Part 3: Gender bias in tax

May 08, 2022
Federal tax Business tax

The RSM Canada National Tax Centre is pleased to present a five-part series on the role of taxation in promoting economic gender equity. This series focuses on consideration of gender bias in taxation and its potential impact on both individuals and the economy, highlighting key challenges amid the COVID-19 pandemic, the path forward, and what we as tax practitioners can do to assess and check our own gender biases in the tax system.

Two years into the COVID-19 pandemic, women appear to have fared worse than men during these unprecedented times. Statistics Canada reports employment rates have climbed faster for men than for women with the lifting of COVID-19 restrictions. The numbers also show women overrepresented as essential workers, suggesting they have faced more pandemic-related work challenges, including long work hours, understaffing and increased exposure to illness. In addition to being on the frontlines, women have often shouldered the majority of household responsibilities—caring for children due to school and daycare closures or taking on additional household chores.

The pandemic has shone a spotlight on long-standing gender bias in the home and the workplace. But that bias, both explicit and implicit, is also found in the Canadian tax system—if you know where to look.

For instance, the tax on split income (TOSI) rules limit income splitting among family members not “actively involved” in a family business. If a family member receives income or capital gain from a business in which their spouse, child or sibling is actively involved but they are not, under the TOSI rules their income may be taxed at the highest marginal rate. This policy is intended to prevent higher earners and business owners from lowering their overall tax burden by moving income to a spouse, typically the wife.

However, the policy fails to recognize the home support provided to the business owner as “active involvement.” A woman may quit her job in the family business or elsewhere, reduce her work hours, or accept lower wages in exchange for a more flexible schedule, all to better support her partner by taking care of the household work and the children—who in turn represent the next generation of business owners. Yet those responsibilities are not considered worthy of compensation or defined as business involvement for tax purposes. Any payment of the business income to the stay-at-home spouse is considered ineligible for a more favorable tax rate under the TOSI rules.

Conversely, if the family hires a nanny and both partners work full-time in the family business instead of one staying home, under TOSI rules the income of both partners will qualify for the more favorable tax rate as well as a child care deduction. Thus, a woman’s decision of how best to support the family business—through “active involvement” as currently defined or by staying home—affects not only her personal financial freedom, independence and creditworthiness, but also the lifestyle options for the family as a whole. 

The gender wage gap is narrowing but still far from closed. Factors contributing to the struggle for fair wages include pregnancy, childbirth and child care needs, all of which can lead women to work fewer hours, log more absenteeism, and experience reduced seniority and employability compared to men. In Canada’s progressive tax system each spouse individually files a tax return and pays tax at the marginal rate assigned to their income level; but many benefits—including the goods and services tax credit, the Canada child benefit and child care subsidies—are income-tested on a family basis. When deprived of those benefits, the lower-income earner is effectively taxed at a higher marginal tax rate, shrinking the family budget overall as well as affecting the lower-income earner individually—again, more often the woman.

Although this system may benefit the family, women may not have access to additional financial resources or hold decision-making power with respect to how these resources are utilized.

Steps in the right direction

While the data may seem discouraging, positive change is underway. Along with appointing Canada’s first female finance minister in 2020, the government is collecting data on the impact of fiscal policy on gender equity, with a focus on major government initiatives like the annual federal budget. In recent months subsidized child care for all families was introduced in most provinces, with additional subsidies for low-income families. Subsidized child care may seem like a small change, but it could be the deciding factor for a woman returning to work when the cost of care is compared to her take-home wage.

Introducing tax reforms that have a positive impact on women and promote gender equity is the minimum call to action. Policy-makers need to consider additional fiscal measures as well, and solicit input from organizations focused on women’s issues. Ensuring greater involvement of women in policy development will help to bring about gender parity in the economy, maximize economic participation by all Canadians and ultimately promote economic development on a nationwide scale.

More from this series