As Canadians, one of the things that we are all too familiar with is paying taxes. I always had a sense that we were heavily taxed, but never knew by exactly how much until I read a report by the Fraser Institute yesterday.
June 9th marked Tax Freedom Day. According to the Fraser Institute, tax freedom day is the point at which “the average Canadian family has earned enough money to pay the taxes imposed on it by the three levels of government: federal, provincial, and local.” Basically, if you gave every penny that you earned so far in 2014 to the government, you would be paid up in all of your taxes for the year. That really is an eye opener. Especially since it comes one day later than it did last year and about two months later than it did in 1961 – the first year in which tax data was analyzed to determine the total tax burden on the average Canadian family.
It is no secret that Canadians are over-taxed. Our tax system is a “progressive” one, which means that the more money we earn, the more we are taxed. The Fraser Institute calculated the total tax burden imposed on the average Canadian family as being $43,435 (or 43.5%) based on an average family income of $99,841. That seems to me to be a bit excessive, especially when I consider how our tax dollars are being spent.
What makes this report even more infuriating is that it comes at a time when our elected officials at all levels of government are mired in spending scandals. I’ve seen report after report about the mismanagement of public funds (ie. our tax dollars). Examples are everywhere these days: Canadians are over-paying for new navy ships that cost 3 to 5 times more than what other countries have paid for them. The federal government has faced a lot of criticism about Canada’s new jet fighter, the F-35, which will cost the tax payer way more money than what was originally announced. And, of course, there is the Senate spending scandal where our senators are claiming expenses that are paid by the Canadian tax payer for work that is done to benefit their own political parties. The list goes on and on!
Taxes also weigh heavily on investors. As investors, we need to be mindful of what kinds of assets we hold, what kind of account they are held in, and the type of income we receive from them. I make use of every tax shelter at my disposal – a registered retirement savings plan (RRSP), a tax-free savings account (TFSA) and a registered education savings plan (RESP). Also, as much as I hate paying taxes, I also know that there are ways to lessen the tax burden by investing in assets that receive favourable tax treatment. Outside of my tax-sheltered accounts, I invest in Canadian companies that pay an eligible dividend. Dividend income and capital gains are taxed more favourably than interest income (which is taxed at your marginal rate). These tax strategies allow me to shelter some of my investments for as long as possible from the taxman.