Does half your money go to taxes?

Every year tax time is a good reason to complain about paying too much tax.  One of the big misconceptions I hear over and over again is this notion that we pay half of our money to the government.  Just recently, someone showed me an insurance proposal where the advisor used a 50% tax rate to illustrate the benefits of a tax sheltered life insurance policy.  We pay a good chunk of tax but this is very misleading to me!

Tax Freedom Day

It’s nearly impossible for the average Canadian to really figure out how much tax they pay especially when you include all forms of tax from all three levels of government like sales taxes, import duties, excise taxes, gas tax, payroll tax, etc.

The Fraser Institute in Canada calculates tax freedom day every year. Tax Freedom Day is the theoretical day in the year the average Canadian family has earned enough money to pay the taxes imposed on it by the three levels of Canadian government: federal, provincial, and local. Taxes used to compute Tax Freedom Day include income taxes, property taxes, sales taxes, profit taxes, health taxes, social security and employment taxes, import duties, licence fees, taxes on alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes, and a host of other levies.

Tax freedom day has lead many people to believe 50% of their money goes to tax in some way shape or form. In 2012, Tax Freedom day was June 11th.  In theory this means we pay 44% in tax, not 50%.  Here’s some tax freedom dates from the past:Debt Interest

  • June 11, 2012
  • June 10, 2011
  • June 6, 2010
  • June 3, 2009
  • June 22, 2005
  • June 25, 2000 (latest tax freedom day)
  • May 3, 1961 (earliest tax freedom day)

Tax freedom day is also different from province to province.  Here in Alberta, we enjoy the lowest tax freedom day in Canada, which was May 22 in 2012.  On that basis, this translates to a 39% tax rate, which is far from 50%.

Even at the peak of tax in 2000, tax freedom day in Canada was June 25th, which makes it closer to that 50% figure.

I’ve been following the tax freedom day for quite some time now but I’m always skeptical of the dates given because they seem to be inconsistent.  I think it’s an interesting view of tax but another perspective is to look just at marginal tax rates (including both Federal and Provincial Income Tax).

Marginal tax may not a true reflection of tax

A lot of times, people use marginal tax to reflect how much tax we pay but this can also be misleading.  Marginal tax is the amount of tax we pay on any additional dollar we earn.  As we make more money, we pay more tax.  To understand your marginal tax rate (MTR), you can start with the federal tax rates:

Income Earnings
Lower limit upper limit
$0 $10,822 0.00%
$10,823 $43,561 15.00%
$43,562 $87,123 22.00%
$87,124 $135,054 26.00%
$135,055 29.00%

These rates do not include provincial tax.  Once you add the provincial income, tax, every province has it’s own marginal tax rate.  For example, here are the combines tax rates for Alberta:


 Income Earnings
 Lower limit  upper limit
 $-  $11,038 0.00%
 $11,039  $17,282 15.00%
 $17,283  $43,561 25.00%
 $43,562  $87,123 32.00%
 $87,124  $135,054 36.00%
 $135,055 39.00%

 

If you want to know the marginal tax rates for other provinces, you can download this handy one page summary of all the Marginal tax rates for all provinces and territories in Canada. 

DOWNLOAD 2013 TAX RATE CARD (3791)

Nova Scotia is the only province in Canada with a marginal tax rate of 50% and you have to make more than $150,000 to pay that rate.

Doing the math

If you earn $50,000 in income in 2013, then you would be in the 32% marginal tax bracket and you would pay 32% on any additional dollar you made to the government. If you earned $100,000, then you would be in the 36% marginal tax bracket.

One of the biggest misconceptions about tax rates is that your entire income will be taxed at your marginal tax rate. Here’s an example to show you how it actually works:

The person making $50,000 per year would not pay $16,000 in tax ($50,000 x 32%). Instead, his/her tax would be calculated like this:


Income Earnings Tax on
Lower limit upper limit $50,000.00
$0.00 $11,038.00 0.0% $0.00
$11,039.00 $17,593.00 15.0% $983.10
$17,594.00 $43,561.00 25.0% $6,491.75
$43,562.00 $87,123.00 32.0% $2,060.16
$87,124.00 $135,054.00 36.0%
$135,055.00 39.0%
Total Tax $9,535.01
Average Tax Rate (%) 19.1%
Marginal Tax Rate (%) 32.0%


The marginal tax rate of 32% is the amount of tax paid on any additional dollar made up to the next tax bracket. In this example, the average tax is only 19.1% ($9,525 divided by $50,000 of total income). Average tax is the percentage of tax paid based on your total gross income and reflects the total tax you are paying. It is the total amount of tax you will pay through all the brackets divided by total income and will mathematically always be lower than the marginal tax rate.

When you understand the average tax rate calculation, it is easy to see how misleading a 50% tax rate is.  In fact, whether you look at tax freedom day, marginal tax or average tax, there is not 50% tax rate.  We pay a significant amount of tax but do not fall into the trap of believing that 50% of our money goes to tax.  Be careful of people who are using too high of tax rates to sell you tax savings products.  As you can see, you might pay less tax than you think.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

Filed Under: Tax

10 Responses to Does half your money go to taxes?

  1. How about when you include HST/sales tax? I know sales tax varies from province to province and our consumption varies from person to person so everyone might have a different tax freedom day when sales tax is factored in. So it may very well be 50% when all is said and done for some. This may not be accurate when pushing tax savings products but for our overall financial picture seems the case to me.

    • I work and have a home based type business (party plan) and do prtety well with it, as well as my regular “day job” which I have had to cut back on hours because the home business is doing so well.I file together, using a schedule SE for my home business to take the deductions out such as mileage (a HUGE deductions) airfare and hotel for training events, and usually after the mileage is calculated I wind up owing nothing on my home based business. I also deduct postage and advertising expenses, and office supplies, demo products, and any losses such as damaged or broken items I write them off.I do travel quite a distance to do my parties, several times a week.You cannot deduct clothing or dining expenses, or “fluff” your deductions, it will set off a big red flag, so be very careful that you only deduct what you actually can legally. Was this answer helpful?

  2. “tax freedom day” is a joke. It’s so flawed it is meaningless.

    Basically they take all government revenue (no matter the source) and call it “taxes” and then divide that by “income” (but only from sources they choose to include).

    So if Ford or Honda build a vehicle in Canada there is “embedded” corporate tax in the price of the vehicle. Fraser assumes that tax is paid for by Canadians. But if the vehicle is exported, the embedded tax is paid for by someone in another country, not Canadians.

    As mentioned they assume ALL gov’t revenue is “taxes”. If the gov’t leases space out in a gov’t owned building to the private sector, that revenue is counted as “taxes”.

    If the gov’t buys mortgages from banks (which they did) and are now collecting the interest on those mortgages (which they are), Fraser counts that revenue as “taxes”.

    If an oil or nat gas company pays resource royalties to a province they count that as “taxes” even if the product is exported and the royalty embedded in the price of the product is paid for by the non-Canadian customer.

    They only count “cash” income (something they define). So if my employer gives me a $1200 bonus a year and I use that to buy blue cross they count that as income. But if my employer pays the $1200 premium so I can have health benefits, they don’t count that as income.

    They also count capital gains taxes as taxes paid. But they don’t count the actual capital gain as income.

    Is it any surprise that when you calculate % of tax by dividing “taxes” by income and you do everything you can to inflate the numerator and make the denominator as small as possible you end up with a large percentage?

  3. Your “Here in Alberta, we enjoy the lowest tax freedom day in Canada” is misleading.

    On $50,000, an individual claiming only the basic personal amounts federally and provincially would pay a total of $8,850 of taxes in B.C. or $9,680 if she lived in Ontario, but in Alberta, would face a tax bill totaling $9,815!

    While we think of Alberta as having the lowest personal income tax in Canada, that’s really only true at *higher* income levels, owing to the nature of its 10% flat provincial tax rate.

    For the $50,000 Alberta income-earner, both her marginal and average tax rates (32% and 19.6% respectively) are above the rates in B.C. and Ontario.

    For the recent tax returns it shows that 75% of people file under $50,000. I.e. Alberta pays a lot more taxes for 75% of the people than other provinces.

    • Thanks for your comment Sydney. Your response is very thorough. Tax Freedom Day was created by the Fraser Institute and I was merely going with their calculations. Their evaluation, right or wrong, goes into more taxes than just income tax. For example, in BC there is a provincial sales tax that does not exist in Alberta. They also incorporate property tax and other forms of taxation.

  4. I April 2013 I am about to sell a home in another country and return to B.C. Canada as I am Canadian. I will be getting paid $77000. a year until the property is paid off. How much tax will I have to pay?

  5. We really do pay half our money to taxes. By the time you add income taxes, sales tax, gas tax, tobacco tax.. its easily half. And seriously? Is it really that expensive to run this country? I mean I don’t mind paying my share of taxes to enjoy things like healthcare, proper roads etc.. but when I see how many people are abusing the system (welfare recipients that have endless children leading also to more child tax credit, Seasonal workers who somehow feel entitled to sit on their rump all winter at my expense, all the corruption on the native reserves where in my opinion there is no reason that they cannot at some point in our national history become contributing, rather that leeching members of our society, and overall foolish over spending at every level of government) I’m just saying taxes are a fair way to enjoy being a member of canadian society but the amount of money you have to make to survive when the government needlessly takes it all away and throws it into the wind is astronomical. And then there is always talk about not having canadian pensions when we retire after even paying into it every payday?? This is absolutely ridiculous. Talking healthcare cutbacks is another one. I am really losing faith in the country I was born and raised in. All I can believe is that they will find new ways to grab for more of the cash I work for and shaft me not so softly in the end. It is really unfortunate and downright sad but, it is ultimately the truth.

  6. Don’t forget what is removed for EI and CPP. I know these are not taxes, per se, but if you are trying to project how much your paycheque will actually be, these can’t be forgotten.

  7. Defining ‘taxes’ as government revenue seems like a perfectly acceptable way to define stuff. If the gov’t is requiring us to pay money, I don’t care what they want to call it – it’s a tax.

    I pay money for a fishing license every year. It’s not a license. It’s a user tax. The requirements for the license? Paying the fees. that’s a tax, no matter how you pretty it up.

    Our driver’s license isn’t much different. I think we pay $60-$70 annually. How much does it cost to send me a sticker in the mail to put on my license plate? Not $60 a year. Clearly another example of taxes and government revenue being called soemthing else.

    By contrast, the boater’s license is just that. I take a course, pay to take the course and the exam, and I then have my license. I don’t pay ongoing ‘license fees’ after I’ve proven I’ve met the requirements.

    Not that I’m objecting to the licenses – anything but. I just object to it being called anything other than a tax. It seems like convenient way for government’s to avoid scrutiny.

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