So what are Canadian taxes really like?

Well, I just finished doing my tax return this week, and I was not really amused to see that I owe the man a little money.  Well, in truth, it’s more like a lot of money.  I have the same issue every year – I have two sources of income.  Warriorbanker isn’t just a retarded name, it’s the truth.  I have money coming in from my day job – the banker part, though that’s not really an accurate description of exactly what I do for a living, and the warrior part from being a soldier in Canada’s Army Reserve (or more affectionately, the SWAT Team, SWAT standing for Some Weekends And Thursdays – that’s another story though).  I never quite seem to get the withholding tax straight and it usually means that I have a bunch owing at the end of the year.  I should have made a bigger RSP contribution I guess, but again, it’s been quite a year and that went by the wayside.

Anyhow, I’m a higher than average earner in Canada, my wife and I would fit definitely into the middle class.  I’m going to give you a rough idea of what the tax impact of that is like.  I’ll explain my methodology as well.  For Americans, there’s no such thing as “filing jointly” as you would know it in Canada – individuals cannot really split employment income.  There’s some tricks to do it, but I haven’t been in a position to employ any of them, and they’re not really all that effective for working folks anyhow.  I have no dependents for tax purposes, and no other fancy tax credits.  My taxable income for 2009, rounding slightly, was $80,000.  I grossed more than that, but have deductions for my Registered Retirement Savings Plan (which is basically the equivalent to an IRA) and my contribution to my military pension from the top line, because those are tax deductible – they’re also not significant amounts particularly.

In calculating the tax impact, I’m not going include to the cost of my contribution to the Canada Pension Plan, which is Canada’s public pension.  CPP is well funded and assessed by actuaries to be stable, so I’m not worried about this being a loss for nothing, I’m confident it will be there when I retire.  It’s designed to replace 25% of the average industrial wage in Canada, it pays about $1,000 a month to those who qualify for the full amount.  There’s a lot of proposals on changes and enhancements to CPP, which maybe I’ll get to another time, it’s something I’m interested in.  Anyhow, the record, my contribution in 2009 to CPP is $2,118.60, the maximum, since I make well above the Yearly Maximum Pensionable Earnings.  How this impacts is kind of strange, you wind up with a non-refundable tax credit for the contributions, so I’m not including it in this exercise.  I’m also going to exclude minor things like drivers licence and plate renewals, since that’s about $100/year, if that.

So, here’s the math:

Net income: $80,000

Total income taxes: $19,200 (note: I’ve rounded both figures up to the nearest $100)

Property taxes on the condo I own: $2,400 (again, rounded a bit, down this time, which more or less makes the total picture accurate.

So, that totals up to $21,600 in income taxes and property taxes.

To keep things simple, lets add $800 onto that to cover my Employment Insurance Premium.  It’s actually $731.09.

So we’re at $22,400.  That suggests then, my net income after these items is $57,600.  But we’re not quite done yet.  There’s sales tax to figure in.  Ontario, where I lived last year, has a provincial retail sales tax of 8%, and then there’s everyone’s favourite, the federal Goods & Services Tax.  Some folks call the GST the “Gouge and Screw Tax”, but actually, its malignment is more a matter of bad marketing than bad policy.  That too is another story, but the long and short of it is that the Progressive Conservative Government of Brian Mulroney replaced the convoluted, often much higher Manufacturers Tax with the transparent GST but didn’t explain it too well.   As for the two sales taxes, Ontario is replacing this with a Harmonized Sales Tax of 13% starting later in 2010.  Nova Scotia has this system already, so it doesn’t matter to me, except that I won’t be in Ontario to pocket the $1,000 bribe the province is paying out to ease the transition.

I’ll simplify things and assume that I spend every penny of my net income and every penny of it is taxed at 13%.  This is actually rather ridiculous, because a huge chunk of that spending goes to my two largest expenses, being my mortgage payment and groceries.  The mortgage payment is, of course, not subject to sales tax, and most groceries aren’t either.  However, I want this to be as “oppressive” as possible.

So, 13% of $57,600 is just shy of $7,500 in sales taxes.  We’ll call it $7,500.  So, by this pretty generous estimate, in 2009 I paid about $29,100 in taxes.  On an income of $80,000.  That’s 36.375% all in.  If I added on the CPP contribution we come out at 39%, but as I mentioned above, that sort of comes out in the wash anyhow because of the tax credit it creates.  Remember, too, that that makes some pretty generous assumptions about the impact of sales taxes, because off the top of my head, I can tell you that about $12,000 of that goes to my mortgage payment and groceries, which again, aren’t taxed.  Taking that out brings the rate down to 34.5%

If you’re American and you think that’s really high, you may well be right – but consider that on top of your taxes, you have to pay for health insurance to get an apples-to-apples comparison.  To do that exactly wouldn’t be easy because you wouldn’t find a directly comparable insurance policy, probably.  What I can say is that when I worked the comparison last with a friend of mine who lives in the United States, and compared his tax hit + health insurance costs for a modest plan with a lot of out-of-pocket costs, we wound up taking home a fairly similar amount.  My only out of pocket expenses are for my extended insurance, which I think costs less than $20/biweekly, and out-of-pocket stuff, which is basically dentists and drugs.  Nearly nothing (actually, having two dental plans, I wouldn’t really normally have to pay anything, but the out of pocket is so small I don’t bother with the hassle of making the claim against the dental plan I get being a Reservist, it’s not worth the effort).

I hope you’ve found this interesting – you must have, if you’ve gotten this far!


4 comments so far

  1. Jeremy Hoover on

    Nice post. I’ve always thought taxes were pretty much a wash between the two countries. For the slightly higher taxes you pay in Canada, you get more services: health insurance, better roads, and a safety net.

    One thing you mentioned, about Americans having to buy health insurance on top of their taxes, is, obviously, a bit trickier since most Americans receive some kind of health insurance through their employer. Sometimes this is completely paid for; sometimes the employee pays a portion.

    Since the cost is “hidden” (at least partially so), many Americans would not see this analogy. It’s one of the myths of “lower taxes” here. But the bottom line is–someone is picking up the tab.

    • Chrissy on

      With regards to employer-provided health insurance in the US, I wonder what the average person with such healthcare pays in co-pays? I ask because I have a few American friends who have what they seem to feel is good health insurance through their jobs who still seem to dish out a lot in co-pays.

      • warriorbanker on

        I’ve always been staggered by the out of pocket costs insured people pay. In fact I recall reading not long ago that a large chunk of medical related bankruptcies actually befell people who had insurance but still couldn’t cover their copays.

      • Jeremy Hoover on

        @Chrissy: Good question. There can be significant co-pays/deductibles. Often, the best employer-based insurance is very good in that its coverage is expansive. Some employers pick up the tab for co-pays and deductibles. But if they don’t, as you suggest, those costs can be prohibitive.

        One very real problem is that some Americans who oppose health insurance reform don’t know where their health insurance actually comes from. I have two very conservative Republicans in my church who adamantly oppose health insurance reform of any kind. Both receive their health insurance through their wives. And guess what? Their wives are school teachers, which means their is actually publicly funded (through taxpayers) *and* negotiated by unions! It’s a double whammy for them that they appear to miss. It benefits them, but not everyone.

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