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
 

Determining which accounts (Tax Free, Retirement, or Taxable) to hold different investment types in

Should you put stocks in your RRSP or TFSA? What about fixed income like bonds? This post will answer these types of questions. It’s assumed the reader is already familiar with the TFSA, RRSP, and regular taxable accounts.

There are two parts to every investment decision we make; the investment itself, and the type of account to hold that investment in.

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 taxed at different 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. 😉

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In an ideal world all of our investments would be bought inside tax advantaged accounts such as a TFSA or RRSP. There’s little reason to use a non-registered (taxable account) if there is still contribution room remaining in our tax free or registered retirement accounts. However its possible to purchase more investments than what our tax advantaged accounts will hold. If that’s the case then investment income that is typically 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 follow.

  • Use RRSPs for interest producing investments and U.S. dividend paying companies.
  • Use non-registered accounts for Canadian dividend paying companies and preferred shares.
  • Use TFSAs for everything else.

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 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 net 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 is not 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 the U.S. stocks are held in a Canadian mutual fund or ETF, we will need to pay the unrecoverable 15% withholding tax on the dividends.
  • Keep in mind that 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.

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Mar 182015
 

The following article was contributed by a staff writer.

All Americans are well aware of what debt is and how it can negatively impact our lives. While the amounts and types may differ, when it comes to resolving debt issues, many opportunities are similar for everyone. However, there are special services and consideration for members who have served in our Armed Forces.

According to certain studies, members of the military often carry more personal debt than civilians, with at least a quarter of military personnel facing credit card debt of $10,000 or greater. Other types of debt most common among military veterans include auto loans, education loans, and mortgages. Fortunately, like civilians, service members have options when it comes to tax debt relief.

Debt consolidation is one of the more popular choices because it can combine all debt into one payment at a lower interest rate. Often it’s hard to make even minimum payments because of interest rates that are sky high. Mix that with potential late fees, and a minimum monthly payment may not even begin to cover the actual accrued debt. Military veterans also have the option of taking a consolidated loan from the VA, which offers reduced interest rates and more appealing lending terms to help pay down debt.

Another option is debt settlement. Some credit card companies and loan providers may consider a debt settlement amount that is lower than the overall total due in order to have it paid in a timelier manner. Calling on the help of an industry professional and the options they offer like Community Tax Services can help ease the burden of dealing with the IRS or other collecting parties on your own.

A debt relief company can help you negotiate lower amounts due on your debt, so that you can make payments more aligned with your current financial situation to allow you to achieve a clean slate. When looking into a debt settlement option, take a look at your income and be honest with how much per month you’d be able to pay. This will help when you discuss possible payment plans with a debt relief specialist.

When it comes to other tax services for military veterans, there are programs provided by the IRS to help assist with preparing and filing tax returns. The Volunteer Income Tax Assistance Program gives veterans who make less than $53,000 or suffer from a disability an opportunity to receive tax support from IRS-certified volunteers to make sure tax forms are filled accurately and on time. This can help with late fees, penalties, or audits.

These tax tips are helpful for military veterans who may be overwhelmed or just in need of a little help when it comes to filing tax returns or handling tax debt. There are solutions available for those who are willing to work towards the goal of paying off any money owed. Make sure to research other opportunities within your own city that may focus on helping members of our military during tax time.

Have you used a tax debt relief service? How did they help you? Would you recommend them to others?

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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