Overhaul tax system for fairness: C.D. Howe Institute

Think tank calls for flat rate on investment income

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(Getty Images)

(Getty Images)

OTTAWA – A new research paper for the C.D. Howe Institute says Canada can help combat rising income inequality by taxing people separately for their paycheque and investment income.

The paper’s author says applying a flat rate on investment income would create fairness by closing legal, taxation-avoiding tactics — mostly used by higher-income earners.

Kevin Milligan of the University of British Columbia also recommends adding a tax bracket for annual incomes of $250,000, and perhaps another one at $400,000.

Milligan says the changes could open the door to other reforms on consumption taxes, environmental taxes and corporate taxes — which could help promote economic growth.

He says Canada’s income-inequality gap has widened considerably over the past 30 years, even though it hasn’t kept pace with the divide in the United States.

Still, he says over that period Canadians in the top 0.01 per cent of earners have seen their incomes rise by 150 per cent, while those in the bottom 90 per cent have only seen eight per cent growth.

Canada’s tax system, Milligan added, was developed in the 1960s and no longer fits today’s economic reality.

“What’s interesting is our tax system hasn’t responded at all to that very large change in the distribution of income,” Milligan, also a fellow-in-residence for the C.D. Howe think-tank, said in an interview.

“We need to look seriously at a number of tax reforms that would improve the efficiency of our economy and provide a better environment for investment to provide the jobs for the future.”

2 comments on “Overhaul tax system for fairness: C.D. Howe Institute

  1. I don’t see this happening that investment income being taxed at a lower flat rate and closing tax saving loopholes. Interest income will still be taxed at the highest rate unless it is in a TFSA.

    In regards to interest income in a RESP, this is mostly taxed at the lower tax rate with a adult child as beneficiary with most taxpayers. As for RRSP’s, they are good tax deferring, tax sheltering for interest income and compound interest investments if planning properly ahead such as converting a portion to a RRIF at 65 to receive $2,000 for each spouse almost income tax free and pension income splitting using RRIF’s at 65 years old.

    Right now, the best conservative tax strategy for those decades, maybe 10, 15, 20, 30 years plus is maximum contributions to TFSA’s and RRSP’s for compound interest growth through 5 year GIC’s provincial strip bonds at 3.05% to 3.65% and reinvesting the RRSP annual income tax refunds with other family members TFSA’s and RRSP ‘s.

    If you don’t have the last option, reinvest annual RRSP income tax refunds in dividend paying stocks, shares, funds, ETF’s with the lowest fees possible and pay anywhere from 10% to 20% less annual income taxes per $1 of dividend income plus reinvest those dividends at current dividend yields of 3.5% to 4.25%.

    Also, make sure non tax deductible debt like mortgages, car loan debt, credit card debt, line of credit debt etc. is paid off years and decades before in or near retirement. It takes alot of planning, prudence, responsibility and financial research, education and literacy to accumulate assets, investments and savings over 20, 30, 40 years.

    There is no one thing that anyone can do that will make someone in their late 50’s and 60’s be prepared.

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  2. Also, having a decent amount of non-registered investments in comparison to your total investments is key to having income taxes kept lower. For example, A $2,000,000 in total investments which includes $600,000 in TFSA’s, $800,000 in RRSP’s but also $600,000 in non-registered investments.

    Another important point we made sure that my wife and I ha planned for 37 years now which we are 60 and 61 soon maybe 2 to 4 years from retirement is to not have more than 20% to 22% of our net worth primary residence and all other TFSA’s, RRSP’s, RRIF’s, non-registered investments combined in real estate which includes our primary residence.

    Just remember, by having a big portion relative to all investments in a primary residence, you will have much more utilities, insurance, H.S.T., repairs, maintenance, property taxes and many other related housing costs such as real estate commissions, lawyer fees, closing costs and H.S.T on top of this.

    This will over years and decades sink your financial well being if it represents 35% to 50% or more of your overall total investments that generate capital gains, interest, dividends, distributions etc. Higher Pension income in the thousands more a month can protect some people but when one spouse dies that is when the real problems start with 35% to 40% less pension income which can be $1,000, $2,000 or more per month.

    This is true also because you are losing hundreds of dollars to thousands a month through lost income earning and compound interest, growth of having maybe $100,000, $200,000, $300,000 tied up in a much bigger primary residence than you really need or needed.

    This is going to be a real problem in coming years in Canada and other aging populations in the G-7 world.

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