 11.7%.

In 2005, 320,000 children, just under half of all the children in low-income families, lived in female lone parent families. The low-income rate of children in female lone-parent families was more than four time higher than that of two-parent families. However the low-income rate for these children fell from 40.4% in 2004, to 33.4% in 2005.

Low-income rate for working age persons

In 2005, 11.4% of people aged 18 to 64 lived in low-income. About half of this group consisted of unattached individuals. About 6.9% of persons aged 18 to 64 living in families experienced low income while 34.3% of unattached individuals experienced low income.

Seniors in low income

In 2005, 6.1% of seniors lived below Statistics Canada’s low income cut-off. The low-income rate among seniors remained stable in 2005 following a downward trend which began in the early 1980s.

Seniors living alone experienced a rate 15 times higher than seniors living in families: 18.4% compared to 1.2%.

Technical note – the “Gini” coefficient

The ’Gini coefficient’ provides an alternative way to measure income inequality. It is particularly useful in examining inequality trends over a longer period of time.

The Gini coefficient is a number between zero and one. The number zero represents perfect income equality, where everyone receives the same income. The number one represents perfect inequality, where one person receives all income and others receive nothing. The higher the value of the Gini coefficient, the higher the degree of income inequality in a society.

Using after-tax income for families, the Gini coefficient rose during the 1990s to about 0.33 in 2000, after fluctuating slightly between the 0.29 and 0.30 marks throughout the 1980s. The coefficient has remained at about 0.33 since 2000.

We see different trends among senior families and non-senior families when we examine Gini coefficients based on after-tax income. In 1980, seniors saw a higher level of income inequality, at 0.33, than did non-seniors, at 0.28. This inequality fell over time among seniors, but rose among younger families. Currently, senior families experience less income inequality, at 0.28, than do non-senior families, at 0.32.

Chart 13 Gini coefficients of after-tax income, Canada, 1980 to 2005