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Bank of Canada rate increase today
October 30, 2018
6:21 am
Bill
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Loonie, you wrote "It looks like inflation for 2018 might come out at about 2.2%.........Considering my average tax rate, if my money were all invested at 3.5%, I would be ahead of taxes and inflation by 80 basis points over the year."

If inflation is 2.2% and after taxes you beat it by 80 basis points that means you're netting 3% after taxes. If you're making 3.5%, to get to 3% you'd need an average tax rate of less than 15%. Even if you are in the very lowest level, Ontario's combined federal/provincial tax rate is just over 20%. Is there a way you're bringing your "average tax rate" (not even your lowest rate) down to about 15%? If so, please share!

October 30, 2018
9:31 am
Norman1
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Loonie said
I'm not sure we get the same amount of money from all these CPI calculations though.
And now you know why I find all of this so confusing. I'd just like to know who I'm supposed to believe when I want to know what the inflation rate is.sf-confused

That's correct. One will get a different number from each of the three different presentations I mentioned for inflation. It is not that one is right and the others are wrong. They each represent a slightly different aspect of inflation.

Really, one can't represent prices and inflation with one or two numbers. That's why Statistics Canada releases a set of CPI numbers and inflation numbers.

What question did you wish to answer with the CPI and an inflation rate? I think that will guide you to the appropriate presentation.

For example, if I'm trying to see if the return on the TSX 300 Index outpaced Canadian inflation in 2017, I would compare change in the TSX 300 Total Return Index for 2017 with the change in the Canada all-items CPI from end of December 2016 to end of December 2017.

October 30, 2018
9:38 am
Loonie
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Bill, I don't get the feeling you appreciate the difference between average tax rate and marginal tax rate, which can be quite substantial. The 20% you quote is a marginal rate.
There's no magic in what I do. I just follow the rules and do a lot of income planning and tax planning. We probably have more tax credits than most people our age, and we use them all.

October 31, 2018
7:46 pm
Bill
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Loonie, maybe you can help me. My understanding is that your marginal tax rate is the rate you pay on your last, highest dollar of taxable income, whereas your average tax rate is your overall average % tax, e.g. if your taxable income is $75K and your tax bill is $20K then your average tax rate is 20/75 = 26.67%. Do I have that right? (If so, seems to me your average tax rate can never exceed your marginal rate.)

I wasn't understanding how you can pay 15% average tax rate when the absolute lowest combined rate in Ontario is 15% federal (on the first $46K or so) and 5% provincial (on the first $42K or so). But you're absolutely right, I overlooked the fact that if your income isn't very high to begin with plus you have a lot of additional Sch 1 non-refundable credits (e.g. disability amount, medical expenses) that most folks don't have then your 3.5% return can easily be 3% after taxes. In fact my understanding is very low income people can get away without paying any taxes, and I forgot about that.

November 1, 2018
7:47 am
Loonie
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There is truth in what you say, Bill. As you know, however, there are lots of very wealthy people who brag about paying little or no tax, Warren Buffet among them. I saw him explain on youtube recently that he doesn't pay tax because his money is all invested in Berkshire Hathaway and there it remains. I doubt this is literally true. Surely he must take some out as income to live on, but the point for me is that he has controlled his declared income, and that is what I have endeavoured to do, no doubt to a far lesser extent, as those billions have so far escaped my reach!

It depends on what you mean by "not very high" income, of course, but it's quite possible for a senior couple to have declared household income significantly over 100K and still pay less than 20% average tax by using available strategies - don't forget income splitting, "sharing" and deferral; political donations, charitable donations, and small business expenses. And those non-refundable tax credits are no use unless you would otherwise have a tax bill to equal them, which the low income folks would not have.

It's all in how you arrange your income and tax credits. Your generosity can have a significant impact, and we are significant donors, well above the national average. It gives us a bigger bang for our buck than self-indulgence or watching governments squander it. This is a strategy that the very rich discovered long ago and exercise in spades. The tax that bugs me the most is property tax, because there is no room for manoeuvring. That said, if I were in government, I would definitely raise the tax rates on people like me, because I don't like the size of gov't debt. We can afford it, even if we don't like it. nobody does.

In the years to come I expect our average tax rate to increase because declared income will increase and will have to be arranged differently. It's complicated, but part of a larger strategy. I haven't worked it out but it may well go over 20%. However, that is not a concern as there will be lots of capital to see us through and, at that point, fewer years to be concerned with. Also, I would not be at all surprised if taxes go up, because they're going to have to. So, I'd rather have bigger income at that stage than now, in order to be able to pay them without too much damage.

As I've said elsewhere, my biggest concern is the value of the Cdn dollar. I haven't resolved that one yet as I also find the USD problematic.

November 1, 2018
8:42 am
Vatox
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November 1, 2018
8:49 am
Vatox
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You_Doodle_2018-11-01T15_47_23Z.jpg

There is no deflation for Canada in 2018.

November 1, 2018
5:27 pm
Norman1
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Loonie said
There is truth in what you say, Bill. As you know, however, there are lots of very wealthy people who brag about paying little or no tax, Warren Buffet among them. I saw him explain on youtube recently that he doesn't pay tax because his money is all invested in Berkshire Hathaway and there it remains. I doubt this is literally true. Surely he must take some out as income to live on, but the point for me is that he has controlled his declared income, and that is what I have endeavoured to do, no doubt to a far lesser extent, as those billions have so far escaped my reach!

I pretty sure Warren Buffet does pay income taxes. He may be referring to the taxes he personally pays on his gains in the value of his shares of Berkshire Hathaway. There's no taxes to be paid on the gains while he still holds his shares.

In this October 2016 CNN article, he says he has paid federal income taxes every year since 1944.

I know that he has commented about his average tax rate. He said it doesn't seem quite right that he was paying a lower average tax rate on his income than someone less wealthy, like his long-time admin assistant.

November 1, 2018
7:45 pm
Kidd
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Paul Martin, our ex minister of finance, ex prime minister. He paid no income tax because he had his shipping business licenced off shore. When caught, he prided himself on having that loophole closed.

https://openparliament.ca/debates/1996/10/3/paul-martin-4/

The attached link are the question period minutes, transcribed. Your Royal Highness Martin is being drilled by a block member.

November 1, 2018
8:59 pm
Loonie
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I would not be able to find that youtube item now except to say that it was from a few years back. I don't know how I landed up there.

November 1, 2018
10:06 pm
christinad
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What worries me are things like property taxes, strata fees and car insurance yearly increases. These inevitably rise more than inflation.

November 2, 2018
4:02 am
Kidd
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Loonie said
I would not be able to find that youtube item now except to say that it was from a few years back. I don't know how I landed up there.  

Is this it? Warren admits to paying 17% tax, whereas others who make a lot less pay 30%

November 2, 2018
6:05 am
Bill
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I routinely hear folks talking about taking every possible deduction, credit, tax planning feature, loophole, etc LEGALLY available to them to reduce their taxes, i.e. using same approach (i.e. LEGALLY minimize tax bill as much as possible) as Buffet, Martin, etc. Nobody wants to distribute to their fellow citizens, via the national Treasury, more than absolutely required by law.

November 2, 2018
6:14 am
Loonie
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No, Kidd. That's not the video I saw, but may be what Norman is referring to.

November 2, 2018
6:28 am
Loonie
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christinad said
What worries me are things like property taxes, strata fees and car insurance yearly increases. These inevitably rise more than inflation.  

I agree, in general.
Next time you replace your car, if you do, inquire about the insurance rates of various models before you get into serious shopping. You may be surprised. I was. Some vehicles are more 'accident-prone' than others, which is to say that the kinds of people who buy certain kinds of cars are more likely to have accidents; and all owners pay for that.
My current car is much more insurance-efficient than its predecessor.

November 3, 2018
12:25 pm
Vatox
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Hypocrisy abound, I love double standards.

November 3, 2018
1:39 pm
moneyhelp
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Loonie said
My current car is much more insurance-efficient than its predecessor.  

What kind of car is that?

November 3, 2018
8:07 pm
Loonie
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PM sent.

November 3, 2018
8:11 pm
Norman1
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christinad said
What worries me are things like property taxes, strata fees and car insurance yearly increases. These inevitably rise more than inflation.

Some categories will have higher inflation than the inflation of the overall all-items CPI. Some categories will have lower inflation. The all-items CPI is intended to reflect the inflation of a basket of goods and services.

These are the 2015 weights of the categories in the Statistics Canada all-items CPI basket:

Food 16.23%
Shelter 27.15%
Household operations, furnishings and equipment 12.97%
Clothing and footwear 5.44%
Transportation 19.70%
Health and personal care 5.00%
Recreation, education and reading 10.89%
Alcoholic beverages and tobacco products 2.63%

Shelter and transportation are weighted around 47% of the basket.

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