The PBO report on Universal Basic Income and the Taxation of WSIB Benefits (Part 1)

July 28, 2020

The federal Parliamentary Budget Officer (PBO) issued a report on Universal Basic Income earlier this month in responses to questions asked of it about the extension of the Canada Emergency Response Benefit (CERB). In that report, the PBO suggested that part of the cost of a Universal Basic Income program could be partially offset by allowing for taxation of certain benefits including workers' compensation. The PBO did not appreciate the nature of the workers' compensation system nor its history. The PBO report is here:

The PBO report states at page 9:

"PBO also estimated the potential fiscal offsets that could be used to defray some of the incremental GBI expenses. The criteria for this inclusive list, as well as a complete list of measures, are included in Appendix A2. Generally speaking, they are measures targeted toward low-income or disabled persons, and are limited to programs delivered via the personal income tax system as well as the social assistances."

Workers compensation benefits are listed as a federal program in Appendix 2. It is not clear whether the PBO considers workers compensation as a "program delivered via the personal income tax system" or one of the "social assistances". The report just lists the benefit in the Appendix, and provides no indication why measures targeted for the disabled should be offset.

Workers compensation is not, in fact, a program delivered by the personal income tax system nor is it in the nature of social assistance. It is a right possessed by workers, not based on need but based on entitlement as part of a grand bargain with employers. The program has been legislated by provincial governments. In the grand bargain, workers gave up the right to sue their employers for workplace injuries in exchange for no-fault compensation at a reduced rate administered by an agency rather than the courts. The Ontario workers' compensation scheme actually predates the 1917 Income War Tax Act which was the first piece of income tax legislation in Canada.

Workers compensation benefits have not been taxable. In the original Income War Tax Act, the threshold for taxation was high enough that all injured workers fell beneath it. In more recent decades, workers' compensation benefits, including those paid to survivors, have been explicitly not taxable by law. The levels of benefits paid to workers in Ontario in the last 50 years (75% of gross income, then later 90% of net income and since 1998, 85% of net income) have been set on the understanding that the benefits are not taxable. This reflects the bargain between workers and employers, and a unitlateral change by the federal government to reduce costs associated with a Universal Basic Income program would upset the bargain.

There are actually good reasons for workers compensation benefits to be made taxable as part of broader changes to the system to be made by a (forward-thinking) province, in exchange for tax recognition for the province and other changes from the federal government. The changes would not result in any reduction in benefit levels overall, but would lead to better pension protection among other advantages. More on this in Part 2.