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Low-income before-tax cut-offs (LICO-BT)
Part A - Short definition:
Income levels at which families or persons not in economic families spend 20 percentage points more than average of their before tax income on food, shelter and clothing.
Part B - Detailed definition:
Measures of low income known as low income (before tax) cut-offs (LICO-BT) were first introduced in Canada in 1968 based on 1961 Census income data and 1959 family expenditure patterns. At that time, expenditure patterns indicated that Canadian families spent about 50% of their total income on food, shelter and clothing. It was arbitrarily estimated that families spending 70% or more of their income (20 percentage points more than the average) on these basic necessities would be in 'straitened' circumstances. With this assumption, low income cut-off points were set for six different sizes of families and persons aged 15 years and over not in economic families.
Subsequent to these initial cut-offs, revised low income before tax cut-offs were established based on national family expenditure data from 1969, 1978, 1986 and 1992. Cut-offs for other years are indexed by applying the corresponding Consumer Price Index (CPI) inflation rate to the cut-offs from the base year. For the NHS, the 1992 base year was used to construct the cut-offs.
The initial LICOs were based upon the total income before tax of families and persons aged 15 years and over, not in economic families.
After a comprehensive review of low income cut-offs completed in 1991, low income cut-offs based upon after-tax income were published for the first time in Income After Tax, Distributions by Size in Canada, 1990 (Catalogue no. 13-210).
In a similar fashion to the derivation of low income cut-offs based upon total income before tax, cut-offs are estimated independently for economic families and persons not in economic families based upon family expenditure and income after tax. Consequently the low income after-tax cut-offs are set at after-tax income levels, differentiated by size of family and area of residence, where families spend 20 percentage points more of their after-tax income than the average family on food, shelter and clothing. Based on the 1992 Family Expenditure Survey, families spent 50%, on average, of their total income on necessities. The threshold was thus set to the income level where families spent 70% of their income on necessities.
The following is the 2010 matrix of low income before-tax cut-offs (LICO-BT):
Low income before tax cut-offs (LICO-BT at 1992 base) for economic families and persons not in economic families, 2010
Economic families and persons aged 15 years and over not in economic families in private households
Low-income cut-off is one of a series of low-income lines used in the National Household Survey. See also Income status; Prevalence of low income; Low income gap; Severity of low income and Economic family total income.
Since their initial publication, Statistics Canada has clearly and consistently emphasized that the LICOs are not measures of poverty. Rather, LICOs reflect a consistent and well-defined methodology that identifies those who are substantially worse off than average. These measures have enabled Statistics Canada to report important trends, such as the changing composition of those below the LICOs over time.
The choice of using before or after-tax income cut-offs depends upon the analysis undertaken. The after-tax income cut-offs will take into account the reduced spending power of families because of income taxes paid.