Monday, May 26, 2014

Taxes, Just Another Savings Account

I don't have a lot of spending money.

Don't feel bad for me; I'm doing fine.

I don't have a lot spending money, and it's by design.  By design, I mean that I have almost 10 different chequing and savings accounts between which I partition my money and only one of them has an Interac Card.

Four envelopes stuffed with money labelled: "Vacation", "Reno", "Tax", "Car"
Bank accounts: the new money envelope
The Wealthy Barber advises that you pay yourself first, "yourself" meaning your retirement savings.  I pay myself first, but I also pay my house repairs, my future car, my vacations and my education first.  I have an account that exists just for my property taxes.

Me on a bench looking at a pair of shiny new shoes, thinking: "Hmm... Is there enough money in the shoe fund?"
I'm not this bad.

Do I drown in bank fees?  No, I don't pay any bank fees.  One account requires a minimum balance, which I keep.  The others are all free.

In my main account, where I get my spending money from, I keep very little money.  We won't quibble about exact numbers, but once I'm done squirreling money away, I get to "keep" about 5% of my take home pay, after taxes.

And by "keep" I mean use it for things like new clothes or books or gadgets.

Me, looking like a squirrel, hiding money in a knot in a tree.
Or hiding in convenient cubby holes, for winter.

I arbitrarily don't have a lot of spending money and it works well.

When I had a mortgage, about half of my take-home pay went to paying it off.  (A note:  My house isn't so expensive that I had to pay this much; I just wanted the debt paid off.)  An automatic transfer deducted the money after each pay day from my main account and placed it in a mortgage savings account, where the mortgage payments were automatically deducted.  I never saw that money again.

A picture of me standing in front of my house, waving to my money as it flies away and saying: "Farewell, money.  Fly free!"
Except, you know, I got to keep the house.  So it wasn't exactly gone.

Which brings me to taxes.  I'm from Canada, and we are purported to have a very high tax rate relative to other countries.  The exact number of that rate is hard to pin down - I briefly checked two sources, and they quoted different percentages.  Let's break it down.

I pay income taxes to both the provincial and federal governments.  The taxes are bracketed, meaning that chunks of my earnings are taxed at different, ascending rates.  Those tables can be found from my most favorite Canadian tax website, for those who are interested.

Me, hunched over under a heavy weight labelled: "Taxes", that is sitting on my head.
It gives no advice on how to cure tax pain.

I also pay sales tax on nearly everything that I buy to both the provincial and federal governments.  A few years ago, the Ontario government teamed up with the federal government and 'Harmonized' their sales taxes.  It means that I pay more taxes, but only see one line item on my bill.  Harmony!

Two identical faced singers standing back to back, singing: "Sales Tax!" in unison.  One is wearing a green jacket with the Ontario Trillium insignia, the other is wearing a Red jacket with the Maple Leaf insignia.
But it's nice to see them playing well with each other.

That number, in Ontario, is 13% - it varies by province and sometimes by city (Montreal, for example tacks on an additional 1%)

Finally, I pay property taxes on my house.  Even if I rented, I would still be paying this via my landlord, who would account for this fee in my rent rate.  How property taxes are calculated remains a mystery to me, probably relating in some way to horoscopes and numerology.

I am looking skeptically at a person in a gaudy wizard costume who is gazing into a crystal ball with an intense expression.
"Let's see, the house aligns with the axis of light on the third rotation of the moon.  It's also near a high school.  $3750 per year."

So the real amount that any person pays in taxes in Canada is relative to how much stuff they buy and how big their house is taken together with how much money they actually earn.

While the number varies from person to person, the sentiment generally doesn't.  Nobody likes taxes.  Filing taxes is not anyone's idea of a fun time.

I am wearing a slightly sad face.
What the face of a taxed person might look like.

People's reactions vary, but thus far I've managed to resist the urge to run away from civilization and build a sovereign commune in the wilderness.

Me, sitting curled up in a dark space.  Around me is: toilet paper, gold bars, cans, useless weapons (sai) and a can opener.   I am muttering: "...No one takeses my gold.... No one takeseses my cans..."
They'd probably try to tax the commune's land and then things might get awkward.

Instead, taxes are a background noise that I ignore.

It might sound really pompous when I say it that way.  "Taxes are just background noise.  It's really hard to notice them over the jet engines on my yacht."

Me inside a boat-like thing with jet engines.  I am surrounded by stars in space.
My SPACE yacht.

Except that doesn't even make sense - taxes don't make any noise.

An envelope labelled 'taxes' sits on a table.  It is shaking and making a noise: "Skritch skrtch krtchh".  I am standing across the room, facing away, holding a box labelled "box o' stuff".  I am looking over my shoulder with a concerned expression.
Except when you least expect it.
I have a job, which deducts my taxes at the source.   Their standard calculations suck, as they assumed that I had a all manner of bouncing baby tax deductions that I do not have.

Cartoon babies
Cartoon babies: not tax deductible.
Me giving a present to my older niece, while my younger niece smiles and looks adorable.
Holiday presents for my nieces: not tax deductible.

I was routinely paying a lot of extra taxes at tax season.

Me, frowning.
Last year.

How do taxes become background noise? Last year, I told the finance people to deduct extra money from my paycheck for taxes.  After a full year, the tax deductions did what they were supposed to do.  I could enjoy tax season because it meant that I got a refund.

Me, smiling broadly and waving my arms in the air.  Money is falling like rain around me.
This year.

Of course, there are detractors to this method, who rightly point out that extra money that you pay to the government is held interest free.  Any money you get as a tax deduction could have been sitting in your bank account or your brokerage, earning you returns.

There is one thing that these people neglect to include in their calculations, and that is human nature.  My tax return was in the ballpark of $1500.  This number is a bit ridiculous, but it takes into account a few unexpected things that I did this year, like earn less money and deposit some money into my RRSP.

Broken down over 26 pay periods, I paid an extra $57 to the government on each paycheck, money that I could have been investing that money or, more likely, spending it on all the random stuff that I spend my money on.  Maybe a few dinners out, maybe a pair of pants.

Me sitting on a chair looking at shiny shoes.  I'm smiling and thinking: "Of course there's enough money!"
"I like them so much, I'll buy five."
At the end of the year, I sure wouldn't have had that money sitting around to pay taxes.

Taxes, like dentistry, are a necessary part of life.  Like dentistry, taxes are best when they are painless.  It's hard to resent the government when they're giving you money, even if it's your money that they're just returning to you.

So in one way, taxes are like an automatic savings program.  In another way they're better.  Sometimes they give money back to you.

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