I met a man a few years ago who wrote a letter to the Canada Revenue Agency. It read like this: "Dear Sir/Madam: I have been cheating on my taxes for the last eight years and I've been losing sleep at night. Please find enclosed a cheque for $50. P.S. If I still can't sleep at night, I'll send you the rest."
While cheating on taxes is not a good idea, it's easy to understand why many might do it. Turns out that the average Canadian worked until June 6 – just this week – to pay the taxman for 2016. It's only after that date that we can keep anything for ourselves. This is known as "Tax Freedom Day." I'd like to share some statistics with you that are illuminating.
Tax Freedom Day
If you were to pay your taxes for 2016 starting the first of January and continued to hand over your full paycheque until your taxes for the whole year were covered, then June 7, 2016 – Tax Freedom Day – would be the first day you'd be able to keep anything for yourself. Each year, the Fraser Institute does the math and figures out the date. Last year, Tax Freedom Day was June 9, 2015, which on the surface would suggest we're better off in 2016 than 2015. Not quite. There are reasons other than lower tax rates as to why the date fell two days earlier this year – more on this in a minute.
The calculation by the Fraser Institute counts all types of taxes, including: payroll and health taxes, sales taxes, property taxes, liquor, tobacco and amusement taxes, auto, fuel and motor vehicle licence taxes, import duties, natural resource levies, and of course income taxes, among other taxes.
It's worth noting that Balanced Budget Tax Freedom Day actually arrives on June 18, 2016. If federal, provincial and local governments were to increase taxes sufficient to balance their budgets instead of borrowing and incurring deficits to cover expenditures, Tax Freedom Day would fall 11 days later.
Don't be quick to celebrate the fact that Tax Freedom Day comes two days earlier in 2016 than 2015. First, Tax Freedom Day used to be as early as May 3 back in 1961 (the earliest year for which the calculation was done). We've moved a long way in the wrong direction. Second, 2016 is a leap year which, all other things being equal, would cause the date to fall one day earlier this year. Finally, and most importantly, the calculation is based on government forecasts of revenues for the current year and governments across the country have been very conservative in estimating 2016 tax revenues (the Tax Freedom Day calculation is redone when the actual figures for the year are in; last year, this moved the date one day earlier).
In 2016, the average Canadian family will earn $105,236 in income and will pay a total of $45,167 in taxes of all types. That is, 42.9 per cent of all income will be paid out in one type of tax or another. The top 20 per cent of income earners in Canada pay a higher share of all taxes than their share of all the income earned. Here's what I mean: The top 20 per cent pay 56 per cent of their income in taxes while earning 47.6 per cent of all the income. On the flip side, the bottom 20 per cent of earners pay 1.8 per cent of all the taxes while earning 4.8 per cent of all the income. The Fraser Institute research also revealed that the top 10 per cent of income earners pay an effective (or average) tax rate of 56.2 per cent but their marginal tax rate is a whopping 68 per cent (this is the tax rate they pay on their last dollar of income). The bottom 10 per cent of earners pay an average tax rate of 13.4 per cent with a marginal tax rate of 23.5 per cent.
Virtually all high-income folks that I've met are okay with the idea of paying a higher percentage of their income in taxes than lower-income earners. This "burden" on higher-income earners typically remains in place even after a lot of good tax planning – contrary to what many might think.
I expect we'll see Tax Freedom Day move in the wrong direction over the next couple of years as tax rates rise even further or remain high, and government revenue projections improve. Bottom line? It's more important than ever to understand the pillars of tax planning and put them into practice – something I'll talk about again very soon.
I expect we'll see Tax Freedom Day move in the wrong direction over the next couple of years as tax rates rise even further or remain high, and government revenue projections improve. Bottom line? It's more important than ever to understand the pillars of tax planning and put them into practice.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices.