I Love my Federal Government

Ok, perhaps ‘love’ would be a bit strong of a word, but I really like the adjustment they have made to the basic tax exemption for Canadians.  See here for details.  The general gist of it is they have raised the exemption this year to $9600 and plan to raise it again to $10,100 per person in 2008 (or a 5% increase).   What gets me excited about this is if they keep raising it off and on until I retire in pace with inflation I should really be paying no tax if I can split my income between my wife and I in early retirement.

For example, let’s say I want to spend $24,000/year in retirement (today’s dollars).  With the new rates I wouldn’t get taxed on $20,200 of it between my wife and I.   Which leaves $3800 a year to be taxed.  Yet if that $3800/year income is dividend based I should have no tax bill at all (since at lower income levels the dividend tax credit is more than the dividend itself).  So I guess we need to start shopping for some more dividend income for my wife’s portfolio and mine in the coming years.

So that is today’s short lesson.  Regardless of where you live, you have to be interested in your tax bill and changes that effect it.  After all the less tax you pay the earlier you can retire.

9 thoughts on “I Love my Federal Government”

  1. I also like the idea of more tax reductions especially that nasty GST. Thanks for linking to the site for the details.

    The largest expense reduction I had when I retired was a very large reduction in income tax.

  2. Smoke & mirrors IMO. Vote buying at it’s finest. Few voters will look back and remember that the conservatives gave us the GST inthe first place. Further, our first GST cut came along with an increase in the marginal tax rate from 15% to 15.5% (on earnings up to $36,400).

    All people will remember is the cuts, but don’t look behind the cuts to see where that money is being made up.

    Needless to say, I’m not a conservative! CD, as you note, this will certainly have a positive impact on the individual, but I wonder what it will cost Canadians.

  3. Yes, it’s great to have a government that takes governing seriously.

    Will, the government has a surplus! That means these cuts do not affect any programs or services at all.

    Some Canadians are never happy. Even when there is good news they find a way to complain.

  4. Will,

    I agree some of it was smoke and mirrors. After all you are correct they raised the 15% tax bracket back up to 15.5% just after getting in, just to lower it again. *sigh*


    I’m fairly sure the surplus was under $60 billion, which is the total cost of the tax cuts the Fed’s introduced. They are going to have to cut some programs to make it work.

    Thanks for the feedback everyone,

  5. $60 Billion… I’d say a lot of that was picked from our pockets at the gas pumps, so any little bit we actually get back is ours anyway. The price of gas has gone up, stayed high, and is about to be jacked up even more for the winter.

    We now produce electric cars in Canada, for sale to other countries, but we Canadians are not allowed to buy them, because the government would lose to much in gas tax!

    I would rather have an efficient, environmentally clean car, rather than a couple loonies back in my pocket, only to be spent on more tax at the pump. Wouldn’t you?

  6. A good tax approach outside your RRSP is to take your income as dividends

    Currently, it is more efficient to keep your dividends outside your registered account if you are a low income earner (except BC).

    Your dividend income is grossed up by 45% which is then added to your employment income to figure out your marginal rate.

    These numbers are based on tax law today and probably won’t be the case in a couple years with our randomly changing tax landscape.

    Provincial Maximum Tax free Dividend Income (assume you have no other income)
    NL $29500
    NS $29500
    PE $37100
    NB $37100
    QU $29900
    ON $35900
    MB $37100
    SK $37100
    AB $37100
    BC $68700

    Bottom line is that since you live in Ontario you can earn $35900 tax free in dividends. So can your wife.

    To get the combined $71800 tax free per year you need about $1.4 M in Canadian bank shares. (Mix in some convertible preferreds in for safety)

  7. John,

    I don’t live in Ontario. I’m in Saskatchewan, home of the Grey Cup champs for 2007!! (Sorry I can’t help that, it still seems a little unreal.)

    I agree a taxable account would typically have mostly dividends, but in our case it doesn’t matter that much with my wife. She is below the basic exception for her business income.

    Thanks for that list of numbers.


  8. I thought you were talking about “in retirement”

    My point was you should start building that dividend portfolio today so that “some day” all your income (outside your RRSP) would be Canadian dividends

    Hail to the champions – here in Ottawa we do not even have a team

  9. John,

    Actually I’m not sure where I’m going to live in retirement. Likely close to my family, so SK has appeal for now.

    I’ve actually just started my dividend portfolio just last month. I picked up a bit of BMO when it was around the bottom of its latest dip.


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