Trudeau’s Millionaires & Everyone’s Tax Hike

trudeau-wynne-20150129As a rule I dislike large majority governments. Far from believing that minority or coalition governments are unworkable, we have a good history of weak governments focusing on practical solutions that usually avoid the trappings of their respective ideological ends. Because the thing that worries me most about governments is not the promises they won’t keep, but the promises they will.

The resounding victory for the Liberal Party and Justin Trudeau means that the big worry for Canadians should be exactly this. Trudeau has promised rollback TFSA contributions, decreases in the planned rise of OAS, and add a new tax on people earning more than $200,000. Tax hikes haven’t been a popular part of political platforms over the past few decades, yet Trudeau’s platform was successful for precisely that, tackling perceived inequalities benefiting “millionaires” and a promised difference in governing style from the more insular and autocratic Harper.

While I may personally quibble over defining (and vilifying) “millionaires” as people earning more than $200,000, we must acknowledge that an upper tax rate of 33% on income over $200,000 isn’t so cumbersome that we should start panicking and freaking out. That is until you add in the provincial taxes.

Assuming that everything goes to plan, the top tax bracket in Ontario will be 54% sometime next year. That won’t even make Ontario unique. More than half of the provinces will have a top tax bracket in excess of 50%, with the highest being New Brunswick, clocking in at an impressive 59%. And what of the tax cut for earnings between $45,000 to $90,000? While it is estimated to put around $670 back into your pocket, it’s relief may be short lived in Ontario.

Hot on the heels of that cut will be the new ORPP, or Ontario Retirement Pension Plan, which will take about 1.9% of your salary by 2017, easily eating up whatever tax savings you were just given and then some.

ORPP Schedule

It’s easy to lose perspective on taxes and become an annoyance at family dinners, complaining about your money being stolen by evil government officials. But that shouldn’t mean that we aren’t vigilante about how much we pay in taxes either. On the docket across the country tax hikes are poised in every corner. In Alberta the NDP has raised taxes on corporations, even as the economy weakens. In Ontario the Liberals have decided to allow each municipality to set their own land transfer tax, representing a likely hike for many cities. And of course federally, the ending of income splitting, the rolling back of TFSA contribution room and the aforementioned new tax bracket all represent new costs for citizens.

I have an open dislike of Trudeau’s use of the term “millionaires” and “the wealthy” to talk about people earning $200k, it seems like a semantic trick. Few of us, after all, can muster the courage to defend an income that many will never see. But as unsympathetic as we may be to the “1%”, we should be mindful that taxes go up to cover costs, and if the economy slows or debt balloons, we may find that the “millionaires” encompasses an increasing number of us.

You Won’t Believe How RRSPs Can Ruin Your Retirement!

h64ocNo seriously, you won’t believe it. That’s because RRSPs really can’t ruin your retirement, and yet every year someone, somewhere writes an article about the RRSP Tax Trap! This year’s contribution is from the Globe and Mail, which was also the source of last year’s main entry (also by the same author). The argument in these articles is that your RRSPs can become a taxation nightmare, forcing up your annual income and making you pay a higher marginal tax rate in retirement than you did in your working years! Cue panic.

Wondering why you don’t hear this complaint more? Why you don’t see lots of special reports on the nightly news of some sad-sack sitting at his kitchen table opening letters and then explaining to the camera how he “never foresaw the tax nightmare he’s in” happening? That’s because this particular issue is often overlooked as being one of having too much money, and is not widely regarded as a significant problem by most people (in fact the opposite for most Canadians is true). And while it’s true that being wealthy can create more complexity in investment strategies the “mo’ money, mo’ problems” aspect here has yet to stir a vast number of people to forgo their wealth and move to a commune.

The crux of these regular articles however (the reason why your average middle class Canadian should worry) is because RRSPs don’t save you taxes, but DEFER them. This emphasis on deferral, that your taxes will come back to haunt you is the kind of half truth that the media cheaply peddles without much thought for whether it does any real harm to the investor reading the article. It’s also bad math, because in addition to the taxes you deferred by contributing to your RRSP, there is also all the taxes you didn’t pay over the lifetime of the investment.

Let’s create a simple scenario to better illustrate what I mean. Assume the following things:

  1. You are 50.
  2. You currently earn, and will never earn more than $125,000 from now until you are 71.
  3. That you contribute every year $22,000 to your RRSP
  4. That your investments will return an average of 6% per year.
  5. That you start your RRSPs at age 50 with $100,000
  6. You invest $5500 of your tax refund into a TFSA with a 6% ROI

Let’s also create a second scenario, identical to the first, but instead of saving in an RRSP you do it in an unregistered savings account, splitting the $22,000 contribution between that and a TFSA, with a taxable rebalance triggered every 5 years. In all other respects the scenarios would be identical. What would happen?

Well thanks to excel it would look something like this:

20 Year Savings Plan

That gap in returns is the compounding difference of avoiding ongoing taxes from rebalancing and investing a portion of your tax refund into your TFSA. In essence you made each dollar travel farther over that twenty years by utilizing your RRSP more than you did without out, to the tune of nearly 25% additional savings.

There are a lot of ways to play with this, with numerous avenues to improve or refine this scenario, but no matter how you slice up these hypothetical scenarios there will never be a version where having less money is inherently better than having more. Having more is the whole reason you’ve been saving in RRSPs in the first place.

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That isn’t to say that you shouldn’t be mindful of taxes in retirement, or that your retirement strategies shouldn’t include things like debt reduction or trying to maximize different investment pools, like TFSAs. It also doesn’t mean that there aren’t ways to be more sensible with your savings for retirement. What it does mean though is that realistic threats to your retirement are unlikely to come from having saved too much, and that concerns over your taxes being too high because you were good at saving your money is the literal definition of a first world problem. In short, don’t worry that your RRSPs are going to ruin your retirement when they will likely underpin a successful retirement plan.