October 20, 2020
Introduction
Canada’s Poverty Reduction Strategy gives a broad definition of poverty which allows for the incorporation of many dimensions of poverty. The strategy commits to monitoring progress along a number of these dimensions using indicators. A dashboard with these indicators will be updated to keep Canadians informed of progress in the reduction of poverty.
But as we have stated elsewhere, the strategy identifies time-bound targets for making progress in reducing poverty linked to only one of these indicators. This suggests that the federal government can be held accountable for its efforts in achieving these targets. The indicator it uses is an official poverty line. The official poverty line is a uniquely income-based concept. The targets are as follows:
– By 2020, the poverty rate will be reduced by 20% from its 2015 level, and
– By 2030, the poverty rate will be reduced by 50% from its 2015 level (aligned with the United Nations Sustainable Development Goals)
In other words, the official poverty line can be used to calculate the poverty rate: the percentage of the population with an annual income lying below this line at a particular point in time forms the poverty rate.
The purpose of this article is to explore what the official poverty line is and how it is used to determine poverty rates. In the conclusion, we will draw the CVITP’s connection with this official poverty line. As you will see, the income tax and benefit returns processed by the CVITP play a crucial role in helping to raise clients’ incomes relative to the official poverty line.
The poverty line
In the past, the Canadian government used a number of different measures for determining low income rates in Canada. These included the Low Income Cut Off or LICO, the Low Income Measure or LIM and the Market Basket Measure or MBM. The poverty reduction strategy indicates the government is using the Market Basket Measure to establish Canada’s official poverty line.
Experts agree that there is no perfect way to measure poverty. Each measure has its shortcomings. This article will not explore these shortcomings and will limit itself to explaining what the MBM is and how it is used to establish the poverty rate, appealing to your intuition while (hopefully) avoiding most of the technical complexities involved.
There are four things you need to know to understand the MBM:
1. Composition of the basket
The MBM identifies a basket of goods and services the typical Canadian family needs to achieve a modest, basic standard of living. There are five components that make up this basket: shelter, clothing, food, transportation and other necessities.
Over time, the elements within each of the five components may change, reflecting changes in Canadian society. (For example, at present the food component makes use of Health Canada’s nutrition standards as outlined in its 2019 National Nutritious Food Basket.) To ensure the elements within each component making up the basket remain current, the government commits in the poverty reduction strategy to undertake a comprehensive review of the basket every five years. The last review took place in 2008 and the government has just completed a comprehensive review which reflects the elements considered essential to achieve a modest standard of living in 2018. This will allow Statistics Canada to move from what it calls the 2008-base MBM to the 2018-base MBM.
2. Costs – family size
Having established the elements for each of the five components that make up the Market Basket, it is necessary to determine the cost of these components. The MBM establishes the cost of this basket using a “reference family” of one male and one female adult aged 25-49 with two children (a girl aged 9 and a boy aged 13). (For example, the 2018 base MBM adopts the National Occupancy Standard for the reference family, basing shelter costs on what it would cost the reference family to rent a three-bedroom rental unit.)
The overall cost serves as the threshold or poverty line for the reference family. Only those families with incomes lying below the line would be considered poor.
To arrive at the thresholds for families of different sizes, the MBM adjusts costs using a commonly accepted methodology.
3. Costs – local prices
As will be evident to anyone who has moved around in Canada, prices for the various items in the Market Basket will vary from city to city and from urban to rural area. (For example, shelter costs are usually much higher for urban than for rural dwellers.)
Above, we told you that the MBM establishes the costs for the reference family. Given that the prices for the elements which make up the five components of the basket vary across Canada, the MBM establishes the cost for a reference family by distinguishing the prices in 53 different regions, including 19 specific communities (e.g. Vancouver, Toronto) and 34 population size and province combinations (e.g. Quebec – rural, less than 30,000, 30,000 to 99,000, 100,000 to 499,999). Effectively, this means that there are 53 different thresholds or poverty lines, depending on where the reference family lives.
(Statistics Canada is presently working with the three territories to develop poverty lines based on a basket of goods and services adapted to their unique circumstances. Discussions are also underway with Indigenous groups to co-develop indicators of poverty and well-being that reflect the multiple dimensions experienced by First Nations, Inuit and Métis.)
Finally, as prices vary from year to year, the MBM makes use of prices adjusted for inflation to establish the 53 different poverty lines for each year.
4. Incomes
Above, we told you that families with incomes lying below the poverty line are considered poor. If you have looked at your income tax and benefit return paper records, you will realize that there are many different ways of interpreting what is meant by income (e.g. total, net, taxable).
When comparing the family’s income with the poverty line, the MBM makes use of the concept of disposable income. The MBM methodology defines disposable income as total income (including government transfers, such as the Canada Child Benefit, the GST/HST credit, Old Age Security and Guaranteed Income Supplement as well as provincial credits and benefits) after deducting for: income tax and several non-discretionary expenditures including Canada Pension Plan and Quebec Pension Plan contributions, Employment Insurance and Registered Pension Plan contributions, union dues, child care expenses, spousal support payments paid, public health insurance premiums, and direct medical expenses including private insurance premiums. Disposable income is also adjusted to compensate for homeowners without mortgages in order to reflect their lower shelter costs.
Thus, where the disposable income of the reference family lies below the poverty line, the reference family is considered to be poor.
In summary…
if you know your family’s income, you can determine if your family lies above or below the poverty line by:
- Adjusting your total income to reflect your disposable income;
- Identifying in which of the 53 geographic regions used by the MBM that you live;
- Identifying the year of your disposable income in order to choose the appropriate inflation adjusted poverty line for a reference family; and
- Finally, adjusting the poverty line for the reference family to reflect the size of your own family.
To illustrate, let’s take a hypothetical family of two people (a couple with no children) which had a disposable income of $31,400 in 2018.
- Identify which Canadian city they live in – we give some examples below.
- See what the 2018 official poverty line was for the reference family of four.
- As our hypothetical family is composed of only two people, Statistics Canada multiplies the reference family poverty line figure by 0.7 to derive the poverty line for a family of two people living in that city in 2018.
- Depending on where they live, the hypothetical family of two will either be living just above or just below the 2018 official poverty line for their city.
To establish poverty rates at the national level each year, Statistics Canada uses the 53 annual 2018-base MBM poverty lines, adjusted for inflation, as the basis for comparison with annual income tax and benefit return data and 2016 census data (to be updated at the time of the 2021 census).
You may also hear use of the expression “deep income poverty”. This measures the percentage of individuals with a disposable income that lies below 75% of the official poverty line.
The CVITP connection
You will have noticed that disposable income – which is compared against the MBM costs to determine whether the income lies above or below the threshold – is composed of total income inclusive of government transfers.
As we indicate elsewhere, the income tax and benefit return plays a critical role in establishing the eligibility for and in maintaining the flow of many credits and benefits from government to families and individuals. These benefits and credits are government transfers that increase their total incomes. The CVITP focuses on helping low-income families and individuals to file their income tax and benefit returns in order to receive the government transfers to which they are entitled.
If low-income individuals do not file, they lose out on these government transfers. This lowers their total income and consequently their disposable income. Even with the government transfers (which, in some cases, can amount to thousands of dollars), the disposable incomes of many families and individuals will still fall below the poverty line. But for some, it is the difference between being counted as poor and simply as low-income. For everyone, government transfers make it somewhat easier to adopt a modest standard of living.