Low income definitions

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Low Income Cut-offs (LICOs)
Rebasing and Indexing the LICOs
Use of after-tax and before-tax LICOs
Low Income Measures (LIMs)
Market Basket Measure (MBM)
Low income rate and low income gap ratio

Low Income Cut-offs (LICOs)

Low income cut-offs (LICOs) are established using data from the Survey of Household Spending. They convey the income level at which a family may be in straitened circumstances because it has to spend a greater proportion of its income on necessities than the average family of similar size. Specifically, the threshold is defined as the income below which a family is likely to spend 20 percentage points more of its income on food, shelter and clothing than the average family. There are separate cut-offs for seven sizes of family - from unattached individuals to families of seven or more persons - and for five community sizes - from rural areas to urban areas with a population of more than 500,000.

The first step in the production of a set of low income cut-offs is to calculate the average proportion of income that a family spends on food, shelter and clothing. The 1992 Family Expenditure Survey found that, on average, families spend 43% of their after-tax income (and 35% of their total "before-tax" income) on these necessities. Then, 20 percentage points are added, giving 63% of after-tax income. This is done on the grounds that a family spending more than this proportion of its income on necessities is significantly worse off than the average family. The final step is to look at the distribution of income by expenditure and determine, using a regression line, the level of income at which a family tends to spend 20 percentage points more than the average on the necessities of food, shelter and clothing.

Every year a research paper is produced which provides a detailed description of the LICO including a time series of the lines.

Rebasing and Indexing the LICOs

Over time, Canadian families have spent a smaller percentage of their income on the necessities of food, shelter and clothing. This relationship between families' income and spending is associated with a specific point in time, i.e. the year of the expenditure survey used to derive the cut-offs. That particular year is referred to as the base year for the set of cut-offs.

After having calculated LICOs in the base year, cut-offs for other years are obtained by applying the corresponding Consumer Price Index (CPI) inflation rate to the cut-offs from the base year - the process of indexing the LICOs.

Use of after-tax and before-tax LICOs

Statistics Canada produces two sets of low income cut-offs and their corresponding rates - those based on total income (i.e., income including government transfers, before the deduction of income taxes) and those based on after-tax income. Derivation of before-tax versus after-tax low income cut-offs are each done independently. There is no simple relationship, such as the average amount of taxes payable, to distinguish the two types of cut-offs.

Although both sets of low income cut-offs continue to be available, Statistics Canada prefers the use of the after-tax LICOs. The before-tax rates only partly reflect the entire redistributive impact of Canada's tax/transfer system. It is therefore logical that the low income rate is higher on a before-tax basis than on an after-tax basis.

Low Income Measures (LIMs)

For the purpose of making international comparisons, the LIM is the most commonly used low income measure. Unlike the low income cut-offs, which are derived from an expenditure survey and then compared to an income survey, the LIMs are both derived and applied using a single income survey. The LIM is a fixed percentage (50%) of median adjusted household income, where "adjusted" indicates that household needs are taken into account. See the Family or Household Size Adjustment (equivalence scale) for more information.

The LIMs are calculated three times; using market income, before-tax income, and after-tax income. They do not require updating using an inflation index because they are calculated using an annual survey of household income.

As opposed to the other low income lines, the Low Income Measures (LIMs) depend on the SLID samples. Every year the Low Income Lines paper in the Income Research Papers Series provides a detailed description of the LIMs including a time series of the lines.

Market Basket Measure (MBM)

The MBM is a measure of low income based on the cost of a specific basket of goods and services representing a modest, basic standard of living.  It includes the costs of food, clothing, footwear, transportation, shelter and other expenses for a reference family of two adults aged 25-49 and two children (aged 9 and 13).  It provides thresholds for a finer geographic level than the LICO, allowing, for example, different costs for rural areas in the different provinces.  These thresholds are compared to disposable income of families to determine low income status.  Disposable income is defined as the sum remaining after deducting the following from total family income: total income taxes paid; the personal portion of payroll taxes; other mandatory payroll deductions such as contributions to employer-sponsored pension plans, supplementary health plans, and union dues; child support and alimony payments made to another family; out-of-pocket spending on child care; and non-insured but medically prescribed health-related expenses such as dental and vision care, prescription drugs, and aids for persons with disabilities.

The MBM, including its definition of disposable income, was designed by a working group of Federal, Provincial and Territorial officials, led by HRSDC between 1997 and 1999 (Hatfield 2002 and Michaud et al. 2004). During 2009 and early 2010, the MBM underwent a comprehensive review of both content and methodology (Hatfield, Pyper and Gustajtis 2010).  Though led by HRSDC, the consultation process involved officials from Provincial and Territorial governments, other federal departments and agencies including Statistics Canada and a panel of experts in low income measurement.  This review process led to a rebased series of thresholds (MBM 2008 base).  Among the changes to the MBM resulting from the comprehensive review was the revision of the shelter component to include the costs of homeowners without mortgages.  This revision recognized that, in a given year, homeowners without mortgages may pay less for shelter than they would if they were renting.

During 2012, HRSDC officials re-examined the methodology for including homeowners without mortgages in order to better implement the conceptual decision to reflect these costs in the MBM.  Following this re-examination, a revised methodology was adopted that adjusts the MBM disposable income of homeowners without mortgages to account for the potential differences in their shelter-related expenses.  The shelter thresholds themselves are now exclusively a reflection of the median costs for all two- and three-bedroom rental units in each MBM region, weighted to take into account the actual distribution of such units.

The annual report Low Income Lines of the Income Research Paper Series provides a detailed description of the MBM including a time series of the thresholds.

Low income rate and low income gap ratio

To determine whether a person is in low income, the appropriate low income line (LIL) is compared to the income of the person’s family^{Note 1} (or household)^{Note 2}.  If their income is below the cut-off, the individual is considered to be in low income.  In other words, “persons in low income” should be interpreted as persons who are part of low income families (or households), including persons living alone whose income is below the cut-off. Similarly, “children in low income” means “children who are living in low income families (or households)”.  Overall, the low income rate for persons can then be calculated as the number of persons in low income divided by the total population.  The same can be done for various sub-groups of the population; for example, low income rates by age, sex, or province.

After having determined that an individual is in low income, the low income gap ratio can be analysed by using the amount that the person’s family (or household) income falls short of the relevant low income cut-off, expressed as a percentage of the relevant low income cut-off. For example, an individual living in a family (or household) with an income of $15,000 and a low income cut-off of $20,000 would have a low income gap of $5,000. In percentage terms, the “gap ratio” would be 25%.^{Note 3} The average (or median) gap ratio for a given population is the average (or median) of these values as calculated for each person.

Notes

1. The family concept used is the economic family, that is, all persons living in the same dwelling and related by blood, marriage, common-law relationship or adoption.
2. When using the LICO or the MBM, the economic family is the appropriate unit. When using the LIM, the household is the appropriate unit.
3. For the calculation of this low income gap, negative incomes are treated as zero.