Income Research Paper Series
Defining disposable income in the Market Basket Measure

The Market Basket Measure (MBM) of low income compares the disposable income of families to the cost of the MBM basket. This discussion paper describes considerations for updating the disposable income component of the MBM and for improving the methodology used for its determination.

This discussion paper also provides an opportunity for feedback and comments to the proposed changes to the MBM.

Introduction

This document is the third in a series of four discussion papers that are being prepared to provide an update on the comprehensive review of the Market Basket Measure (MBM). The MBM establishes poverty thresholds based on the cost of a basket of food, clothing, shelter, transportation and other items for a family of four that reflects a modest, basic standard of living. This is the last document before the publication of the final report of the comprehensive review which will be released in the winter of 2020.

This paper discusses the concept of disposable income used in the MBM. Disposable income is a measure of the means available to a Canadian family to meet its basic needs and achieve a modest standard of living.  The disposable income of families surveyed in the Canadian Income Survey (CIS) is compared to the cost of the MBM basket for the size of the family and the region, and families with disposable incomes below that cost are deemed to be living in poverty. The definition of the MBM basket was the subject of the previous publication entitled Towards an update of the Market Basket Measure (Djidel et al., 2019).

On August 21, 2018, the Government of Canada released Opportunity for All – Canada’s First Poverty Reduction Strategy (Employment and Social Development Canada, 2018), which contained long-term commitments to guide current and future government actions and investments to reduce poverty, including:

• Establishing the MBM as Canada’s Official Poverty Line (Statistics Canada, 2016)
• Introducing poverty reduction targets using a baseline of 2015
  • Reduce the rate of poverty by 20% by 2020, and
  • Reduce the rate of poverty by 50% by 2030 (aligned with United Nations Sustainable Development Goals)
• Creating a National Advisory Council on Poverty
• A Data and Measurement Plan, which includes ongoing funding to develop and improve data to measure poverty and to inform policy decisions.

The Poverty Reduction Act received Royal Assent in June 2019 and legislates commitments made in the Strategy including entrenching the MBM as Canada’s Official Poverty Line.

The Poverty Reduction Act mandates Statistics Canada to review the MBM on a regular basis “to ensure that it reflects the up-to-date cost of a basket of goods and services representing a modest, basic standard of living in Canada.” In 2018, Statistics Canada launched a comprehensive review of the MBM, which will be completed in 2020.

To date, the comprehensive review has consisted of several related activities. From September 2018 through April 2019, Statistics Canada with the participation of Employment and Social Development Canada (ESDC) conducted broad consultations with Canadians, poverty experts, other stakeholders and officials from provincial, territorial and federal governments, which was summarised in An update on the Market Basket Measure comprehensive review (Heisz, 2019).

Next, in the spring of 2019, Statistics Canada and ESDC prepared a work plan to test various methodological changes to the MBM arising from the comments received during the consultations. This work went through the summer and fall of 2019. The process has been collaborative, with Statistics Canada responsible for launching and conducting the comprehensive review as well as for the statistical methodology of the MBM and ESDC responsible for setting the scope of the comprehensive review and for the policy direction of the MBM.

This discussion paper provides an update on the work that Statistics Canada has undertaken to update the MBM applied in the provinces, focusing specifically on the elements of the methodology associated with the determination of disposable income.

As indicated in An update on the Market Basket Measure comprehensive review, Statistics Canada is also working with the Northwest Territories, Yukon and Nunavut to develop territory-specific MBM thresholds for these regions.

To recognize the lower shelter costs faced by homeowners without a mortgage, the 2008-base MBM made an adjustment to disposable income, which was called the Mortgage Free Advantage (MFA). The MFA added the difference between the cost of the shelter component of the MBM basket (based on renters) and the typical shelter costs for mortgage free homeowners, to the disposable income of mortgage free owners, placing homeowners without a mortgage on a more equal footing with renters in regards to their shelter costs.

The 2008-base MBM methodology only made adjustments for mortgage free homeowners, while homeowners with a mortgage and families in subsidized dwellings were treated as having shelter costs equivalent to renters. For the 2018-base MBM, it is proposed that the MFA concept be extended to homeowners with a mortgage and subsidized renters; thereby, putting all families’ shelter costs on an equal footing when determining poverty estimates, regardless of their tenure type. This new concept would be referred to as the Tenure Type Adjustment (TTA).

The estimation of the TTA for each MBM region and tenure type would be obtained by subtracting the typical shelter costs of a specific tenure type from the shelter costs for renters derived during the construction of the MBM shelter basket. The following three sections describe in more detail how shelter costs would be estimated for each of the three tenure types (see text box – Statistical Fine Print: TTA).

Update of medical expenses

Medical expenses are one of the non-discretionary expenses that are deducted from after-tax income to derive disposable income for the MBM.

These medical expenses include out-of-pocket expenses for prescription medicines and eye wear, for medical services and health care equipment, and for dental services. They also include health care and dental plan insurance premiums.

Under the current MBM methodology, medical expense amounts are determined for each adult using the appropriate line from the individual’s tax form. For adults who do not report a medical expense on their tax form, a value is imputed using data from the Survey of Household Spending (SHS). For the 2008-base an older SHS value is used, while for the 2018-base it is proposed that a new value be derived from the 2017 SHS and adjusted using a price inflator for other years (see text box – Statistical Fine Print: Medical expenses).

Treatment of taxes caused by a capital gain or loss

A capital gain or capital loss occurs when an individual disposes of or transfers a capital property (e.g., land, buildings, stocks, bonds, mutual funds, etc.). Since these financial settlements are not always foreseeable and for many people constitute an occasional lump sum transaction, the standard is not to include them when calculating income (UNECE, 2011). The current MBM does not include the values of capital gains or losses in disposable income. However, due to the complexity in estimating the taxes on a capital gain (or the reduction in taxes on a capital loss), the taxes on capital gains had not been previously removed from the taxes that are deducted from before-tax income in deriving disposable income.

For the 2018-base MBM, it is proposed that the taxes on these capital gains be estimated and that disposable income be adjusted accordingly. Specifically, it is proposed that capital gains taxes be removed from other taxes to prevent families from appearing to be in poverty due to paying a large capital gains tax. Since the tax implications of capital gains/losses are not directly known from available tax information, they would have to be estimated.

Child care expenses

Child care expenses are amounts paid by a parent to a child care provider to care for their child, so that the parent can pursue employment, business or education. This aligns with how the Canada Revenue Agency defines child care expenses in the income tax system. In the MBM, child care expenses are taken into account by subtracting from an individual’s income the actual child care expenses incurred by each respondent to the CIS in order to derive the family’s disposable income.

More precisely, under the MBM methodology, there are two data sources for determining child care expense amounts incurred by the CIS respondent:  (1) the CIS and (2) the respondent's tax record (line 214) if a link to tax data was possible. Current tax rules regarding child expenses require that the expenses be reported by the lowest earning parent and are also subject to a maximum claimable limit. Therefore, since there is a maximum reportable amount in the tax data, the final amount of child care expenses deducted from disposable income is the higher of the amount reported in CIS and the amount reported in the tax data^Note .

As reported in An update on the Market Basket Measure comprehensive review (Heisz, 2019), child care expenses is an area that has been flagged for the forward looking research agenda to study further before the next comprehensive review.