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August 23, 2016 | Losing It

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


The easiest money you make is what you don’t send to the government. It’s called tax avoidance. It’s legal and is the antithesis of the ‘shared society’ concept T2-loving Millennials have embraced. So if you have cowboy tendencies and are of dubious social value (like me), it’s useful to know how taxation happens. Or, you can just trust everyone and hand over your income. That should work out well.

When you work for it:

Poor schmucks who toil working for employers are sitting ducks for taxation. Your boss, by law, has to record what you make, withhold taxes at source, remit them (monthly) then issue verification to you and the feds. The more you make, the more you pay under our ‘progressive’ system, with the only serious relief coming from RRSP contributions. (But every time you put money into an RRSP it becomes taxable again.)

In you earn a hundred grand in Ontario, for example, the basic tax is 25% of your paycheque, leaving you with just under $75,000. But while the ‘average tax rate’ is 25.2%, the ‘marginal tax rate’ is 43.4%. That means of every extra dollar earned above this income, you’ll lose forty-three cents. Ouch. This is a really good reason not to buy a rental property, because…

When you collect rent:

Rent’s taxed the same as employment income. So if you earn $100,000 and shell out 25% in tax, then collect $12,000 in rent, the bite is huge – about $5,000 in tax on the rental income alone. This is something most amateur landlords usually discover the hard way.

When you earn interest:

Ditto for interest. It’s also 100% taxed since every dollar in piteously-low returns from braindead GICs or flaccid HISAs is heaped on top of your employment income and hit by that marginal rate. Yes, it’s bad enough when a GIC yields 2% and barely keeps its nose above inflation, but having to pay serious tax on it – often on returns you haven’t yet received – is nuts. And silly people think this is ‘risk-free’. Ha.

When you invest for a gain:

Let’s contrast that with the money you might make owning an ETF instead which, over time, rises in value. The profit here is called a ‘capital gain’ and half of it is not subject to tax. Seriously. Unlike rent or interest, which is 100% taxable at your marginal rate, a capital gain is only 50% subject to pillage. So, someone with a two million-dollar portfolio who harvests a $100,000 gain in higher asset values gets to keep half of it, while paying tax on the other half at a rate determined by their income. The maximum that would amount to (for someone making more than $230,000) would be 26%.

That’s right. The dude with two mill and an income of almost a quarter million pays tax at the same rate on his investment income as the guy working for a $100,000 salary. That’s why rich people stay that way, and don’t have GICs.

When you get investment income:

The same principle – that people with investments have better sex lives than employees – holds true when it comes to taking an income stream from your portfolio. Many investments (such as preferred shares, stocks or some ETFs) pay through dividends, which come with the dividend tax credit. This complicated little break results in a lower tax rate, and can result in a $50,000 tax-free income. How cool is that? It’s also possible to take an income stream in the form of ‘return of capital’ from a portfolio, which is non-reportable. Thus a retiree could have monthly cash flow but stay in a subterranean tax bracket, with no clawback in the government pogey. Moe reasons for Millennials to hate us.

When you work for yourself:

Finally, self-employed people have the greatest flexibility. They can set their own salary level, thereby managing the amount of RRSP contribution room created and the level of withholding tax. They might also pay themselves through dividends, splitting the tax load with their businesses. They can often invest through the corp, enjoying the lower business tax rate. They can repay themselves any personal investment in the business, tax-free. Plus, legitimate deductions abound for everyday expenses, while putting spouses or kids on the payroll, splitting income. Sweet.

Don’t focus on what you make. Obsess about what you keep.

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August 23rd, 2016

Posted In: The Greater Fool

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