He said, “The government takes away a chunk of my paycheque in income tax. What BS. I work more overtime after cashing it out I’m left with a lot less than my regular paycheck.”
This dude is a prime example of trading time for income. More time = more income = more taxes = no thanks.
How do you stop working so hard and just make more money? The best way to do that is to tax advantage yourself. Hey, 99% of people aren’t doing it - come the way of the 1%!
My economics degree-wielding colleague had no idea that different flavours of pie had different slices to take home.
Why do high-level company executives like CEO’s make only a mid six-figure salary but receive bonuses in the form of stock options below market value?
Read on, young Jedi.
I promise you will make and save more money reading this than you’ll ever make winning any pools. So, if you don’t surf away to a fantasy football website, below you’ll find 4 major ways of being taxed.
There are more, but let’s tackle the basics:
Known as the best way of losing most of your money to the government. I have been doing this for most of my life like most people around me. Think of income tax like this:
The more income you make at your day job from your employer, the higher the tax bracket you’re in and the more your provincial/state or federal government thank you for your contribution to their sexy pensions.
Look, somebody’s gotta pay and if it’s you, your government and I thank you for paying more than your fair share.
Income is taxed at your marginal rate. This fancy word means whatever tax bracket you fall into in the various forms of government when all the math is put together. (Check out this website to find out what your marginal tax rate is).
Talk to anyone that owns a successful business and they will tell you that they draw a very minimal salary.
This is not because they pay their employees more or really love their companies more than vegans like tofurkey. No. They understand that drawing a salary means they get an income and getting paid in income is worse than lighting $100 bills on fire.
These smart people take their due in the form of dividend payments from their company.
This is an even better way of paying fewer taxes. In Canada, you have eligible and non-eligible dividends.
Small business owners get paid in non-eligible dividends, but this rate is much lower than income tax rates.
- A small business owner getting paid $75,000 annually will pay about $8,465 in taxes in Ontario.
- If this same small business owner took the $75,000 as salary income, they will owe the G-man a total of $16,651 in taxes.
Hmm, what robbery!
The difference is a used Harley or a five-star trip to Europe. Who doesn’t want that?
Eligible dividends come from owning shares in public companies that trade on the stock market.
Big companies you've probably heard of like Royal Bank, TD Bank, Encana, Telus, Bell, etc… all pay their stockholders a dividend and this payment counts as an eligible dividend in the eyes of the taxman.
The way it’s structured is a bit confusing, but all you need to know is that it’s a very great way to keep most of the money in your pocket: Even more so than non-eligible dividends.
- If you live in BC, Ontario and Alberta (and many other provinces) for example and don’t make a dollar of income working for the man, you can earn $49,276 in 2014 from eligible dividends and not pay a cent of tax.
You hear that, old sport?
NO TAX on the first $49,276 in eligible dividend income. You get to keep it all! Now that’s bank for your buck.
Let’s say you have some cash in the bank because you got an inheritance, sold a house or imported a small boat of contraband successfully and you have $1 Million to invest in nothing but bank preferred shares that pay a hair shy of 5% annually.
You would be making that $49,276 without paying any tax.
I love this country.
God bless Canada.
If you made $49,276 in employment income instead, you’d have to fork over $8,396 in taxes living in BC. Now that’s just redonculous.
Capital Gains Tax
Capital gains tax is money you pay when you buy something, it goes on to appreciate, and then you sell it. Pretty simple.
Your spouse doesn’t fall under this category btw. An investment property or shares in a company definitely do.
Very wealthy people love making money in the form of capital gains because the tax advantage is huge.
Someone making $350,000 in income is paying $137,127 to the taxman in BC while someone that made $350,000 in capital gains is paying only $56,979.
That’s a brand new BMW every year.
What happens if the value/price of your asset goes down?
You get what’s called a Capital Loss. And this is NOT a bad thing as i'll explain.
- If you buy an investment; say a property, stock or ETF for $1000 and it rises to $1500 and you sell, you pay a capital gain on the $500 that your investment gained.
On the other hand:
- If you buy a stock or ETF for $1000 and it decreases to $500 and you sell, you can book a capital loss that you can carry forward against a capital gain in the future.
Stay with me here… The simple version is this:
If you sell for that $500 loss on your original $1k, you’ve got $500 in a capital loss (essentially you’re negative five hundy).
In the future you then make an investment for $1000 (or any amount) and say it goes up by $500 or $1000 and you sell.
Whatever that capital gain is on the original investment, you can subtract the $500 that you lost previously against that gain. You’re net zero on taxes.
-500 + 500 = 0 taxes paid
However if you gained more than you lost, you can only claim what the capital loss was against that gain.
So if you’re investment went from $1000 to $3000 and you sell, you’ve now made a capital gain of $2000.
Only the first $500 of that gain is yours to keep because you carried forward that capital loss against it.
Smart investors don’t mind booking some losses because they can carry them as capital losses against future capital gains.
This is called tax-loss selling and will be featured in the more advanced writings on the Things You Won’t Learn in School web site.
How do capital gains stack up against eligible dividends?
In Ontario, for example, when you start making capital gains of $125,000 and higher (like most wealthy people do) this tax becomes more attractive than eligible dividends.
For people that own the house they live in – aka a principal residence - there is an exemption that took 8 lawyers and 4 economists to come up with the clever name of “Principal Residence Exemption” that allows you to pay no capital gains on any appreciation in the price of your own home.
There you have it.
Wealthy people diversify their income streams into dividends and capital gains so they pay much less taxes. Don’t hate on the 1%, structure your life like they do and quit complaining.
That’s even how super wealthy people in the USA like Mitt Romney or John Kerry only end up paying a 13 or 15% tax rate while the rest of the working shmucks fork over 30-50% of their hard earned income.
Hard earned income or sit back, relax and keep collecting dividends and capital gains income?
Now you know – your choice on how to set yourself up.
Capital Gains > Eligible Dividends > Non-Eligible Dividends > Employment Income
Next time your spouse is trying to woo you to bed, say you’re busy figuring out the best way to structure your life to pay less taxes.
You could watch NFL on Sunday or learn this during half-time and save enough money to buy tickets to many future games.
When you’re ready, try this calculator, courtesy of SimpleTax. It’s so simple that my dog was doing her taxes. Give it a try and see for yourself.
And who said taxes couldn’t be sexy?
These things you just won’t learn in school.