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Invest or Pay Debt?

A very good question that most mutual Fund Salesman Financial Planners don’t always talk about, is it better to Invest or pay debt? (where invest usually means buy Mutual Funds for your RRSP or TFSA)

Let’s do some math ? Let’s give ourselves $500.00 that we FOUND (yeh, I wish I could find $500 too). Let’s look at what happens in our scenarios.

Invest in a Good Mutual Fund

Yes, I am not going to tell you what this is (but look at the Management Charges FIRST and we’ll talk about that another time as well), assume this mythical fund can pay 7.5% annual growth year over year (again, I have no idea if such a fund exists, I am only doing this for examples sake).

After 10 years our $500.00 will be worth 500 * (1.075)^9 = $958 or so (approximately) which means you made about $458 profit, good for you!

That’s not bad, especially if you have put it in an RRSP, so you have saved tax money too.

Put money on your Credit Card

Assuming you have a nice credit card company and they are only gouging you for say 14%, given for some bizarre reason you might carry this balance for 10 years (and if you have done this, let me kick you in the butt now.

$500 off your balance would save you 500*(1.14)^9 = $1625.00 or so, which means you have saved $1125.00 ! WOW!

KARUMBA!!!! Hey, I think you should put that money on your credit card, don’t you think?

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Taxes, taxes, taxes….

Seems I am on a bit of a “bender” when it comes to the Canadian tax system lately, but I have been paying taxes, employment insurance and Canada Pension Plan payments now for more than 20 years, and I don’t get much back from this. Now, I am not wishing to dip into the Employment Insurance payments I have made, but I would hope that when (or if) I retire there is a Canada Pension Plan. A really good book that discuss the Pension system is Free Parking (2nd Edition) by Alan Dickson, well worth having a read (because it is SO contrary to ALL of the other financial analysts out there). Even if you don’t agree with the contrary positions to your opinions, it is good to know what their argument is (and I am not sure that I disagree with Mr. Dickson, either).

Ottawa is abuzz with pre-Election fever, so remember, if you want the system to change NOW is your chance. Call your Member of Parliament, better still, call his or her opponent and put forth YOUR opinions. BE HEARD!!!

You can simply forward my blogs to them via e-mail (the little envelope icon at the bottom of each entry means you can e-mail it to someone in specific, so that COULD be your MP!). I don’t mind being quoted, if it changes the system.

If you don’t do something now, you don’t get to complain later!

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My Spouse is Worth How Much?

This piece was originally written in 2005 so the numbers aren’t quite right currently, but the sentiment is correct. Figuring out my spouse is worth how much isn’t that hard these days.

So, we now have figured out that the Government of Canada thinks little of the “traditional family” (IMHO), so let’s just ask another interesting question.

How much is the work that my spouse (who stays at home and WORKS) worth in the eyes of the government?

That’s a darn good question. If we go back to our happy calculations from our last set of Blogs:

  1. Assume an income of $100K (yes, I keep choosing that number because it is easy for me)
  2. All we need to compare is the income of a Single Person that makes $100K and someone with a spouse, right?
  3. Assume this is Ontario (the good) of course.

Well if we look at how much a single person (who doesn’t do anything with their money except LIVE), the would pay approximately: $29,952.00

That is a lot of money, no matter how you slice it eh?

OK, if we now look at a married couple where one spouse makes $100K and their spouse or live in partner do not have enough income for the Tax folks to notice, they would pay: $28,219.00

So this says to me (and I could be mistaken), that my spouse who works very hard at home is worth: $1733.00

That is real money too guys (i.e. it’s money you aren’t paying in Tax, so it is REAL money). If I get paid every two weeks, that means my spouse is worth $66.00 per pay cheque.

That is not fair, now is it? My spouse’s labors to take care of our kids, the house and keep me from killing myself is worth $66.00 every two weeks? NO! That is not right.

Again my numbers are thanks to our friends at Quicktax.

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The Tax System Hates Single Income Families (Final Analysis)

I wrote this many years ago (2005), when we were effectively a single income family, and I was lamenting the tax system’s treatment of us. The numbers have changed over the years, but single income families really do get the shaft from the Tax System.

So what have we learned?

  1. In our specific scenario (read all of my disclaimers in my previous posts) a Single Income Family as compared to a Dual Income Family, pays:
    $7424.00

     

    Approximately MORE in taxes (that is Provincial and Federal taxes combined).
  2. This means that the Single income family to NET the same would have to make over $12,000.00 GROSS more to bring home the same amount (that is just unfair). Remember the single income earner at that level is taxed at the HIGHEST level on that extra income.
  3. The Dual Income family is MORE likely to be eligible for:
    1. Family allowance cheques
    2. Provincial tax credits
    3. Pay less for the Ontario OHIP TAX
  4. The Dual income family gets to write off a great deal on Daycare including:
    1. Daycare costs
    2. Summer Day Camps costs

If this doesn’t convince you that the Taxman HATES Single Income families, I don’t know what would.

If you agree or disagree comment on this, I am willing to dialogue with folks on this, but if you agree that this is UNFAIR, contact your member of Parliament. Remember an election is just around the corner, and they MOST LIKELY will return your calls (as opposed to afterwards when they kind of forget you exist (IMHO)).

What can we do to fix this?

  1. Introduce a FAMILY or HOUSEHOLD income concept, where spouses or live-in folk can split the income (or even level the taxes) of the house and NOT get taxed at such a high level.
    • Might promote more folks to stay at home with kids (thus not as much daycare)?
  2. Overhaul the whole tax system, so that everyone pays the same thing. Here I should be careful, because they’ll just end up making dual income folks pay as much as Single income folks!
  3. National Daycare moneys should go directly to the families, (ALL OF THEM) and let THEM figure out what to do with the money (ok, now I sound like Ralph Klein).

The previous points are MY Opinion only, but maybe it’s time to get more than just crazy crackpots like ME thinking about this?

If you want to compare this and have Quicktax, it’s dead easy, just create an extra return in it, and compare what you might pay if you were a Single Income earner!

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Government hates single income families (Part 3)

The numbers here are from more than 10 years ago, however they still illustrate how a family income and single income models skew how much income tax  single income families pay.

OK, so we now know how much a single income family has to pay in taxes approximately (28% of there income and that is before you think about GST, PST, Property Taxes, and living expenses), pretty gross huh?

Now let us look at a family with 2 income earners both making $50,000 a year (which adds up to the exact same amount as our single income earner). Same assumptions about CPP, EI, etc.,

So let’s look at the table NOW for Spouse #1:

Tax Line DescriptionLine #Amount
Employment Income101$50,000
Total Net Income236$50,000
Total Taxable Income260$50,000
Net Federal Tax420$7,201
Provincial Tax428$3,196
Total Tax Payable485$10,397

So, thanks to our tax system, Spouse #2’s income tax looks the same so the total tax payable for this couple would be: $10,397 * 2 = $20,794.00

Interesting eh? So, let’s compare with our single income family which pays : $28218.62

A difference of: $7424.00 (approximately)

Tomorrow, my commentary on this, and a possible solution, which I will borrow from our U.S. cousins.

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