"Death and Taxes", am I right? The only two certainties in life, according to the common idiom. And there's some truth to that.
However, unlike the author of that quote, the self-employed of today may need to look at some potential pros of a system intended, but only sometimes utilized appropriately, to serve them.
While it is in my very nature, as a fellow taxpayer and, more importantly, a Financial Manager, to ensure you receive the most significant ROI from your hard labour and clever ingenuity, I'd like to take a moment to examine a common misstep among the novice self-employed attempting to strategize on their taxes. This is a common mistake that affects Tipped Workers as well.
So, allow me to do something different and dive deeper into the often-overlooked and arguably rare advantages and benefits to you of having a higher taxable income.
Let's begin with the most apparent pain point.
Now, as a person with striking good looks and incredible intelligence, you already know the more money you make, the more money you have to tell the government you make.
This year, the bottom tax bracket ends at just above $50,000. If you make $50k in taxable income, you will pay just under $10,500 in tax (about $870/month).
$4508 in Federal Tax
$2357 in Provincial Tax
$3582 in CPP/EI Premiums
Your average tax rate is 20.89%, and your marginal tax rate is 24.15%.
If you make $250,000, you'll owe over $96,000 in tax (just over $8000/month). That's an average tax rate of 38.53% and a truly painful marginal tax rate of 53.53%.
So then, what benefits and advantages could be had with a higher taxable income?
1) Eligibility for Debt – Your Opportunities Fund
The first thing rich people will tell you is that access to debt is really important. Cheap debt isn't just an emergency fund (though, ideally, you have cash on hand for emergencies! 3-6 months of expenses in a liquid account). But think of this also as an opportunities fund.
In the 80s, my folks were approached by their co-workers about investing in a trivia game. I'm not sure how much money they were asked for, but they were caring for a young lad (me), so they politely declined. The actors in this group will know that this game turned out to be Trivial Pursuit, and they missed out on a substantial return on investment.
The lesson here isn't to invest in every wild idea your friends have, but instead, that opportunity doesn't wait until it's convenient for you. If you come across a rental property, if you get the chance to invest in a business, having access to cheap debt can make those opportunities a reality.
2) ... and If You Want a House…
The dream of home ownership today is aggressively being presented as more and more fleeting for those born after 1990. Some would argue 1980.
Similarly, however, the dream of being self-employed has never been more sought after and achievable than it has been for the under-40 age demographic. Yet, the self-employed folks out there tend to be overly aggressive with their deductions. A strategy that can be counterproductive.
If you're trying to get pre-approval for a mortgage and proudly show your lender your five consecutive years of taxable income under $12,000, they will politely thank you for your time and show you the door.
I want to drive it home. Access to debt is essential, even if you don't need it right now.
3) Eligibility for some government programs
Most government programs tend to advantage lower taxable incomes (again, more on strategies to lower your taxable income later). But we must discuss some government programs that incentivize higher taxable income.
CPP (Canada Pension Plan)
CPP is a contributory pension available for Canadians who have spent most of their life here. So, the more years you have a higher taxable income, the fatter your pension when you retire.
RRSP Room
You get room based on your income. 18% of your taxable income, to a maximum of just under $30,000/year. If your income is higher, you can consistently generate a lot of RRSP room.
Is that it?
Honestly, yeah. That's primarily it. I’m not going to lie, noone comes to me wishing they paid more tax. But sometimes it can be beneficial. If you're self-employed, making $50k/year, and deducting your income down to 10-20k, it will be extremely challenging for you to get a mortgage.
If you're a server, declaring only some of your tips might leave you with more cash, but you'll have difficulty qualifying for debt.
A higher taxable income is linked to having more money. But there is also the beneficial RRSP room, the Government Pension in Retirement doesn't hurt, and paying hundreds of thousands in tax might give you a warm and cuddly feeling when you look at the schools and hospitals your money helped build.
With that said, let this be the only time I ever write about the advantages of a higher taxable income.
My job is to put more money back into your pocket, not the government’s.
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