It’s almost tax season and I enjoy taxes a little too much. You may have heard that wealthy corporations and millionaires avoid paying taxes and meanwhile the little people like yourself have to pay huge amounts. Want to act like a millionaire and avoid paying your taxes too? Let’s find out how.
I’m going to use an example of someone who makes $40k because that’s a nice round number, and also falls into the lowest Canadian tax bracket, ie the one you’re most likely to be in early in your career and before you’ve gotten a handle on how wealth works.
The first $11,474 on your paycheck is tax free. That leaves $28,526 that’s subject to a 15% income tax. Since that first 11-and-a-bit thousand doesn’t count, your average tax rate (in BC – other provinces are different) is 14.61%. You owe the government $5842 of your hard-earned and you get to keep $34,158. I’m sure they’ll spend it wisely. (Check the numbers yourself if you want, with SimpleTax’s calculator here.)
It’s pretty painless – the payroll person at your work will helpfully deduct 14% from your check each month so you never even see it, and in the spring your tax bill will be zero, or close to it. You might even get a return if payroll dude did the math wrong.
And that’s the end of it, I guess.
No, wait. I brought you here for a reason. Millionaires.
If you have a million dollars, it’s very easy to stash it all in an indexed mutual fund that will pay dividends, or capital gains, about about 7% a year. (Here’s some nice simple portfolios you can invest in that will get you returns like that.)
You can pay yourself 4%, reinvest 3%, and keep doing that infinitely. Basically never work again unless you feel like it. The capital will keep growing slowly if you withdraw at that rate, so you can just keep it up forever. 4 percent of a million is like $40,000. Convenient, hey? The exact same salary you get! Wouldn’t it be great to just get paid $40,000 a year forever, and never have to work for it? It’s possible, and all you have to do is start with a million bucks.
Okay, end sarcasm.
Someone who has a million dollars is rich, safe to say. Rich people should pay more taxes, right? That’s the whole point of the marginal tax rate, right? Only here’s the thing – only half of the capital gain is subject to income tax, and it’s taxed at your average tax rate. This millionaire did nothing but sit on his butt and watch grass grow this year, so he doesn’t have any job income, and only $20,000 in taxable capital income. His average tax rate is 4.3%.
So the millionaire only has to pay $1,784 tax on their $40,000 income.
The highest tax rate in Canada is 33%, if you make over $200,000, but a five-millionaire can make that much just by letting his dividends grow and still gets taxed at only 11%, a lower rate than you, who spent the whole year grinding for your 40 large.
Doesn’t that kind of suck? Wouldn’t you rather pay less? Like they do?
Let’s find out how. You need to get rid of $5842 in income, tout suite. The easiest way is to stash it in your RSP. Money in your RSP is tax free if you don’t withdraw it til you’re a thousand years old and not making money anymore, and at least it’s still yours. You can put 18% of your income in there each year, and your payroll person was going to take it off your paycheck anyway so its not like you were using it. Tell payroll to stop making deductions, and just put 14% of your paycheck directly into an indexed mutual fund as soon as you get paid. Then you can start making your own capital gains. If you don’t know how to do that there are lots of super good tutorials to get you started here: Canadian Couch Potato
Another fun one is medical expenses. It’s kind of bullshit, but there are quite a few medical expenses that our provincial healthcare won’t cover – glasses, physiotherapy, hearing aids and medical devices (like wheelchairs). But you can pay for them yourself and claim them as medical deductions. For myself, I got new glasses and a hearing aid this year, for a total of $2200. Of that I can claim $1187. You can get $200 for moving expenses too. Don’t forget to check if you have any educational amount leftover from school – it’s around $5000 a year and that carries over.
Contributions to charity, and, for some reason, political parties and churches, also work. I don’t agree with that philosophically, but those are the rules.
Reducing your taxable income this way as well will let you pay less for MSP as well. RSP and medical contributions are deducted from your net income, and if you get that down to 34,158 then your MSP bill will only be $56 this year, instead of the $72 it probably was last year (if you made 40,000 last year as well). Put just a little more in your RSP and get it under $34,000, and you will only have to pay $46. That’s almost a good deal for healthcare, even if it doesn’t cover wheelchairs. Hopefully it covers the cost of all those goddam envelopes they insist on sending out every month. There’s like 16 of them on my kitchen table now, all addressed to people who don’t live here anymore.
So maybe if you can act like a millionaire yourself, you can feel a little better about the ludicrously low taxes that rich people get to pay, and the punishingly high ones extracted from lower income people.
Look, I’m not against taxes. The role of the government, as I see it, is to protect the common resources. That means the land, the people, the water, the oil, all of it. I especially care about the weaker members of our society, the ones who end up on the street after trauma leads to mental illness and addictions, getting stuck in the poverty trap. I want to be compassionate to them and make sure they get what they need, and I want to chip in my share for it. But our provincial and federal governments act like it’s not their job. They act like selling our land and resources for stupid cheap prices to corporations and letting millionaires off the hook for income tax is a good idea, and they don’t look after people with the money they’ve got.
It’s frustrating. I think I can use my money more effectively than the government, and I will as much as I can, within the rules.
Hope this helps some of you save some money too.
*** I did my best to be accurate and cite sources, but please tell me if you see any discrepancies.