Historical article note: This article was originally published on 2019-01-10. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
It is often said that taxes in Canada are too high, but just how high are they? The Fraser Institute provides a clear answer: Canadian households spend 43% of their income on taxes, only 36% on essential living expenses, including clothing, food, and housing, and the remaining 21% on transportation, education, healthcare, and savings. In 2017, the average household income in Canada was $85,883, yet the amount paid in taxes reached $37,058. Back in Canada 56 years ago, in 1961, the annual household income was $5,000, with various taxes amounting to $1,675, meaning the tax burden accounted for only 33.5% of household income. Over 56 years, the tax burden has increased by nearly 10%. Jokes like 'a country of countless taxes,' 'the government taxes you without negotiation,' and 'peace through taxes' have become common ways Canadians tease each other. The Fraser Institute is a Canadian public policy research organization, and its reports are rigorous and authoritative. The conclusions of this tax burden study report are as follows: from 1961 to 2017, the consumer price index rose by 731%, the tax burden increased by 2,112%, housing expenses rose by 1,480%, clothing and other apparel expenses rose by 732%, and food expenses rose by 625%. After excluding inflation, tax expenditures increased by 166.4%.
Canada's tax system is mainly based on direct taxes, with individuals being the primary targets; China, on the other hand, relies mainly on indirect taxes, targeting primarily businesses. Because in Canada every individual is a subject of taxation and is taxed in a "direct" way, it feels especially painful. Taxes are already so high—could they possibly go down? Hehe, just look at whether the government has a surplus or a deficit; with the current deficit, sooner or later it will have to be repaid through taxation. So, do you think taxes will continue to rise or will they decrease in the future? Taxation is the state's transfer of income through its authority, redistributing the earnings of those who can work and make money to those in need of assistance. Canada is a high-welfare country, with too many entitled groups waiting to be fed: people receiving social welfare, people receiving pensions, people receiving free healthcare, people receiving unemployment insurance, people receiving childcare subsidies… all lined up outside the tax office. This high-welfare system not only discourages taxpayers from being motivated to earn, but also fosters a mentality of aiming to benefit from the system. The system was originally designed to assist the unfortunate, yet some who are unwilling to strive still aim to become beneficiaries rather than contributors. Seeing people willingly sink into laziness also deeply pains taxpayers. Taxpayers all know that the taxes they pay while working today will not be refunded when they retire, because they are supporting those receiving benefits; it's the same in all countries—the social security system is always spending tomorrow’s resources today, or in financial terms, a Ponzi scheme.
Whether trying to move upstream or downstream, the goal being pursued is actually the same: get something for nothing. The social security benefits provided by the Canadian government can only be claimed after reaching a certain age, and if you want to receive the maximum government pension, it’s not easy: your other monthly income must be less than 26 yuan to get the highest social security payment, which is less than 15,000 yuan per person per year. I can't maintain long-term extreme poverty, so let's discuss how to strive to move upstream. For those striving upstream, to get something for nothing after retirement, passive income must be enough to maintain a decent life until leaving this world. When young, 43% of labor income is taken by the government, 36% is needed to cover basic living costs, leaving only 21% of income to be allocated to transportation, education, healthcare, insurance, investments, etc. If someone can invest 10% of their total income, it’s already remarkable. Can such investments generate enough passive income by retirement? This uncomfortable problem has only one solution: taxes cannot be paid in vain; use tax receipts to borrow from the bank, buy investment properties, and accumulate personal assets.
One of the most painful things for many high-income families is the high tax rate, while the higher the income, the fewer benefits they can enjoy. The progressive tax system is essentially taking from the rich to help the poor; if you choose Canada, you have to accept all of Canada’s pros and cons. Canadian tax law states that expenses for investment properties are tax-deductible, and families without investment properties cannot enjoy this tax benefit. The advantage of high-income families is that they can easily apply for mortgage loans, invest in real estate, and enjoy the tax benefits that come with investment properties. High-income families, due to their high current income, do not need rental income to supplement cash flow; they just want their taxes to be effectively used, turning their current high income into assets that generate cash flow and delaying enjoyment until retirement. Real estate investment perfectly meets the needs of high-income families. High-income families who pay a lot of taxes but do not invest in real estate can be said to have not fully understood Canada’s tax system, and their financial literacy still needs improvement.
Many Chinese business owners can decide how much of their business or operating income to report as personal taxable income. Because corporate tax rates are lower than individual tax rates, people are reluctant to report the company's operating income as personal taxable income. The benefit of this approach is that if the business is sold later, it can be sold at a good price, cashing out all at once; the drawback is that if the business cannot be sold or goes bankrupt, personal income during operation is too low to apply for a mortgage, and personal assets have not been accumulated. If the business fails again, under this double blow, one could be back to square one overnight.
For low-income individuals, it is too early to discuss tax avoidance or accumulating personal assets; increasing income and saving should be the focus.
For middle-income individuals, the situation is a bit more complicated. If they are accumulating assets and leveraging, and are under 50 years old, when encountering a conflict between tax saving and borrowing ability, they should give up tax saving, use income to cover taxes, and use taxes to support loans, increasing leverage. For example, do not claim depreciation for investment properties. If over 50 years old, no longer accumulating assets or leveraging, it is recommended to prioritize tax saving. Paying an extra 4,000 in taxes to borrow an extra 40,000, a 1-to-10 transaction, one should of course choose to pay more tax and borrow more.
A person, from starting work to retirement, from age 23 to 65, has 42 years. Most people only start having savings and thinking about investing around age 33, so the effective investment time is only 32 years. For investing, the greatest risk is 'not having enough time.' Data shows that if you invest in the stock market for only 10 years, those 10 years could all be bear markets. In other words, if you start investing in stocks at 55 and retire at 65, your 10-year investment period could all be bear markets, and you would only lose money without making any; if the total investment period is 25 years, starting at any point will eventually yield profit. For those planning to retire at 65, stock investment should begin at 40; any later is a bit late. Buffett’s impressive investment performance is largely due to starting early and living long. Therefore, some investments started too late may be missed forever. That is why investing should be done as early as possible. For real estate investment, if you do not leverage when you can and are always thinking about tax avoidance, you miss the 5–10 years of highest income, and it becomes difficult to leverage later if you want to. Many people lament that they are not financially fortunate, but in fact, it’s because they didn’t do what they were supposed to when they should have, and having missed the opportunity, all that’s left is the dream of winning the lottery. Thinking about leveraging while paying taxes does not cause heart pain. The more loans you have on investment properties, the more property you own, which indicates that banks trust your repayment ability. Your tax statements reveal your repayment capacity. These debts are lent by the bank to help you accumulate net assets, repaid by tenants. This is the greatest benefit of paying more taxes in Canada.