Jun 012018
 

Next week is Tax Freedom Day! This is the first day of the year in which Canada has earned enough income to pay its taxes. Every payment to the government of all levels that is officially considered a tax is counted. The purpose of having a tax free day is to provide tax paying citizens with a metric with which to estimate their “total tax bill.” 🙂

Tax freedom day is unique to every country. For example, it’s June 7th in Canada because 43% of all income earned by Canadians goes to tax collectively. But in the United States, it falls on April 24th because of a lower 31% tax burden.

How to calculate your personal tax freedom day

To determine our own tax freedom day we need to calculate our tax burden percentage. This can be done by adding up all the tax we pay to cities, provinces, and the federal government. Some forms of tax like tariffs are out of our control. But here’s a list of typical taxes I pay every year, and how much I pay into them relative to my gross income.

  • Income tax – 14% (Federal + provincial)
  • Payroll tax – 4% (employment insurance, state pension premiums)
  • Sales tax – 2% (GST/PST, consumption tax)
  • Property tax – 3% (apartment and farmland)
  • Other surcharges, excise tax, environmental levies, and duties – 5% (tax on alcohol, electronics, gasoline, etc)

So as it turns out my tax burden percentage is about 29%. This is just a rough estimate. But it means in a 365 day year, my tax freedom day would be around mid April. 🙂 It used to be in May, but I’ve managed to lower my tax burden over the years. Despite earning a high income, I’ve learned to pay relatively low taxes. My goal is to eventually drop my tax burden to 25% of my total income. 😀

Here are some strategies I’m using to keep more money in my own pocket.

  • Max out my retirement contribution (RRSP) every year. In 2017, I effectively lowered my taxable income by $12,000 this way, saving me over $3K of income tax.
  • Earn business income. Instead of accepting income as an individual, I use a small business when conducting freelance work. This way I can spend money on business related expenses first, and then pay taxes on whatever profit is remaining.
  • Learn to cook. Prepared meals either from the supermarket or restaurant are marked up with a sales tax. Basic groceries, meat, and produce are exempt from tax.
  • Efficient commute. My city has the most expensive gasoline in North America. It broke records a month ago at CAD $1.62/Litre, (USD $4.72 per gallon.) A big reason for this is taxation. There’s carbon tax, motor fuel tax, and public transportation tax all built into the price of gas at the pump. I recommend either live closer to work, or take public transit. My car only gets driven about 5,000 Km per year.

Taxation is a major living expense for everyone. But luckily there are aspects of it that we can control and reduce. 🙂

 

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Random Useless Fact:

Sep 052015
 

Simple Tax Saving Tips for Anyone

People who work for either the CRA or the IRS often feel stressed out because their jobs are so taxing. ? Everyone has to pay taxes of course, but here are a few easy tax saving tips that you can use to minimize your tax burden.

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  1. Income-split with your trusting spouse.
    It’s easy to shift the tax liability from a family member with a higher income to a family member with a lower income to reduce the overall tax a household has to pay. 🙂 Opening a joint non-registered account allows couples to income-split any capital gains down the road, which can save a lot of tax money if one spouse earns more than the other. And if anything happens to one person, the other person takes over the entire account with no messy legal or estate business. A spousal RRSP strategy can also achieve similar results.
  2. Earn more money from investments, instead of working.
    Capital gains and dividends are taxes less than active income such as from salary or wages. For example, in Canada, you can make up to $50K a year without paying any income tax, 😉 as long as all your income comes from eligible dividends. This is why it’s so important to prioritize investing over spending, especially at the beginning of someone’s career. Once an investment portfolio is large enough it will have enough momentum to continue growing by itself without any more additional savings. A job delivers high-risk income because it’s relatively common for jobs to be lost, along with the income. But investment gains, on the other hand, are low-risk. Counting on a steady stream of dividends in a diversified portfolio is much more reliable than relying on income from work or from running a single business.
  3. Make use of tax-advantaged accounts.
    401(k) and IRAs can be used by Americans to shelter their taxes. In Canada, the best vehicle we have is the Tax-Free Savings Account (TFSA.) The combined TFSA contribution room for a couple is $82,000 today. That is more than enough to invest in a broad range of low-fee index funds, where the future gains won’t be taxed. 🙂 If you manage to max out all your TFSA room, or if you’re a high-income earner with 140K+ salary, you have up to $25,000 of contribution room in your RRSP for just this year alone. Max out all your tax efficient vehicles before buying stocks, bonds, or ETFs in a regular cash (or non-registered account.)

By using just the 2nd and 3rd tips in this post, I save more than $5,000 of income tax every year. A little planning can go a long way!

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Random Useless Fact: 

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Jul 072015
 

Deciding which accounts to hold different assets in

Should you put stocks in your RRSP or TFSA? What about fixed income like bonds? This post will answer these types of asset location questions. Readers should already be somewhat familiar with tax advantaged accounts such as the RRSP, and regular taxable accounts.

The importance of asset location

Asset allocation helps to spread out our risk so we don’t put all our eggs in one basket. But asset location is also important because different types of investment incomes are subject to different tax rates. We can hold our investments in special tax advantaged accounts to shelter our profits so we don’t pay more tax than we have to. 😉

asset location for investment efficiency

In an ideal world we would hold all our investments inside tax advantaged accounts such as a TFSA or RRSP. However some people have more investments than what their tax advantaged accounts will hold. If that’s the case then investment income that is taxed at higher rates should take priority inside a TFSA or RRSP. So with that in mind let’s get down to the nitty-gritty. 🙂

Which Investment Vehicles to use: TFSA, RRSP, or Non-Registered

Where is the best place to put stocks, bonds, mutual funds, and ETFs? Should they go in an RRSP or a TFSA? There is no categorically correct answer. But here are some general guidelines that I would follow.

If you only use RRSP and TFSA:

  • RRSP for interest producing investments and U.S. dividend paying stocks.
  • TFSA for everything else.

If you have RRSP, TFSA, and a non-registered account:

  • RRSP for interest producing investments and U.S. dividend paying stocks.
  • Non-registered accounts for Canadian dividend paying stocks and preferred shares.
  • Everything else can go into the TFSA.

For a deeper look, below are two charts that go into specifics. The first chart shows how different types of investment income is taxed in different kinds of accounts for someone in the 31% marginal tax bracket. The second chart suggests the best accounts to buy different types of specific investments in. 😀

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Additional asset location notes to consider:

  • If we hold U.S. dividend stocks in a taxable account we’ll pay the 15% U.S. withholding tax off the top. But we can claim a foreign tax credit on our tax returns to recover some or all of this amount. However we’ll pay tax at our marginal rate on the full amount of the U.S. dividend. The result is that U.S. dividends held in a non-registered account will be taxed at the same rate as interest income.
  • Dividend income from U.S. dividend stocks in a Tax Free Savings Account (TFSA) is also subject to the 15% withholding tax, however this tax is non-recoverable. But the remaining dividend and any capital gains will not be taxed.
  • Dividend income from U.S. stocks in an RRSP are exempt from the 15% withholding tax. But this only applies if we directly hold a stock or ETF traded on a U.S. exchange. If we hold U.S. stocks in a Canadian mutual fund or ETF, we will need to pay the unrecoverable 15% withholding tax on the dividends.
  • Although many investment incomes are tax efficient while being held in an RRSP, any money withdrawn from the RRSP or RRIF later on will be subject to income tax at the full marginal rate and could trigger claw-backs for income tested government benefits like OAS.
  • Tax efficiency should not be the only factor when deciding which account to put an investment into. Simplification of record keeping, personal financial situation, risk tolerance, and retirement goals all have to be considered.
  • For most intents and taxation purposes RESPs behave the same way as TFSAs. RRIFs and LIRAs behave similar to RRSPs.

Continue reading »

Aug 262014
 

Looks like a merger is on the menu for Burger King 🙂 It’s currently in talks to merge with Canadian company Tim Hortons and move its headquarters up here to Canada 😀 Tim Hortons is a quick service coffee chain that has a strong Canadian identity. Here’s a drive thru window at a typical Tim Hortons.

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Last year I blogged about buying some Tim Hortons shares and how investing in the coffee industry is the best idea ever! Thankfully my investment paid off because each share today is worth about 62% more than when I purchased them. Tim Hortons’ performance has beaten the overall stock market index in both Canada and the U.S. 🙂

If the acquisition is successful Burger King and Tim Hortons would continue to operate as individual franchises. You won’t find Timbits in your Whopper, and you won’t be offered fries with your coffee, haha 😆

The merger would benefit both companies. Right now Tim Hortons sells most of its coffee in Canada because it faces tough competition in the U.S. from Starbucks and Dunkin’ Donuts. But Burger King is already established in the U.S. and also has locations in Latin America and Europe, so Tim Hortons can use those valuable business channels to expand its brand awareness, and gain better access to global markets. Meanwhile Burger King would benefit from the high margin coffee business and also save money via tax inversion.

Tax inversion is when a U.S. company that has large overseas markets moves its main corporate office into a lower tax country. This allows the company to reposition itself as a foreign corporation so it can return foreign profits to stockholders without double taxation. This means if the merger is successful Burger King will get to pay a lower income tax, which will leave more after tax profits for its shareholders 😀

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Continue reading »

May 182014
 

I recently read an article written by the affable David Carrigg, a prolific Canadian columnist 🙂 The article is about how a public insurance company (ICBC) made a botch of things and overcharged its customers by $39 million! Furthermore ICBC not only overcharged some of its clients, but it also undercharged other customers to the tune of $71 million total. Many B.C. residents became upset. When a Crown corporation mismanages money tax payers may be on the hook. And governments will often feel the pressure to raise taxes on the public to maintain fiscal order.

During this past year the Feds raised EI premiums. Quebec raised personal income taxes. B.C. increased its health care (MSP) premiums. Manitoba raised its provincial sales tax from 7% to 8%. And many Canadian cities like Toronto, Edmonton, and Vancouver (where I live) have raised local taxes 🙁 According to the Fraser Institute, a public policy think thank, the average family earned $97,254 in 2013 and paid $42,400 in total taxes. In other words, 44% of what the average Canadian family makes is spent on various taxes. 14-05-tax-dollar-goes-Summary

Many people go out of their way to find discounts on stuff they want to buy. They shop wholesale to save on bulk items. They feel disappointed when they miss a sale on their favourite toothpaste. Yet they don’t even think twice about paying the full retail price for their taxes 😐 They can try to outperform the stock markets. They can cut coupons everyday. They can even work extra long hours for overtime pay. But they could probably save more money than all those strategies combined by simply lowering their total tax rate by ten percentage points or so.

This is why I operate my rental farm as a business instead of a personal property, invest inside tax sheltered accounts, and have debts with deductible interest so the more taxes I pay, the more I get back. It’s all for the purpose of saving taxes. Each year I calculate how much tax I pay as a percentage of my total income. I track this ratio and try to reduce it every year 🙂 Like any other personal finance metric, once we start to track something regularly it will start to become something real to us that we can monitor, so that we can then set appropriate goals for it. But if we don’t track it, then we won’t know where to start or how low we should aim for. Last year my total taxes (income tax, sales tax, payroll tax, property tax, etc) represented about 30% of my total income. So I’m fourteen percentage points lower than average, but I think I can do better 😀 Who says doing taxes can’t be fun? 😉

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Random Useless Fact: 

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