Trudeau and the $10M lifetime tax bill
According to prime minister-designate Justin Trudeau, “Canadians who have done well have always been willing to help out in meaningful ways.”
Today we are going to see just how helpful some of these Canadians will be. I recently wrote about a 65-year-old couple with a net worth of $10 million who managed to pay $0 in tax for 2015, but I noted that they would have paid a lot of tax in the years leading up to 65, and that they would soon once again be paying tax, especially once they start to drawing down their RRSPs.
But how much money would a couple like that pay in taxes in their lifetime — especially under some of the federal tax changes Trudeau is proposing?
In Canada, we have a progressive tax system. This means that the more money you make, the higher percentage of your income goes to income tax. While many would say that is very fair that those who can most afford it, pay the most. The flip side is whether it is fair that one person contributes $10 for the same services that the next person contributes $2 for, and the third person contributes $0 to the cause.
The same family that uses the same roads, health care system, infrastructure and police department, pays many multiples what another family pays for the same services. In fact, the wealthy family may use the education system and even the health care system less, if they choose some private options.
Whether it is fair or not, let’s look at what two different couples will actually pay in Canada’s brave new world. To find out the tax payment disparity, we will look at two 35 year old couples living in Ontario. One couple would make a middle-class family income, by Trudeau’s definition, and the other would make a family income in the top one per cent. All four individuals would be employees without a corporate pension plan. Both families have two children aged three and five.
As best as possible, we tried to make their lifestyles realistic for couples that fall into these two income groups.
The middle-class couple earns $50,000 each (by the way, this $100,000 of household income is still much higher than the median Canadian household income of $76,000), and spends collectively $60,000 a year. They have chosen to put all savings into TFSAs as they have been told that the tax savings on the front end of an RRSP will likely not make up the tax payments when they have to draw in retirement. They live in a smaller community. They own a house worth $250,000 and, at 35, have a $150,000 mortgage on the house. They bought it four years ago for $200,000.
The one-per-cent couple spends $160,000 a year. One earns $250,000 a year, while the other earns $150,000. They maximize RRSPs because they will get 45-percent-plus tax benefits on their contributions, and if there are excess funds, they put them in TFSAs. They have a house currently worth $1 million and they have a $500,000 mortgage. They bought their home four years ago for $750,000.
In both cases, we are showing investment assets growing at six per cent, inflation at 2.5 per cent, real estate growing at three per cent, and will project that they all retire at age 60. Working with my business partner at TriDelta, Asher Tward, we have tried to integrate the projected changes in tax rates and TFSA contribution room.
Doing a financial projection that assumes each couple passes away at age 90, we determine that the middle-class couple paid lifetime income taxes of $669,000. The one-per-cent couple paid lifetime income taxes of over $10 million!
Forget the Six Million Dollar Man. For the various governments of Canada, this is the Ten Million Dollar Couple. Of course, this doesn’t include realty taxes, land transfer taxes and HST that would be paid over a lifetime. Those could easily add $1.5 million more to the total tax bill. Is $10 million, or $11.5 million, in lifetime taxes, a fair amount for a couple to pay?
In both cases, the families are going to be fine in retirement. The one-per-cent couple that paid all that tax will still have an estate value of $23.2 million in future dollars, or $5.9 million in today’s dollars. This is after maintaining their lifestyle their entire lives.
The middle-class couple will have an estate value of $2.9 million in future dollars, or $745,000 in today’s dollars, after maintaining their lifestyle their entire lives.
Of course, most lives don’t work that smoothly. We have assumed steady employment for all four of them for the next 25 years straight. That rarely happens, and likely paints a rosier picture than reality. At the same time, we have assumed that their incomes grow with inflation. In many cases, especially in management level jobs, income
will grow faster than inflation for a 35-year-old as his or her career progresses.
So, is $10 million in taxes for a high-income family too much, too little or fair? That’s subjective. Objectively speaking, the higher taxes haven’t stopped the one-per-cent couple from a strong lifestyle with a nice cushion.
What I do know is that Canadians shouldn’t be looking at this one-per-cent couple as greedy capitalists. They should be saying “thank you” for funding so much of Canadian society. As a society we should be looking at ways to boost the economy so that more people can earn more and pay more.
In the sporting arena, after years of cheering on “best efforts” that finished far from the podium, Canadians are finally comfortable looking for, and cheering on, goldmedal winners. In the same way, Canadians need to start cheering business and economic success, instead of marching against it.