How income clawbacks work in the real world of social and income assistance
Many disability and poverty activists are wondering what provinces and territories will do when it comes to the treatment of the new Canada Disability Benefit (CDB) under social assistance (often called income assistance).
Will they exempt it as activists wish?
Will they claw it back?
Will rent geared to income housing programs include it in income calculations charging rent on it?
Will the federal government enact promised legislation at the last minute to make the CDB non-reportable which will therefore exempt it?
Life before 2020
Prior to 2020, things seemed easier. If a new federal benefit was a refundable credit, then the credit was exempt and no rent was charged and no refundable credit was reduced. All the old taxable entitlement programs like OAS, EI, and CPP are not exempt, were all charged at 100% and that continued because that was the rule.
Earnings were partially clawed back in order to encourage recipients to earn money and governments endlessly tinkered with the formulas over the years allowing people to keep more and keep less along with a blizzard of time restrictions governing how much could be earned and when.
Then came CERB and CRB
But when Covid-19 hit, the federal government, for the first time since 1978, brought in new income security programs as taxable benefits in the form of the CERB and the CRB.
Provinces and territories didn’t know what to do at first because the benefit was paid through the income tax system but was not a refundable credit that is itself not taxable. Such benefits attracted a T4A and social assistance programs had always offset such benefits at 100%,
Federal Minister Qualtrough told provinces and territories to treat the CERB and CRB as refundable credits even though they weren’t refundable credits. Provinces and Territories wondered why they should treat a taxable benefit as a refundable credit. Why didn’t the feds make it a refundable credit in the first place? After all, they increased or created a number of refundable credits like the GST credit, Child benefits and a special payment to people with disabilities all during the pandemic.
But whatever the feds were selling, provinces and territories except for BC weren’t buying and in the end, only BC exempted the taxable benefits.
Activists had trouble making out what was going on with either level of government and expressed their bewilderment at the array of full exemptions, partial exemptions and full clawbacks depending on where you lived.
Things got a bit clearer with the CRB when provinces and territories clearly biased their treatment towards clawbacks. For example, Ontario applied earnings exemptions to the CERB but clawed back the CRB in its entirety as did most other jurisdictions.
So what is this all about? I think I know the answer. And it’s all about history and income tax pedigree.
1966
To understand things fully, we have to go back to 1966 and the implementation of the Canada Assistance Plan (CAP) that paid for half of social assistance costs in Canada on the condition that there would be no workfare or residency requirements, a stringent assets test, tight earnings exemptions and the solemn promise to claw back other federal entitlements.
The feds thought that paying half of all social assistance and then allowing recipients to keep their other federal benefits was double dipping. So they made a 100% clawback of other federal benefits a condition of cost sharing. This meant OAS, EI and CPP, War Veterans’ and other benefits would be fully offset.
To be consistent, provinces and territories extended the 100% clawback to Workers compensation and a number of smaller programs that were not taxed but tax reportable but they exempted refundable tax credits because taxes had already been paid on the items that attracted the refunds.
In addition, CAP also restricted the amounts that jurisdictions could pay in additional amounts to recipients with disabilities and would not fully share, for example, in the extra $60 a month that the GAINS program in Ontario paid monthly over top of basic allowances in the mid 1970’s.
1978
In 1978, the federal government decided to use the income tax system for the first time to distribute federal income security benefits once they devised payment mechanisms to do so. The idea was that the income tax system already processed tax refunds so if a new income security program was in order, why not use the tax system to deliver it rather than invent a new bureaucracy as had been done in the past with CPP, EI and OAS.
The first new benefit -the first refundable tax credit of the modern era – was called the child tax credit and Monique Begin was the federal minister of National Health and Welfare. She wanted the credit to go to all lower income families with children and requested provinces and territories to allow the credit to ‘flow through’ (in the vernacular of the time) rather than be clawed back.
Around the same time, she oversaw special increases to the federal Guaranteed Income Supplement (GIS) and she told subnational jurisdictions to refrain from charging the increases in the form of increased nursing home fees.
The die was cast.
And over time, all provinces and territories exempted the child tax credit from social assistance payments and most refrained from charging special GIS hikes in nursing homes.
1981
By 1981, it was clear that there were going to be greater use of the income tax system to pay out refundable credits. The yearly credits were now going to be paid quarterly and made exempt from social assistance. But the feds worried that on top of all this, they would be still paying half of the bill for non-taxed social assistance benefits.
They worried once again that their share of the cost of income security to low income Canadians was moving north of the 50% that they promised in 1966.
The federal solution was not long in arriving. A Department, then called Revenue Canada wrote to all provinces and territories to tell them that all social assistance payments were going to be tax reportable through a T slip called a T-5007.
What was this all about? It was not readily apparent why the feds wanted jurisdictions to issue T-5007s if social assistance was to remain non-taxable (as they were quickly assured).
But things became clear fast.
The purpose in making social assistance tax reportable was to ensure that it got reported on what is now line 23600 of the income tax form. That is the line now called Adjusted Family Net Income (AFNI) which is the line that the federal government uses to reduce refundable credits. Introducing the T-5007 for social assistance would ensure that such assistance would be counted in the income tests used to lower child benefits and other federal credits.
Damned if the feds were going to pay for half of all non-taxed welfare and disability payments, all of the new refundable credits and on top of that exempt social assistance payments from the income test used to administer the federal credits.
1996
The Canada Assistance Program was cancelled in favour of block grants and the federal government no longer cost shared in social assistance programs with the exception of payments under Ontario’s 1965 Indian Welfare Agreement. The rationale for federal entitlement programs to be deducted at 100% and for T5007 slips to be issued was largely undercut and really no longer operative.
But guess what happened? The clawbacks stayed in place and the T slips remained. And in 2025 , they each remain firmly in place. When asked why, my reply is always: “There’s a history but no real rationale except cost savings, inertia and convenience”.
1998
The next big story in the clawback saga was the implementation of the National Child Benefit (NCB) in 1998. The feds divided their new child payments into two, with one part being called the National Child Benefit Supplement that was slated to be clawed back by provinces and territories from their social assistance programs.
The provinces and territories had three choices: they could lower their child benefits from social assistance, claw the NCBS back as an income charge or replace their child benefits with a special supplement from which the NCBS would be offset. True to form , provinces and territories went in all three directions while some like New Brunswick decided not to participate at all.
The clawbacks delayed true reform until 2016 when a new federal government finally consolidated all federal child benefits into the Canada Child Benefit (CCB) and most provinces and territories paid most of their social assistance to adult singles and couples along with their own child benefits largely outside of social assistance. The clawbacks finally ended in a scene reminiscent of the Wicked Witch of the West melting near the end of the Wizard of OZ.
2020
In retrospect, the 42 year period from 1978 to 2020 marked the consolidation of refundable credits at the federal level as the preferred method of delivering new benefits, the replacement of cost sharing with block grants and the more or less blanket exemption of refundable credits under social assistance.
It would take the announcement of the CERB and CRB as taxable benefits to really shake things up.
Not only did these pandemic benefits signal a whole new direction away from refundable credits, it once again put exemptions and clawback policies into play.
But it did something more as it relates to the CDB. It more or less signaled the end of federal refundable credits as the preferred model for new federal income security measures.
The CDB legislation made it clear – going back to the announcement in 2020 in the Speech from the Throne, that the CDB would be modeled on the GIS, a non-taxable but tax reportable benefit. And if a benefit is tax reportable – even if not taxes itself – it is included in AFNI which means RGI rents will include the benefit in the calculation of rent.
And that is exactly what is happening – unless it doesn’t.
Right now, the CDB has the same tax pedigree as three other benefits: federal GIS, provincial and territorial Workers’ compensation and social assistance.
And Workers’ compensation and GIS are already clawed back from social assistance while refundable credits are not.
2025
The dilemma of historical tax pedigrees and social assistance clawbacks is unmistakable. Only refundable credits are routinely exempt from income charges and RGI rents.
All taxable and non taxable but reportable benefits are offset at 100% under social assistance. Provinces and territories are once again placed in the dilemma to either exempt or claw back.
But how can they exempt CDB payments without reconsidering the clawback of Workers’ compensation, War Veterans’ payments and GIS? What distinguishes these three payments one from the other if not their tax pedigree?
Of course, few are talking about it but the elephant in the room as all benefit designers in that same room will know, is CPP. Although taxable, social assistance programs claw back 100% of gross CPP from tens of thousands of disability pensioners and survivors across Canada.
If provinces and territories venture down the slippery slope of exempting a tax reportable but non taxable benefit like the CDB, how long will it be before people start calling for a CPP exemption costing hundreds of millions to subnational entities across Canada.
Conclusion
So there you have it!
Provinces and territories were very reluctant to exempt the CERB and most did not and when given a second chance with the CRB, they clawed it back. Not because they thought it was good policy but because they were afraid of the call to exempt the CPP disability and survivors benefit.
Now they are afraid to exempt the CDB because of the similar concern about tax reportable benefits that are deducted at 100%.
So buy some popcorn and watch how this one plays out.
Watch Alberta perhaps claw the CDB back and watch others exempt it.
But while you’re watching, always remember that the CDB could have been made a refundable credit; but that did not happen because CDB eligibility is tied to the Disability tax credit to keep it under the income tax umbrella.
In the end, we need a new era of refundable credits but activists rightly fear that those days are over.
Someone or a group in the federal bureaucracy in Ottawa has won the day on federal benefits and along with new benefits being tax reportable (CERB, CRB, CDB) a new era of public housing rental charges and social assistance clawbacks has begun.
Or has it?
Here is what was in the last Federal Economic Statement in 2024 re the CDB:
“In response to concerns about the federal government’s treatment of the Benefit, the 2024 Fall Economic Statement proposed future legislative amendments to exempt the Benefit from being treated as income under the Income Tax Act. This would also ensure the Benefit does not reduce the amount a person receives from other federal income-tested benefits and programs, such as the Canada Child Benefit, the Canada Workers Benefit, and the GST/HST Credit. People receiving the Benefit would not be required to report the amount they receive on their Income Tax and Benefit Return. As previously indicated, at the present time, the required amendments have yet to be enacted.
Stay tuned!