Thursday, February 18, 2016

Avoiding Trudeau’s Tax Increase

If every Canadian changed nothing about their income from 2015 to 2016, Trudeau’s tax increase on high incomes would have brought in significant extra tax revenues. But things won’t stay the same. Some people find ways to adapt. I’m among these people.

For some time I’ve found my yearly vacation to be less than I wanted. This year is the first time I’ve done something about it. I’m a little past the midway point of an unpaid vacation. I wouldn’t say that the new higher tax bracket is the only reason I’ve taken extra time off, but it doesn’t hurt to know how much income tax I’m avoiding.

I certainly don’t expect anyone to feel sorry for me. And I don’t even have strong feelings about whether the new tax bracket is the right thing to do or not. But if my choice is any kind of example, we can expect some high earners to find ways to avoid the higher taxes. Some will use corporations and other tax manoeuvres, and others like me will just work less. No doubt many will change nothing at all.

In the end, the new higher tax bracket will bring in less money than one would expect naively based on 2015 tax filings. How much less is anyone’s guess.

31 comments:

  1. Treading close to political ranting now. Mind your audience.

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    1. @Anonymous: Did you read what I wrote? It's difficult to rant about an issue when I haven't made up my mind about it.

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    2. And did you read my comment? I said you were treading close to ranting.

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  2. Tax "adjusting" is exceptionally common practice, I would guess, for those to whom it's worth.

    A few years ago a semi-well known blogger/businessman in the US decided to take his income as close to the non-taxable level as possible because he disagreed so strongly with how the government spent his tax dollars.

    He doesn't work, his blog has one ad, he has started zero business, etc. It's kind of a shame because it definitely quells economic activity, but he's definitely got a right to not work.

    Even myself, not wholly for taxation reasons, but I've reduced my hours worked over time in conjunction with pay raises (adjusted for inflation).

    I'd say it's a common tax strategy for those that can do it (it's not always possible to work less).

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    1. @SST: I can't see many people taking a political stand like the businessman you mentioned, but everyone makes personal choices. I'm interested in what changes people choose to make and how we could measure such changes.

      I think you're right that high earners often can't work less. The ones that own their own businesses can do as they like, but employees and partners usually have less flexibility. If any management exec at my company wanted to work less, it would be taken as a sign of laziness and disloyalty. Their choices are either 0 or 60 hour per week. I'm lucky I was able to work out my arrangement.

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  3. What is the point of getting a few extra dollars in your pocket from the feds, when the local municipalities and the provinces simply take it away in new taxes or higher existing taxes 3-4 months later as announced today? It's all a shell game that always has a controlled outcome. I saw this coming long ago...

    Every morning I hear the commercial now for "wealth insurance"... This is on their website:

    "Turbulent financial markets, record low interest rates and higher taxes are challenging wealthy Canadians who seek safety, stability, and preservation of what they have worked hard for. WEALTHinsurance® produces guaranteed results unmatched by any other method or investment in Canada. It has been implemented by many of Canada's most sophisticated investors after passing every due diligence test."

    Absolutely those that have the means will do whatever legal tax avoidance strategy they can. And do you blame them? If you do maybe you should read today's new installment from the Fraser Institute.

    https://www.fraserinstitute.org/

    I don't mind paying taxes but not when they are unfair or simply used wastefully like they are now, propping up the pyramid of extortion we are governed by.

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    1. @Paul: It can make us feel better to (on one side) express frustration about the rich 1% or (on the other side) talk about high taxes and waste, but I don't see much use in such discussion.

      I am interested in how people change their behaviour in the face of tax changes. We know that people with somewhat above average incomes will see a tax decrease and those in the 1% will see a tax increase. Most of us have something to say about these changes, but what will we actually _do_ differently?

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  4. To paraphrase Lemme Kilmeister, Eat the Rich! (but tax them first!). Inflicting taxes on rich folks, just puts more money in the pockets of Accountants and Lawyers, since the rich folk will pay folks to find a way out, whereas we po' folk will just roll over and pay it... sigh...

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    1. @Alan: I'm not convinced it's impossible to tax high earners more, but it does take some work to anticipate how they will try to avoid higher taxes.

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  5. It is funny that how a below average income earner feels about the comments above. My partner lost job in January and on EI currently. My average 40 hours workweek brings a before tax income of $2100. Last years combined income was $95,000. I am working with dentists , who are business owners. If they decide to make adjustments in working hours, my income is going to go down again, unless I find another perfect part time , with suitable timings. It is not going to be easy.
    The average Canadian is not worried about high taxes or tax benefits. We are saving and working hard not to depend on government benefits.

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    1. @Anonymous: Trudeau's tax changes are aimed at people like yourself. He wants you to pay less tax and for high earners to pay more tax. However, I'm not certain that his measures as they stand now will work as hoped. Trudeau may have to plug other loopholes in the tax system.

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  6. @ Anonymous

    The average Canadian is not worried about high taxes or tax benefits. We are saving and working hard not to depend on government benefits.

    I disagree with this part of your statement. The average Canadian IS concerned about high taxes. Only some of us are working hard to not depend on government benefits. I would venture that there is a push on, particularly by millennials, to have more benefits and government in their lives. More benefits = higher Taxes. Kind of the opposite if I understand your comment correctly...

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    1. @Paul: I don't think talking about averages is useful in this case. Obviously, some Canadians worry about high taxes and others don't. Similarly, millennials cover the full political spectrum. I prefer to look for ways to make government benefits and services more efficient rather than just talk generally about increasing or decreasing the size of government.

      But getting back to the subject of this post, how effective will the higher tax bracket be in collecting more taxes (without regard to whether we think higher taxes on high earners is a good idea or not).

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  7. To answer your question directly, I agree with you - I believe it will be ineffective.

    I however believe stating a point is also ineffective without seeking out and identifying the root cause of why. Much like broadcasting news of a crime without any details on the "why" it occurred. For me that's pointless, even misleading.

    That is why I added my comments. I believe the tax changes were never meant to be more than window dressing simply to get votes. They have zero to do with being efficient. Will a few extra hundred $ really help anyone out stretched out over a year? No. Will anyone notice the 5 or 6 bucks extra on their checks? No. Will high earners truly be hurt paying an extra few thousand? No. Will most people change their habits to try to negate the increase? You did. However most Canadians will just grumble and bear the changes is my guess. I actually benefit from the payroll tax changes, but I oppose them because of what I wrote earlier. Sorry for the round about answer.


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    1. @Paul: I would go with saying the tax increase will be less effective than expected, but it will bring in some extra money. I agree that tax increases do nothing to make government more efficient. I wish I knew of some path to greater government efficiency. Most government services are vital, but don't need to cost as much as they do.

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  8. This tax was extremely effective in achieving the objectives of those who introduced it. It was never meant to bring in income for the government. It was always a mere populist soundbite to secure more votes. The net effect on the economy is negative.

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    1. @BHCh: No doubt getting elected was a major consideration, but I'm willing to believe at this point that Trudeau might think it's good for the country too. Whether the net effect on the economy is positive or negative depends greatly on what they do with the money. However, I'm not overly optimistic on this point.

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  9. I am a low income earner and I am against the taxes on the high income earner. What we need is a more effective government.

    High taxes at the upper level also discourage people a the lower level. It eliminates the incentive to work hard to become a high earner or it makes me think on way to pay less taxes even before becoming a high earner.

    Changing the subject. Could you tell me which plugin you use for your blog archives?

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    1. @Alain: That's an interesting point of view not held by many low earners. Personally, I'm a believer in progressive taxation. The tricky part is to decide how progressive it should be. I'd find the taxes I pay to be more palatable if they were used more for programs like affordable housing and helping those with mental issues and less for paying the salaries of the bottom quarter of government workers.

      I use Blogger and the "gadget" is just called "Blog archives".

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    2. I agree with your point. Now, becoming a doctor in Canada is very hard. Once the person did all the studying and become one, there are the high tax and heavy work load. What is the benefit?
      I want a system that encourages people to be rich.

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    3. @DentalAssistant: I suspect that doctors are one of the groups that the government does not want to alienate.

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  10. Good for you Michael with being in a position not to have to work as much, and with a side benefit of controlling your contribution to the state. For the record I don't take your post as treading close to a "political rant".
    With any change in the tax system there will always be a renewed effort by experts and those affected taxpayers to avoid paying more/higher taxes. These changes seem to be poorly thought out by governments intent on growing spending/revenues/debt to attempt to meet the insatiable appetite of many citizens. This may actually result in the loss of tax revenue, from those with higher incomes and from wealth creators. Greater income and wealth often leave people with more options and may actually lead to less tax revenue and less willingness/motivation to grow personal incomes. Therefore its likely not effective policy for this country. Most other people in lower brackets will have to keep working as normal and pay whatever taxes apply.
    I wonder if declining personal savings, growing personal debt, increased pressure for more government program spending actually indicates people are working hard to rely less on government benefits.
    I am not in favour of tax policy that is unlikely to achieve desired outcomes (as admitted by the current government), and one that discourages peoples motivation to increase wealth/income, especially for those individuals who do much to create employment and fund programs.

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    1. @RBull: I'm still thinking about most of the issues you bring up. I don't know what amount of income redistribution is right, but there is no optimum level of government inefficiency above zero. I'd be thrilled if government was about as efficient as Canadian business.

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    2. @Michael, I also don't know what level of income/wealth distribution is right. It is a complex issue and ten people will likely have ten different opinions. But I do believe we must better determine public priorities and improve govt efficiency/delivery with our tax dollars, and establish the ability to say no more often - we cannot afford it. Perhaps the biggest risk we have with very high tax rates especially at the top, is with alienating these people and sending them elsewhere - the consequences of that are grave. We will be left with creating even higher taxation rates for people at all levels.....and/or we will more quickly build a mountain of insurmountable debt (if not already) like other countries some think we should emulate, thereby reducing the efficiency of our tax money.

      As a retired taxpayer and former small business owner I would likewise be thrilled if government was close to Canadian business in efficiency.
      /END RANT

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  11. Exactly and nicely expressed. Unfortunately the "consequences" you refer to are simply dismissed or labeled as the rantings of old white conservatives. People can't envision what could happen if just a few bad choices are made and some current ones aren't addressed.

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  12. Morning Mike;
    The only reason it comes close to a rant is because of the "T" word.
    At any rate the whole issue really evolves around the inefficient and/or misuse of our tax dollars. I don't think anyone would say that employment and welfare contributions are not necessary to help smooth out life's inconsistencies.
    The latest (in Quebec - Ref Journal de Montreal) is the utilization of carbon tax revenues for supposedly "green" inititives such as wing tips for Air Canada planes to make them nore fuel efficient (HMM! wonder if AC passed this on to their customers), bus comapnies upgrading their buses to be more fuel efficient, pipeline company for the reversing of the fuel flow so Queebc can import from western Canada.
    Companies will find out loopholes as fast as the lawyers/accountants can get their hands on the legal texts.
    SO! Why should ordinary Joe Blow (was it not Joe Plumber in the USA a few years ago) not strive to do the same.
    WHen you give money to a homeless person and then see them with a beer in their hand it makes you wonder what your money was used for. Same with our governments. People can see waste and entitlement in government dealings. And so they strive to "waste" as little of their money as possible as it does little to benefit them.
    So YES, the goal is to enjoy as much of your own money as possible.

    My rant for today

    RICARDO

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    1. @Ricardo: I'm not sure if the T word is "Trudeau" or "Tax" but either way, it's true that both subject areas have generated plenty of rants. You don't have to look far to see small examples of blatant waste, but that's inevitable in a huge system. I think the real problem is the systemic lack of removing those public sector employees who do their jobs poorly.

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  13. Ricardo,

    To assist your understanding of the word rant, since you seem to be rather liberal with your interpretation (pardon the pun). Perhaps you mistake a comment with a named politician as a rant; a naming that you seem to believe has no place in a financial blog.

    rant
    rant/
    verb
    verb: rant; 3rd person present: rants; past tense: ranted; past participle: ranted; gerund or present participle: ranting

    1.
    speak or shout at length in a wild, impassioned way.
    "she was still ranting on about the unfairness of it all"
    synonyms: fulminate, go on, hold forth, vociferate, sound off, spout, pontificate, bluster, declaim; More
    shout, yell, bellow;
    informalmouth off
    "she ranted about the unfairness"

    noun
    noun: rant; plural noun: rants

    1.
    a spell of ranting; a tirade.
    "his rants against organized religion"
    synonyms: tirade, diatribe, broadside; literaryphilippic
    "he went into a rant about them"

    Michael, my anecdotal experience through friends and a father who was a senior career public servant makes me believe your last statement is correct.

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    1. @RBull: To be fair, I think Ricardo may have been explaining the reason why others might perceive this as a rant.

      This is just anecdotal, but any time I hear people talk about waste and useless employees at work, public sector workers always have by far the most extreme examples.

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    2. AHH! If only my dictionary were so complete. Just kidding.
      MJ has it right. The only reason "some" people would consider it a rant is because of the "T" word.
      As to whether or not it has a place in a financial blog well I have previously mentioned "Jim's" trick or treat tax on income trusts. That cost a lot of cap gains in one day. And all that after they has said the trusts were OK a few months before.
      Which goes to show one should never take for granted electioneering promises from whoever utters them.
      As to my political leenings well Justin Time did not get my vote even though I could not directly vote for him anyways. As to the "C's" well they showed us what they thought of how government should be run. I think it has to do with something mentioned in those Dodge pickup truck commercials - RAM
      The NDP I will leave to Alberta to solve.
      Now which of those two do you think I voted for RB? It was one of them. I did not "like" any one of them. I just had to hold my nose.

      This is all in jest RB. Don't take it too seriously.


      But this is getting off topic. MJ's topic is how to avoid the extra taxation, not a question of the symatics of the title

      RICARDO

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  14. Fair enough and thanks for the explanation Ricardo. And thanks for your input Michael. It was not my intention to get political.

    Ahh, yes, extra taxation and how to avoid....I expect that will become an even bigger industry as federal, provincial and often municipal debt levels build to stratospheric levels.


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