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How Much Is A "Fair Share" Of Taxes?

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The Liberal Government has stated they want to build a strong middle class, but who comprises the middle class? Mr Morneau in his 2017 budget speech stated, "All Canadians must pay their fair share of taxes," but what is a "fair share"?

The answer to the first question is an ongoing contentious debate. According to former Finance Minister Mr Joe Oliver, the middle class could include households earning as much as $120,000. Given research completed by MoneySense Magazine1, the middle class could include households earning incomes ranging from $38,800 to $125,000, but this varies considerably between Provinces and Territories, and even between cities. However, does owning a private corporation automatically exclude you from the middle class as may be inferred by the Liberal Government's witch hunt on private corporations?

Meet Sally. Sally could be a physician or accountant, an engineer or architect, a therapist or life coach, or a hairstylist or clothing retailer. Suffice to say that either out of choice or necessity, she is self-employed. Let's make her a plumber who is in a position where it makes sense for her to incorporate because she can defer income within her corporation and income split with her spouse under present tax legislation. Her spouse works part-time. Their situation can be summarized as follows:

  • Sally's taxable corporate income:100,000
  • Spouse's gross income:25,000
  • Net income required to meet their lifestyle:80,000
  • Spouse's CPP income:4,300

Sally can distribute a combination of eligible2 and non-eligible dividends between her and her spouse ($41,000 to her and $20,000 to her spouse), leaving approximately $24,000 annually to invest inside her corporation for their retirement. Since she is required to pay both the employer and employee contributions to the Canada Pension Plan (CPP) she chooses to not participate in the program and pay herself solely through dividends. After a 35 year career, Sally can retire with a corporate investment portfolio of approximately $2.2 million. Sally and her spouse can live off the returns of this portfolio3 until their death 25 years after retirement.

Sally is certainly at the upper limit of what might be defined as the middle class regarding income, but is she substantially better off with her private corporation? To answer this, let's introduce JT. JT's spouse also works part-time. JT had a successful 20-year career as a teacher before moving into politics. As a politician, he spent 15 years as a member of parliament before retiring. Being in the public service his entire life, JT is in the fortunate position to be part of a defined benefit pension plan. His family's situation can be summarised as follows:

  • JT's gross income as a teacher:95,000
  • JT's gross income as an MP:176,000
  • Spouse's gross income:25,000
  • Net income required to meet their lifestyle:80,000
  • JT's teaching pension:38,000
  • JT's MP pension:79,200
  • JT's CPP income:7,700
  • Spouse's CPP income:4,300

JT and his spouse also enjoy a 25-year retirement.

The comparison between Sally's family and JT's family can get complicated. For the sake of comparative simplicity, we will ignore inflation and variations in salary and assume their 35-year working careers, and 25-year retirement composes the entirety of their incomes. For taxation, we will assume both live in Ontario.





































Who is Paying their Fair Share of Taxes?

 

Sally

JT

Taxes Over Career

$661,000

$970,000

Taxes During Retirement4

$208,000

$574,000

Taxes on Death5

$725,000

$0

Lifetime Taxes Paid

$1,594,000

$1,544,000

Lifetime Net Income

$3,723,000

$6,969,000

 

 

 

Total Net Income received from Public Funded Sources6

$107,000

$7,638,000

Total contributed to Public Sources7

$1,631,000

$2,470,000

Net Lifetime Contribution to Public Sources

$1,524,000

($5,168,000)

Sally's taxes are lower over her lifetime, but this is more than made up by the taxation of her corporation on death. Sally ends up paying more taxes than JT despite receiving almost half the net income he does. When we look at who positively contributed to the general revenue of the country, Sally put in over $1.5 million during her lifetime while JT paid nearly $5.2 million over his lifetime. Although JT does not get any tax breaks, his taxes do not cover his salary, and while he contributes to his pension plan and CPP, his employer contributes an equal percentage.

This should not be misconstrued as an indictment of our public sector, but rather a reality check in the face of present generalised rhetoric. If Sally has not contributed her fair share of taxes over her lifetime, both in total taxes paid and positive net contribution to general revenue, then "fair" has become the latest four-letter word.

The fact is, owning a private corporation does not make one part of the wealthy. Employees of the public sector and large corporations enjoy benefits and retirement plans that are unavailable to the private business owner. The only means private business has to narrow the gap are the few tax breaks currently available, tax breaks that help save for retirement but don't ultimately negatively impact the general revenue.

The real middle class is perhaps the employees of private business who, due to the costs, often suffer inferior benefits and lack of group retirement plans. If the tax burden on private business increases further, it will be both to the detriment of the private business employee and private business itself There are only a limited number of public sector and large corporate job positions. Rather than destroying this crucial employment sector, help them to compete with the large corporate and public sector employers to provide competitive employment.

1. [Are you in the middle class? January 27, 2015 MoneySense Magazine, authors: David Hodges and Mark Brown.]
2. [Due to her corporate investment portfolio]
3. [That is, the $2.2 million base is preserved.]
4. [Old Age Security has not been included in the considerations.]
5. [Excludes probate fees and ignores savings from excess earnings. Includes wind-up of corporation & corporate portfolio on death]
6. [Public payroll and pensions, and CPP]
7. [Taxes and CPP contributions]

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