Income Research Paper Series
Market basket measure research paper: Child care expenses

Introduction

The market basket measure (MBM), adopted in 2018 as Canada’s Official Poverty Line, establishes poverty thresholds based on the cost of a basket of food, clothing, shelter, transportation and other necessities that represent a modest, basic standard of living. A family with a disposable income below the applicable MBM threshold for their family’s size and region of residence is considered to be living in poverty.

Child care, which can take different forms and vary widely in cost, can represent a significant non-discretionary expense, meaning non-negotiable, to many Canadian families with children. Currently, incurred child care expenses are accounted for in the MBM as a direct deduction to a family’s disposable income, which is then compared to the applicable poverty threshold to determine whether a family lives above or below the poverty line.

During the second comprehensive review of the MBM, stakeholder groups and child care advocates asked Statistics Canada whether child care costs are appropriately accounted for in the current MBM methodology.^Note Interest in this question continued to grow after the completion of the second comprehensive review in 2020, when the federal government released a plan to introduce a Canada-wide early learning and child care system in 2021.^Note

This discussion paper begins by explaining what is commonly understood as child care and how child care expenses currently enter the MBM methodology. It then describes an alternative approach to account for child care expenses by incorporating them as a separate component within the MBM based on the reference family. A discussion of the advantages and disadvantages of each approach is also provided. The public and stakeholders are invited to provide feedback and comments on the discussion points presented.  

What is child care and how does the market basket measure currently account for child care costs?

Child care programs and services, and daycare specifically, are key to the well-being of many Canadian families with children. Child care continues to be crucial to facilitating the labour force participation of women who tend to be the primary caregivers of young children in families.^Note Child care exists in various forms and covers a broad range of services, such as paid daycare (mostly for younger children), regulated or licensed home care, nursery school or preschool, and before and after school care programs.^Note Child care also includes informal arrangements where children are cared for by siblings or extended family members, which may not have an explicit fee or payment associated with them. The decision to pursue child care, and the form it can take, depends on several factors, including access and the affordability of options, the age of the children, the family composition, and the parental employment conditions. 

The MBM currently deducts child care costs from after-tax income to arrive at the disposable income of families. In other words, child care expenses are treated as “unavoidable” costs that decrease the income available to families to “purchase” the goods and services in the basket. This treatment is analogous to how the Canada Revenue Agency (CRA) deducts child care expenses to calculate family net income, which is used to determine entitlement for certain benefits like the Canada Child Benefit. In the MBM, child care data are sourced from CRA administrative tax data and data from the Canadian Income Survey (CIS). When sourced from CRA data,^Note information from survey sources augments the CRA-based amount by taking the maximum between the amount claimed on the respondent’s tax file and what they reported in the CIS because there is a taxable limit on the amount a family can claim for their child care expenses.^Note

The treatment of deducting child care costs from a family’s income is similar to the way payroll taxes, medical expenses and other non-discretionary expenses are currently treated in the MBM methodology.^Note This approach ensures that a family’s needs, as measured by the MBM thresholds, are compared with its available disposable monetary resources in a given year.

Child care in Canada

In Canada, education, including early learning and child care, is a matter of provincial and territorial jurisdiction. As such, provinces and territories have the primary responsibility for the design and delivery of early learning and child care programs and services to Canadian families. Each province and territory has its own early learning and child care legislation and regulations, including varying licensing standards, and typically offers a mix of publicly and privately delivered services.

For families with children, child care use and costs can be influenced by a number of different factors, such as the age of children. Parents of infants younger than one year are among the least likely to incur direct child care costs, reflecting in part the availability of maternity and parental leave schemes during a child’s first year of life. The use of child care services is highest in families with children between the ages of 2 and 4 years and decreases as children enter school age and become more mature. The lowest incidence of child care use for the purposes of facilitating paid work is for children in the age range of 11 to 14 years,^Note which includes the age of the children in the MBM’s reference family.^Note When it comes to cost, available data indicate that families with preschool-aged children spend a greater proportion of their annual income on child care, compared with families with older children. In 2021, families with children where the youngest child was 12 years old or younger spent, on average, about $5,800 in child care expenses for the year, representing, on average, about 4.9% of family after-tax income. Average child care expenses were about $7,100 (6.0% of after-tax income) for families where the youngest child was 5 years old or younger.^Note

Regional constraints are also an important determinant of child care use. Child care policies vary across Canada and the parameters defining child care services are regulated at the sub-federal level (i.e., at the provincial, territorial and local level). For example, Quebec’s universal, low-cost daycare system, launched in 1997, stands out among the other provinces and territories and has been found to increase the use of child care services in Quebec, which is now the highest among all other jurisdictions.^Note Similarly, some provinces (e.g., Ontario and Nova Scotia) offer junior kindergarten or junior primary through the public education system for children aged 4 years, or turning 4 in the year of enrollment, although before and after school care for these students may still be required.

Finally, income is an important determinant of whether a family pursues formal child care services. In general, parents belonging to a higher income household are more likely to use some form of non-parental care. In 2011, about two-thirds (65%) of parents with an annual household income of at least $100,000 used child care for their preschool-aged child. This was close to double the rate for parents in households with an income below $40,000 (34%).^Note Similarly, 46% of the highest income households used child care for school-aged children, compared with 32% of the lowest-income households.^Note

In more recent years, these trends held constant. According to the Longitudinal and International Study of Adults, in 2017, 61.3% of working-aged Canadians^Note living with at least one preschool-aged child^Note with a household income of $108,800 or more paid for some form of childcare.^Note Comparatively, less than one-third (27.8%) of working aged Canadians with children of the same age but with incomes below $43,500 reported the same.^Note The absence or limited availability of subsidized child care was likely a contributing factor for the lower use of child care among lower-income families at the time the study was completed.

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The Canada-wide early learning and child care plan

In Budget 2021, the Government of Canada announced its plan for a $10-a-day early learning and child care system across the country. Combined with other investments, including in Indigenous early learning and child care, up to $30 billion over five years will be provided in support of early learning and child care. Once previous investments announced since 2015 are considered, as of 2025/2026, a minimum of $9.2 billion will be provided every year, on an ongoing basis, toward early learning and child care and Indigenous early learning and child care. This investment allows governments to work together toward achieving an average fee of $10 per day for all regulated child care spaces by March 2026, starting with a 50% reduction in average fees for regulated early learning and child care spaces by the end of 2022. These targets apply everywhere outside Quebec, which already has an affordable, well-established early learning and child care system.

Budget 2022 also provided $625 million over four years, beginning in 2023/2024, for an Early Learning and Child Care Infrastructure Fund. This funding will enable provinces and territories to make additional child care investments.

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Access to affordable high-quality child care has been limited and costly for many low- and middle-income families. In 2018/2019, before the COVID-19 pandemic, parents in Canada paid an average of close to $11,500 per child per year^Note for regulated early learning and child care programs and services for children younger than the age of 6 years. These costs could reach up to $20,000 in some parts of the country.^Note At the same time, while about 60% of children aged 6 years or younger participated in some form of formal or informal child care, availability of regulated child care remained relatively low in Canada outside Quebec, with only about one in four children accessing licensed child care.^Note However, the current landscape of child care programs and services in Canada is undergoing a great transformation.

The Government of Canada has now signed agreements with all the provinces and territories to create a Canada-wide system for early learning and child care, lowering the costs of child care and expanding the number of available child care spaces across Canada.^Note

Child care costs as a basket component or as a deduction to income?

According to data from the 2016 Census,^Note the majority (78.2%) of families with two children approximately the same age as those in the MBM reference family had no child care expenses,^Note suggesting that child care use for children of these ages is generally low. Reasons that explain the lack of child care expenses for families with young children could be financial (e.g., child care is too expensive or services are fully subsidized) or systemic (e.g., lack of child care services in the area where families live).^Note Reasons may also be related to preferences. For example, parents or guardians may prefer to take care of children instead of pursuing another activity, such as participating in the labour market or arranging care with a non-family member.^Note

While progress is being made on the affordability of early learning and child care across Canada, it can still be an expensive undertaking for some lower-income families. It has been argued that child care costs should be accounted for as a separate component of the MBM, as this would increase the visibility of child care expenses in the MBM methodology. A separate child care component in the MBM would also increase MBM poverty thresholds, and incurred child care costs would no longer be deducted from the MBM’s disposable income. While this is feasible (see the text box “Child care costs as a new market basket measure component: An illustration”) there are important considerations that complicate this exercise, such as child care data constraints among lower income deciles and the resulting assignment of an invariable child care amount to all families regardless of their particular child care situation.

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Child care costs as a new market basket measure component: An illustration

Accounting for child care costs as a component of the market basket measure (MBM) requires a robust estimation methodology. Canada’s Census of Population collects data on child care expenses and allows for more detailed disaggregation than household surveys. For example, to estimate the cost of child care for the MBM reference family, provincial-level child care estimates were produced using 2016 Census data for couple families with two children (aged 9 and 13) with an after-tax income in the bottom four income deciles. This option was selected because of data constraints, as most families in these deciles did not report expenses.

Provincial medians were then adjusted using the national level child care data from the Consumer Price Index to obtain a cost estimate in 2018 dollars (child care data are not available at the provincial level). The infrequent reporting of child care expenses coupled with the composition and ages of the MBM reference family prevent a lower level of estimate disaggregation (e.g., census metropolitan area, MBM region). The census-based provincial medians were then added to the 2018-base MBM total threshold amounts (See Table A.1).

Comparing these new thresholds with a family’s income to estimate the impacts of the poverty rate is complicated by the fact that the effect child care would have on a family’s labour participation rate is unknown. Presumably, a portion of individuals from our sample population would enter the labour force had they paid for child care, increasing their family’s income. Simply comparing the new thresholds with a family’s current disposable income (holding everything else constant) requires a highly unrealistic assumption. Conversely, imputing an income based on assumptions that certain individuals could enter the labour force based on selected characteristics would result in a purely theoretical result.

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An additional argument supporting the introduction of a child care component is that it would assign child care expenditures to survey respondents who incur these expenses for non-employment purposes and do not declare such expenses in their tax returns. As mentioned, child care data is sourced from CRA data or surveys. However, surveys that collect child care expenditure data (i.e., the CIS and the census) only capture expenses incurred to work in paid employment.^Note Therefore, including child care as a basket component would allow for a child care amount to be considered when determining the poverty status of some families without child care expenditure data available through tax returns. A child care component in the MBM could also help account for situations where child care costs may be viewed as discretionary (e.g., summer camps), when other options would have been available.

However, the creation of a separate child care component would likely require a stronger justification than increasing the visibility of child care expenses. As the MBM prescribes a basket of goods and services that are required to achieve a modest, basic standard of living, creating a separate child care component would be justified if there were a widely accepted standard for child care services (e.g., the 2019 national nutritious food basket is the standard for the food component) and if the incidence of child care expenses for the MBM reference family were close to universal. The goods and services currently included in the MBM’s food, shelter, clothing and transportation components align with these requirements, as they are based on standards and are essential to most (if not all) families, irrespective of their region of residence, family size and composition, and the age of the family members. Guiding principles should generally determine the fitness for use in the MBM. From a statistical perspective, a proposed child care methodology should have some level of universality across Canada, be measurable and have a level of uniformity when scaling for different family sizes.

On the other hand, the current treatment of child care expenditures as a deduction to disposable income is consistent with the idea that child care services are considered a non-discretionary expense for a limited segment of the Canadian population and that there are no recommended service standards. Thus, the current approach is sensitive to the child care experiences of families, which can vary significantly because of multiple factors.

Furthermore, this approach is likely to be more responsive to the child care cost implications of major policy changes, such as those brought about by the Canada-wide early learning and child care plan. Any changes to child care costs would be readily incorporated into annual poverty rate calculations via the larger or smaller deduction to families’ disposable income. This would not be the case if a separate child care component were used for two reasons. First, component costs would need to be associated with the MBM reference family’s children (whose ages are largely outside the scope of the new Canada-wide early learning and child care plan). Second, the component would only be rebased or updated following the completion of a periodic MBM comprehensive review (i.e., approximately every five years). While the Consumer Price Index for child care services could be used to adjust child care costs between rebasings, the Canada index would be used for all subnational geographies, and would reflect changes in the cost of licensed child care services paid by Canadian families, without differentiating by family income or directly reflecting the number of subsidized child care spaces available. Finally, given the complexity of different possible family compositions, more research would be needed on the square root equalization method to evaluate the scalability of a child care component.

It should be noted that the current treatment of child care expenses does not account for the fact that some families may not be incurring expenses because they cannot afford them, and this is more likely to occur among lower income families. Some families may also choose not to report childcare expenses when responding to household surveys or when filing taxes. To address this, child care expenses that were not incurred or reported could be accounted for by developing an imputation strategy that imputes a child care expense amount for families with a child (or children) of a certain age. This child care imputation amount could then be adjusted for different family sizes and applied to all families with children. In this scenario, the imputation would be like the tenure type adjustment currently done to disposable income in the MBM.

A disadvantage of the imputation option is that the imputation amount would be applied on the disposable income of the MBM and would not address the added visibility that some stakeholders wish to see for child care expenses. Furthermore, the imputation strategy could result in a child care expense being applied to families that, because of family dynamics and needs, would have voluntarily chosen not to incur such costs. Finally, the lag in responsiveness to policy changes as detailed when discussing the limitations of a separate child care component would also apply for this imputation option.

In summary, different approaches to incorporating child care costs in the MBM have advantages and disadvantages, and there may not be a single approach that effectively captures these expenses for all families with children. Understanding the strengths and weaknesses of each approach will help inform discussions on how the MBM accounts for child care costs, especially as Canada undergoes important transformations in child care policy in the years to come.

Conclusion

This paper details the current MBM methodology of incorporating child care expenses as a deduction to disposable income in the MBM and discusses possible alternative options. The discussion of these options reveals the complexities associated with capturing child care costs within Canada’s Official Poverty Line and sets the stage for further research on this topic.

As with the other products in this series, this paper aims to foster engagement and debate with the public and stakeholders to explore research topics that could help inform discussions for the next comprehensive review of the MBM, improve the understanding of the MBM methodology, and potentially expand analytical tools that involve or rely on the MBM. Users are welcome to ask questions, provide feedback and make suggestions for future work on child care expenses and other topics relevant to the MBM. Those who are interested in contacting us are encouraged to do so by sending an email to statcan.market.basket.measure-mesure.du.panier.de.consommation.statcan@statcan.gc.ca.

Appendix A

 

Appendix B



References

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