In Quebec, advisors are now starting to understand the concept around the difference between efficient marginal tax rates and simple marginal tax rates with the publication of the Laferriere/Chartrand tax curves that are now freely available on the site of the CQFF.
Most advisors and financial planners only consider efficient taxation at retirement when trying to produce an income which will minimize the claw back of applicable government benefits such as the CPP or OAS by using tools such as annuities. However during the period where clients are accumulating money for retirement, we ignore this concept when efficient tax rates can reach up to 70 to +100% for a family in their earning years. Should we therefore be surprised when most retirement plans don’t work? Earning more income for a family does not necessarily mean they will have more income available for their savings unless they are disciplined.
Families who work hard to earn more income should understand that this additional income cannot be used for additional leisure. It means they must invest this additional income into a registered investment vehicle to offset the efficient marginal tax rates imposed by the government. If they don’t put this additional money into a RRSP, they will have less discretional income available to them at the end of the year because they will have paid more income taxes on the additional income than the additional income itself in some situations. It gives an entire new perspective to the bonus which your client will receive at the end of the year (pool or an RRSP?)
As a result, the Laferriere/Chartrand tax curves are a great education tools for your clients but will also generate sales for you. These curves should be reproduced for each of the province and an organization such as Advocis should contract Mr. Laferriere to produce these curves.
“Under the table” taxation is part of our tax system founded on fairness as a principle while being discriminatory by its nature. Such taxation can have the opposite effect than what is intended. The best example of this is the social program of the $7 day care in Quebec. This program is the perfect example of ‘under the table’ income tax and how the general public is mislead about the benefits they will receive by politicians who use social programs to score politically instead of solving real social problems.
The $7 day care program of Quebec has often been used by many to criticize the equalization program and transfer payments received by Quebec with the common view that such transfer payments subsidize Quebec social programs. This demonstrates how efficient taxation is misunderstood by all. In fact it is the reverse, with Quebecers paying more federal taxes because Quebecers can deduct less day care cost from their federal income taxes. This means they will pay more federal income taxes than if they had chosen a $24 day care. In fact $7 may look great on paper but when efficient taxation is considered, most families will have paid more for day care at the end of the day by opting for this program. As shown by Claude Laferriere retired university teacher à l’UQAM in his report “Les garderies à sept dollars (7 $) sont-elles une aubaine? Édition 2012”
Couple with two children – # 22
Day Care Cost per Day: 24 $ 26 $ 28 $ 30 $
Day Care Cost per Year 6 000 $ 6 500 $ 7 000 $ 7 500 $
Family Net Income
30 000 $ = a loss ! 992 ! 867 ! 742 ! 617
35 000 $ = a loss ! 1 462 ! 1 509 ! 1 557 ! 1 427
40 000 $ = a loss ! 1 435 ! 1 415 ! 1 443 ! 1 293
50 000 $ = a loss ! 385 ! 313 ! 326 ! 136
75 000 $ = a loss or a gain ! 52 + 65 + 182 + 382
100 000 $ = a gain + 128 + 260 + 392 + 607
130 000 $ = a gain + 949 + 1 147 + 1 346 + 1 636
As we can see this political form of taxation is about giving money from one hand while taking much more from the other one while giving your rich friend a tax break.
But advisors have to be aware of this. For a family with an income of $35,000 which is losing $1462 per year in income because they believe they are getting a deal by paying $7 in daycare, this is $1462 less in a RRSP. This is their retirement plan disappearing into smoke.
Should we get rid of marginal tax rates? Well don’t be too hard on me. I came up with this title to catch your attention. Marginal tax rates are still useful. However in financial planning marginal tax rates are given too much importance and it’s time we view them as what they are and educate clients on the difference between marginal tax rates and efficient tax rates. This will help advisors and clients get back on track for retirement planning and will demonstrate there is an advantage in dealing with an advisor.