Archive for May, 2014

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Rich-Poor Gap? Blame Educated Women

Income inequality is a noted problem in society, and one covered in this blog recently. But it’s one that is complex and requires a closer analysis.

Lawrence Solomon, research director of the Consumer Policy Institute, has well noted this complexity in his article, Female drivers of income inequality, in the National Post last week.

The pull out was attention-grabbing: “One route to greater income equality would be to restrict education for women and arrange marriages for them.”  Really? I was compelled to read on.

Several points were made by Mr. Solomon: today higher education pays more than ever, and contributes significantly to the fact that marriage dynamics have completely changed in Canada, to our economic benefit, especially since 2005. Doctors, lawyers, and other professionals are as likely to be women as men, and so when couples with post-secondary degrees marry, they pull in twice the median income or almost three times the extra amount their counterparts in the 1960s earned, when women were more likely to “marry up” to partners in different socio-economic classes.

Interesting. He goes on to say that at the other end of the education scale, men and women without a high school education who marry earn 59% less than the median income today…much less than what occurred in 1960. In the author’s words: “…the best educated households now have income more than five times that of the least educated groups, a more than doubling in the gap since the 1960s.”

He concludes that the trend to more education, especially for women, has been the key factor that has promoted the rich-poor gap so many find unconscionable. One route to greater income equality, therefore, would be to restrict education for women and arrange marriages for them! Given that alternative, income inequality – and that fact that educated women can now choose to marry their equals – may not be so bad for society after all.

It’s Your Money. Your Life. Last week, I suggested we aim for a high bell curve when it comes to income equality and household wealth. A sure fire way to earn higher incomes – and the resulting increase in disposable earnings for savings come to the rich – begins with an investment in post-secondary education…and it’s never too late to start.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.


Wealth Planning: Canada a Sweet Spot for a Higher Bell Curve

Lots of great material has been released lately about global and Canadian wealth trends. Three works come to mind as must-reads…

The OECD has released its study,  FOCUS on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? and Stats Canada released its wealth of Canadians report Survey of Financial Security, 2012, as well as a report entitled Mortality Projections for Social Security Programs in Canada.

What’s interesting about these reports is the taxation potential that indebted governments see in the recovering incomes and increased net worth of high earners. Since the top 10% of Canadians pay 76% of all taxes, while the bottom 50% pay only 4% of all taxes, prohibitive taxation on one taxpayer group may be a mistake if not well thought through.

Looking at the characteristics of the top earners who are younger, we find post-secondary education is a big key to wealth; so is the acquisition of a principal residence, which accounts for about 30% of wealth. Pension assets are equally important, accounting for another 30% – a bi-product of landing good jobs.

Older also means richer. Based on the mortality study, life expectancies at age 65 are projected to increase from 21 to 24 years for men and from 23 to 26 years for women by 2075. This means that Canadians are expected to live beyond age 90 on average in the future, and they will comprise a much more important part of our taxation base. Over time this means that a greater percentage of income and wealth will come from the capital a large, retired demographic owns.

This is where taxation policy requires caution. Both human capital and capital used for investment purposes is mobile, and both tend to move to friendlier jurisdictions when taxation is prohibitive.

It occurs to me that the optimal goal is to aim for a high bell curve when it comes to the creation of household net worth in Canada; that is, from a policy point of view, to aim for fewer households appearing at the top and bottom of the wealth scale, with the great majority earning a significant enough income to establish a sound capital base that will grow over time. That begins with the ability to acquire and maintain a tax exempt principal residence.

The good news is that over 60% of households in Canada do appear to own their own home, according to these recent studies; a fact that has certainly contributed to the wealth of our society. While income and capital inequality continues to be an issue, particularly for the single households, Canadians are wealthier than ever, and within an aging demographic have more time to experience compounding growth in their capital investments to supplement human capital.

There is likely room for more tax on the top 10%. But, what if governments gave equal attention to stimulating innovation, productivity, and investment in the Canadian economy, thereby creating greater income and investment opportunities across all demographic lines? Both incomes and tax on incomes could grow in the short term.

It’s Your Money. Your Life. It takes a village to grow a world class economy. In Canada so much of the required framework for that kind of success can be found: substantive home ownership, great educational opportunities to grow top earnings, and access to tax-efficient retirement savings. Sharpening the focus to include all Canadians in a higher bell curve of net wealth is a real, achievable opportunity. Do you agree?

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She will be speaking on the national Distinguished Advisor Workshop tour May 21-June 3. Follow Evelyn on Twitter at @EvelynJacks.


Should Top Incomes Be Subject To Higher Taxes?

As provinces in Canada attempt to add surtaxes to top earners in Canada, the most recent being Ontario in its defeated May 1 budget, a debate on whether top incomes should be subject to more tax continues.

This month, the OECD jumped in with a study on the subject entitled “Focus on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer?” 

The issue is that the total pre-tax income of the richest 1% has increased in most OECD countries over the last three decades, and while the financial crisis interrupted the rise, top incomes quickly recovered. In that time, top rates of personal taxes decreased in almost all the OECD countries. Not surprising, it was found that while most of these people had high wages, salaries, bonuses and stock options, they also had more disposable income for capital and business investment. These investments generated more income the richer people got. In Canada, for example, the richest of the rich receive about 20% of their income from capital; in France, that figure is almost 60%.

Interestingly, reducing top rates of income taxes also reduces the incentive to engage in tax planning to avoid or evade taxes, the study found, leading to more income being declared for tax purposes.

As governments struggle with tight budgets, the study suggests several options are available for increasing average tax rates paid by the rich without necessarily raising marginal tax rates. They include:

  1. Abolishing or scaling back tax deductions, credits and exemptions that benefit the rich disproportionately.
  2. Taxing all remuneration from employment, including fringe benefits and stock options as ordinary income (subject to full income inclusion)
  3. Shifting tax mixes to rely more on recurrent property taxes
  4. Reviewing new forms of wealth taxes, such as inheritance taxes
  5. Improving transparency and tax compliance, particularly internationally
  6. Broadening the base for income tax to reduce avoidance opportunities.

It’s Your Money. Your Life. It’s quite possible we are currently within one of the lowest taxed periods for income, capital and transitioning wealth in this century. Professional advisors will want to take this into account in family transition planning sooner rather than later, because many options exist to preserve wealth, tax efficiently. This is the subject of our national think tanks starting in Winnipeg May 21 and then moving to Calgary, Vancouver, Toronto and Halifax. Please join us by reserving your spot by May 15.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She will be speaking on the national Distinguished Advisor Workshop tour May 21-June 3. Follow Evelyn on Twitter at @EvelynJacks.


Will Addition of Mandatory Provincial Pension Plans Help?

Details for a new Ontario Retirement Pension Plan (ORPP) were included in the May 1 Ontario budget and have become an election issue there. Some disagree that the plan is necessary; others are concerned about the immediate economic costs.

The goal of the proposed ORPP is to replace 15% of pre-retirement income. Examples in the budget documents indicate an actual rate of 14.24% of the insurable earnings if contributions are made for 40 years. Structurally, the plan would mirror the federal Canada Pension Plan in that it would be mandatory for all employers and their employees in Ontario, except for those who currently belong to company pension plan deemed to be adequate. The budget proposed that the contributory rate be 1.9% of contributory earnings from the employee and a matching 1.9% from the employer, based on maximum contributory earnings of $90,000 annually. These thresholds would increase annually consistent with CPP increases. It is unclear what the level of any low income exemption might be.

Jack Mintz, head of the School of Public Policy at the University of Calgary and who has twice been a guest speaker at the Distinguished Advisor Conference, prefers the Pooled Retirement Pension Plan regime over the Ontario Retirement Pension Plan (the Ontario government also announced its’ intention to introduce legislation in the fall of 2014 for Pooled Retirement Pension Plans largely consistent with the framework introduced federally and previously adopted by various provinces, but with the following features), and questions whether the ORPP is the right strategy for the times.1

Dr. Mintz notes “Studies by McKinsey and Statistics Canada, which are the best done, show that about 80% of Canadians have more than adequate retirement income. In fact recent Statistics Canada work suggests over-saving, which some behavioural economists have attributed to excess of precaution over risk. . . For about 80% of the population, the mandatory plan will not increase saving but reduce investment in other assets. With higher employer contributions, the plan will certainly have an impact on labour markets.”   Opposition parties agree that this is not the right time to introduce this new “tax” burden on business, which could dampen employment or worse cause some layoffs.2

This commentary is interesting because it speaks to both to the positive preparedness of a majority of today’s pre-retirees and required precaution in planning for high risk groups, including singles and the under-employed,  and perhaps most important, the business community which is expected to propel Canada’s economic growth. 

It’s Your Money. Your Life. Retirement income planning can bring peace of mind for all stakeholders involved. It’s been our experience in teaching the subject over the last decade that the most effective retirement income planning can be significantly enhanced with tax planning. If you are unclear about your own preparedness, or that of your clients, post-tax season is a good time to review the strategy. We look forward to discussing these issues in depth at the upcoming one-day Distinguished Advisor Workshops to be held May 21–June 3 in Winnipeg, Calgary, Vancouver and Toronto, and Halifax.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.

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1 Financial Post: Jack Mintz: Ontario pension unnecessary and expensive. Published May 1, 2014
2 CBC.ca: Ontario’s Retirement Pension Plan: how would it work? Posted May 6, 2014.


Online Commerce Demands Principles For Financial Literacy

Canadians are increasingly transacting online and tracking the path the money takes – into and out of various accounts – and credit arrangements can be complicated, frustrating at times, and difficult to track.

What are the basic financial literacy skills required for the times? It begins by understanding the responsibilities and potential threats of opening accounts with various personal information and accessing these with private logons.

Next are the numerous financial documents Canadians must read, process, double check, file and retrieve for various purposes including tax filing. Consider the following list:

  • A pay stub
  • A bank reconciliation statement
  • An income statement
  • A balance sheet
  • A personal net worth statement
  • An employment contract
  • A pension contract
  • Social Benefit Entitlements from CPP/EI/OAS
  • A T3, T4, T4A, T5, T4A(P), T4A(OAS), etc.
  • A tax return
  • A personal net worth statement
  • A financial plan
  • Financial contracts:  cell phone plan, credit card agreements, mortgages, etc.
  • Investment contracts: (GIC, TFSA, PRPP, RRSP, RRIF, RESP, RDSP, various non-registered investments)

It’s Your Money. Your Life. Do you know and understand basic financial documents and how they are impacted by tax and fees? If you don’t, consider working with a tax and financial advisory team.

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. Her newest book Jacks on Tax: 2014 Edition is now available. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of the 2014 three day think tank in Horseshoe Bay, Texas Nov 9-12 will be “Think BIG: Find the Sweet Spots in Wealth Management”  Follow Evelyn on Twitter at @EvelynJacks.