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 2016, Tax Freedom day was June 7th.  In theory this means we pay 43% in tax, not 50%.  Here’s some tax freedom dates from the past:Debt Interest

  • June 7. 2016
  • June 10, 2015
  • June 9, 2014
  • June 10, 2013
  • 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 17 in 2016.  On that basis, this translates to a 38% 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 (2016):

Income Earnings
Lower limit upper limit
$0 $11,474 0.00%
$11,474 $45,282 15.00%
$45,282 $90,563 20.50%
$90,563 $140,388 26.00%
$140,388 $200,000 29.00%
$200,000 33.00%

 

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 (2015):

Income Earnings
Lower limit upper limit
$0 $11,474 0.00%
$11,474 $45,282 25.00%
$45,282 $90,563 30.50%
$90,563 $125,000 36.00%
$125,000 $140,388 38.00%
$140,388 $150,000 41.00%
$150,000 $200,000 42.00%
$200,000 $300,000 47.00%
$300,000 48.00%


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 2016 TAX RATE CARD (2764)

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 2016, then you would be in the 30.5% marginal tax bracket and you would pay 30.5% 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:

Alberta
Income Earnings  Tax on
Lower limit upper limit $50,000
$0.00 $11,474.00 0.00%
$11,474.00 $45,282.00 25.00%  $8,452
$45,282.00 $90,563.00 30.50%  $1,439
$90,563.00 $125,000.00 36.00%
$125,000.00 $140,388.00 38.00%
$140,388.00 $150,000.00 41.00%
$150,000.00 $200,000.00 42.00%
$200,000.00 $300,000.00 47.00%
$300,000.00 48.00%
Total Tax  $9,891
Average Tax Rate (%) 19.8%
Marginal Tax Rate (%) 30.5%


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.
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 19.8% ($9,891 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.

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.

25 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.

  8. Ok. I am extremely confused. So can you help me figure this out step by step for Ontario? Say someone made $140,000. How much would they actually pay for tax? (I’m not from Canada, but my family may be moving, but one person is not sure because Canada has many taxes because health care is paid for by taxes.) We would just like to know what to expect taxes on, and how much if and when we decide to move.

    • Kira,

      The key takeaway is that your income is taxed at various rates. For example, if making $140,000 you won’t be taxes 39%.

      For the first 11,000 you make, the tax rate is 0%
      From 11,000 to 18,000 you are taxed at 15%
      And so on …

      Only the portion of the salary above 138,000 is taxed at 39%.

      This calculator might help (check After-Tax Income column):
      http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2015-Personal-Tax

      On top of that you will pay sales tax on things you buy. The tax rate depends on the province but it’s about 10-13%. So if you buy a $1,000 laptop you will pay $1130 …

  9. A person who was an employee in Ontario during 2015 and makes 140000, will pay.

    43329 (Federal and Provincial taxes)
    2479.95 (Canada Pension Plan contribution) (Maximum is paid on income over about 53000 income.
    930.60 Imployment insurance.

    So net income would be $93260.

    Source – http://WWW.taxtips.ca calculator

  10. When you add all the taxes Canadians pay, it is far in excess of 50%. PST, Gst, Vehicle plates and registry, drivers licence renewal, hunting fishing licences, fuel tax, hydro debt repayment, entry to provincial parks, on and on and on. Canadian’s are taxed stupid………Just add the PST and GST to the personal income tax of a Canadian earning 50,000.00 and what do you get???

  11. Yes lots of taxes. What do you get? Probably the best country in the world to live and the freedom to leave if you don’t like it.

    • Perhaps you will wake up one day and realize this system is a as corrupt as most, and realize that socialism is equality in restraint and servitude.

      • Alvin, If as you say our system “is as corrupt as most” you have lots of other opportunities to unhappily live among them. Perhaps one day you will one wake up and realize that Canada is a glass half full regardless of a personal, right or left bias.

        • Dave, you’re missing the point…..here is something to consider…..

          The majority of politicians are interested in personal careers of telling others what they THINK they should do rather than comprehending that we must live within the boundary of nature. The truth remains hidden before our eyes. Government cannot manipulate society for the better when they do not even understand how it functions. So politics are self-aggrandizing and sees itself as the solution to everything when in fact it is the cause of war, civil unrest, and oppression

        • Dave, you’re missing the point…..here is something to consider…..

          The majority of politicians are interested in personal careers of telling others what they THINK they should do rather than comprehending that we must live within the boundary of nature. The truth remains hidden before our eyes. Government cannot manipulate society for the better when they do not even understand how it functions. So politics are self-aggrandizing and sees itself as the solution to everything when in fact it is the cause of war, civil unrest, and oppression.

          • Hi Alvin, I’ll restrain myself from further comment except only to confirm that you’re correct, I am missing the point.

  12. There is no doubt that Canada is the best country to live in. Taxes are a fact of life and normally well worth the money. It is wrong when one large portion of workers are paying to support the natives who do not support Canada in any form. They are able to claim back every cent they pay in get or host. The government makes it very difficult to raise a family, save for their education, buy a home and save for retirement with all the programs they support. Their spending and number of departments is totally out of control. They have to get spending under control and justify all the places where money is spent. There are hundreds of programs that are no longer relevant yet are supported every month. billions spent on natives that will never be happy and always be wanting more free hand outs !

  13. I’ve been on long term disability for a number of years and just this year moved into retirement. Every year since 2012 my income has gone down while my taxes I have to pay in the spring have increased. This year is the second that I cannot pay it on time. Taxes owed are $3590.00. I’m on a fixed income. I have no savings and every cent goes to living expenses and some credit card debts. I have nothing left. So this year, again I’ll have to ask for payments which will be about $300 a month. I’ll have to go further in debt to get that. And when next year rolls around I’ll owe more that I can’t pay because no tax is taken from CPP or OAS. I can ask for tax deductions from OAS but then I have not enough money each month to keep going. It’s an endless downward path. No way to get out of it unless I file for bankruptcy, but even then with no debts I’ll just be breaking even. So much for the so-called golden years.

    • Would you be eligible for GIS (Guaranteed Income Supplement)? check it out on the CRA website, it might help

  14. What province are you in.
    Do you own or rent. How much per month rent or mortgage.
    Single or married .if married does spouse have income. Age of spouse
    How much credit card debt. Any other debt or unusual expenses. Do you smoke or drink. Do you have a vehicle.

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