Episode Transcript
[00:00:00] Speaker A: You are listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe, as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
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Everybody wants to know, are the tax deferral, tax qualified plans, tax deferral savings mechanisms that are created by the federal government worthwhile? What if you work for an employee and you get a match program? Whether it's an RSP, a 401K, does it make sense to you? Is it free money? Well, we're going to investigate that a little bit here today. We're going to have a little bit of fun with some great charts that Henry, my good friend Henry Wong has put together for us, and we're just going to have a little bit of fun unpacking some of the thought processes around that. And we have a very interesting statistic that we're going to show you about which direction taxes have actually been going over the last 20 years, and I think you're going to find that very interesting. So thanks for tuning in, Henry. Where do we want to begin this fun chat today?
[00:01:23] Speaker B: Yeah, let's dive into this. And the program we're going to talk about is the most common one that people will ask us when it comes to. Should I take advantage of my employer's RRSP matching program? And I think it's good for us to dive into some of the early mechanics first to set the stage and then dive into some of the wider views of things. And then we'll drill down to a specific example. And like you mentioned about the tax scenarios.
[00:01:51] Speaker A: Now, it's important to understand, obviously, everyone's circumstance is different. We all have a different financial junk drawer. We all have a different bag of stuff going on. And our tax situations are also very unique to the individual, whether you're married, with a spouse or you have kids, you're dependent kids or you're getting any other benefits, certain other things that play a role certainly in your tax scheme, depending on your jurisdiction, what province you're in, et cetera. So everything we're going to talk about here today, we definitely want you take with a grain of salt and recognize that you always need to reach out and have a good conversation with a tax professional, a suitable professional regards to your unique circumstances. So in no way is this going to be advice about what you should do with your registered accounts. We just want to unpack some of the ways that we view and we see how this is impacting at least canadian consumers. And correspondingly south of the border, I suspect our american neighbors are experiencing very similar challenges other than maybe there's some difference on the math and the tax rates. So if you're one of our us friends watching this, you'll feel free to leave some comments in the chat box about what you think about the tax rates you're about to see. But we're going to have some fun anyway. So I'm excited about this. Henry, let's dig into it.
[00:02:57] Speaker B: Yeah, and a big part of this conversation that people may hear about is the matching program is free money and an often very much neglected component, which is what we're going to dive into, is the tax environment. And as you mentioned, the tax environment changes. The government is responsible for changing the legal legislation around the Income Tax act for Canada and how it's calculated. And again, it all depends on that situation. So what we know today as the income tax implications will be very different 20 years down the road. Now, what we do get to benefit from is if we were in the same situation in hindsight, 20 years later, what that situation would look like. So what I want to dive into.
[00:03:41] Speaker A: Specifically on that note, I got to jump in here because this is something that just fundamentally I want people to really think about. So lots of things you're going to have a chance to think about as we go through this conversation, but I really want you to be present and think about this. When it comes to the tax year, the tax year matches the calendar year. The calendar year ends on December 31. So therefore, virtually all aspects of your taxable life end at December 31 of every given calendar year, with one exception, at least in Canada, and that is your ability to contribute money to a government created tax deferral mechanism called an RSP. And you can backdate effectively the payment as though it went into the previous tax year. They're going to give you a whole two months worth of time to get over the Christmas holidays, save up some new money in the new year so that you can create a contribution into.
[00:04:39] Speaker B: A past tax year.
[00:04:41] Speaker A: Really fundamentally. Think about know Nelson Nash in his book becoming your own banker. He said, do you ever have the gut feeling that you're being manipulated? You ever have that suspicion that you're being manipulated? And in my opinion, the fact that they're allowing this one thing as a, quote, unquote, to benefit the society, to benefit the population in some way, you have to wonder, well, what's the benefit to them? What's the benefit to the federal coffer system if they're doing that, if that's the only scenario, the only area in the entire tax realm where they'll allow you to backdate a contribution to a previous year, it's very odd, and I think everyone should consider that as we go through our conversation today.
[00:05:26] Speaker B: Yeah. And a big part of that comes with giving that incentive to bring the deposits to that specific financial institution. And a big part of our conversation, when we talk about becoming your own banker, one of the roles that we want to take control of is being that depositor so that it goes into our system when we talk about becoming your own banker. But now we can at least get some views on seeing what it looks like if it goes to someone else's system. So let me just dive into specifically just some background around the RRSP mechanics. Now, the RRSP mechanics is based on specifically a calculation of how much you can contribute based on a maximum of 18% of your earned income. And for simplicity's sake, for this video earned income, we're just equivalently making it the same as t four. Now, if you have other sources of income and everything like that, that does not get included into earned income. But again, just keeping the noise of everyone's situation very straightforward for people watching this video to digest. We're just using a salary which is equivalent to an earned income. And if you receive a t four, that is essentially what your earned income would include.
Now, the next part to dive into is once money goes into the RRSP, the government will provide when you file your tax return as a personal individual, your deadline to file that tax return is April 30 of that following year. So if 2022 was your year end, you must file as the calendar year, and you must file your tax return by April of 2023. And once you file that tax return, the government will get notice on how much you've earned as an income. And then let's just say you've contributed within February 30, sorry, February 20 eigth of the current year, the latest deadline, 60 days after 2022. As an example, that would get included into your, let's call it a potential refund of what you may get from the taxes that was deducted initially off of source because you've over contributed in taxes. And now, as an incentive, they're giving you a tax refund for the contribution. That again, is part of the government design mechanism.
[00:07:44] Speaker A: And I have a different take on that. I mean, that's fundamentally what happens. In other words, an employer is taking money right off your check source deductions. A lot of that source deductions is the tax payable both in your provincial or your local jurisdiction and your federal jurisdiction. And so you've paid to the tax the entire year, effectively, as long as there's no other strange outward income sources like you didn't sell a rental property or whatever, that year, you should be relatively square in your taxes without anything additional to pay if it was done correctly. Now you've made a contribution even though it was in the new year, but we're backdating into the previous year. That's why you're getting, quote unquote, a refund. People talk about the refund as though it's like found money and it's this big amazing thing that you get every year. I can't wait till I get my refund. What I think we should be changing the conversation around is, boy, I can't wait till I can reduce my tax at source.
Wouldn't you rather have net money every single month with your increasing grocery bill rather than a random refund at the end of the year of tax? Essentially, it's like you gave the equivalent of an interest free loan to the canadian government because they took too much tax from you is really ultimately what's happening when you get a refund. So the idea of a refund sounds good. It's a word that makes us feel warm and fuzzy inside. But if you really break down what a refund is in the tax game, that means you effectively gave an interest free loan to the government and they took more money from you than necessary for twelve months. You shouldn't be happy about that. That's not a good situation.
[00:09:16] Speaker B: It's not a refund and it's about a year. It's when you file. The government then gets notified how much what was over deducted from your paycheck and source. One year. And with today's interest rates, one year of an interest rate is quite valuable in terms of potential earned income, of interest that you can get from that. And then they give you that refund without that interest that they have effectively borrowed from you because they've deducted that source. The other part I would just add aside from source, is finding legal avenues to have non taxable calculation of source income from your situation. Now, before I dive into numbers or go into numbers, the key thing is, everyone gets very lost with numbers. They get so attracted diving into numbers and seeing things. But you've got to look at the bigger picture, the framework of information that may get included or not included in that system of calculation. So the numbers may, quote unquote, make sense, but what variables are missing? What considerations can you actually quantify and not quantify? And that's all based on information, whether you have it at the moment or not.
[00:10:26] Speaker A: We're going to do our best to add some, I guess, context to interpretation of the numbers that we're going to look at today. Because, again, this isn't about a numbers conversation. It's about what's happening conversation. And how can we look at this from a different set of eyeballs than what the mainstream media and society has suggested we go about looking at? We tend to hear things and take them at surface value without peeling the onion a little bit further. And that's part of our goal here today, is to peel that onion. So if we make you cry, I'm sorry, onions do, do that on a daily basis when you peel them. That is not our intent, but we're going to have some fun, at least, anyway.
[00:11:00] Speaker B: But they're healthy.
[00:11:03] Speaker A: There you go.
[00:11:04] Speaker B: So let me just share my screen. So what I'm going to first walk through is lay out some of the information that I'm sharing. And the first part, in terms of the information that's being shared here, is I've taken some information on the gross income, and I've put it on a wide spectrum of people for people to see. So if you are earning 50,000, here's what it would look like. Here's 250, and then the various numbers in between.
It's obviously impossible to incorporate every single person's income in their situation across Canada, but it's given a broad range for people to see. The next part is just to kind of put into perspective, if you've earned this income from an estimate standpoint, different than what you actually file, because the software will go into very specific detail of credits that you're entitled to receive and everything like that. This is a very broad stroked estimated amount of taxes you would pay from that standpoint. So if you earn 50,000, the amount of taxes that would get deducted from you is 10,004. Four seven. Now, if you receive that t four income, if you get paid biweekly, then you will receive roughly the even divided amount of that biweekly paycheck source deducted from it.
[00:12:19] Speaker A: And things that this wouldn't include would be, let's say if you're a union member and you have union dues that would be deducted or maybe some medical tax credits or whatever. So this is just looking at your earned income, assuming no other changes, this would be the tax, effectively, you have to pay. And we're looking at a jurisdiction here. This is the federal and the provincial combined, correct? Henry and we're looking at the province of Ontario. We're choosing Ontario a because it's one of the largest masses of population in the country. So this makes a lot of sense. And then additionally, it's also one of the highest taxed regions in the country. So those are the two reasons why we've chosen that.
[00:12:56] Speaker B: Just for this example, and a slight bias, because I'm in Ontario, I'm too used to seeing Ontario.
[00:13:02] Speaker A: Didn't mean to leave you hanging.
[00:13:03] Speaker B: Henry and then if you had 250, the amount of taxes you would get deducted from source would generally accumulate to be about 96,317, which is quite eyeballing if you kind of think about it, where the amount of taxes is equivalent to the double the amount of an average salary in Canada, which is about 50,000.
Now, the next thing to lay out is the average tax rate. So you have average tax rate here, where, based on the level of income you've earned, the taxes that get deducted from it, generally, from a simplicity standpoint, because we have a progressive tax system, it's very difficult to go through the various gradings of salaries and compensations you get, and the tax brackets that increase on top of the income that you earn on top of. There's a simplified calculation of average. So if you just take what that salary is and the taxes next to it, and divide the two. So you'll just see here, using the 50,000 as the example, 10,004, four seven divided 50. The average tax rate at this compensation section is 20.89%. At the 250 is about 38.53%.
[00:14:16] Speaker A: And what's interesting, as I look at this, Henry, and a quick observation is starting at the $50,000 level in your chart, you're showing roughly a $10,000 increase in increment of income up to 100. And then you jump to $25,000. Incremental increases. The increase is, on average, roughly 1% to 3% for every $10,000 of income. The average tax rate increases, roughly speaking to that, until you get into the higher levels, and then it starts to seemingly get a little bit more progressive at that point. So, yeah, there's a constant incline to the average tax rate every time that you earn more. So in every dollar that you earn, there's an increasing capacity for tax to be taken on every increasing dollar of earnings that you have.
[00:15:04] Speaker B: Yes. And so this is where I want to highlight about the component about marginal tax rate. So when it comes to marginal tax rate, this is with reflection to, let's say if you earn $50,000 now, if you earn extra income on top of it, this is what the incremental tax rate works as. So that percentage goes higher. And that's why you can start seeing as you start earning more income, the more of an average percentage is going to be taken from your source income. So using $100,000 as an example, your average tax rate is 26,347. I'm just using this because it's an easy number to see and relate to. And so that's that. 26.35% as an average. However, the point that I'm trying to recognize on marginal is any incremental amount that you earn on top of the 100,000, this is that tax rate that's going to be applied to it. Again, it's still an oversimplified version, but as an example, you earn $10,000. If you are within $90,000 to $100,000, your tax rate would be 26.35%. However, now that you're at $100,000, if you get a bonus of $10,000 on top of that, what the government is actually getting on top of that, because you're now moving into marginal tax rate, more income you're earning, they're deducting $3,389 from that $10,000. So even though it sounds great on the surface, you're getting a $10,000 bonus on the back end, the government is deducting you higher amounts of taxes for that income that you've earned.
Yeah.
[00:16:42] Speaker A: So I think that's really telling. So you made 100 grand.
[00:16:44] Speaker B: Wow.
[00:16:45] Speaker A: You got a bonus. That's amazing. Everybody, high five. You got a bonus. It's good. Congratulations. You must be doing a great job. Oh, great. Here's your $10,000 bonus.
Almost $3,400 of that $10,000 bonus is going straight to the tax man. So progressively, the amount of net spendable money you have to go buy groceries, go on vacation, invest in yourself, whatever continued education, anything that you want to do at the you and me level is incrementally being stripped away from you, and it's automatically being going to some government coffer to be redistributed for whatever services supposedly that we receive in this great nation.
And supposedly we get lots of those. That's what I'm told.
[00:17:30] Speaker B: Now, on a more extreme example, let's say it's 250,000 and you've got an extra $10,000 of source increase in that income. Well, of that 10,000, $5,353. So more than what you've earned is going to the government in that perspective.
So the government is getting 5300 of that. You are getting 4600 or 4700 of that. So that is starting to tell you. And for most people, we are very incentive driven. This starts to become disincentivizing to earn more income.
[00:18:06] Speaker A: And this is where we see again in the corporate realm. Realm, I should say. People who have canadian controlled private corporations, they tend to defer money and earnings in the corporation and allow it to go do work for them there, whether it's in an opco or holdco scenario. And they don't take that out as additional income when they're the business owner, because they don't want to attract this instantaneous penalty of every time I take $10,000 out, I got to pay almost $5,400 of it directly to the tax man. And I only come all out with a smaller amount of money. Whereas if I could defer that, I can reinvest in the business. I could provide more growth, I could maybe hire a new employee that could allow us to scale more. I could actually build more for my future. And then I still have a tax problem down the back end. I haven't fully solved that, but I can manage the year to year basis because I understand that I'm heavily penalized for taking capital out today as I get to this $250,000 earning level.
[00:19:07] Speaker B: Yeah. And this kind of just as a comment in the book that we co authored, Richard, keep tax away from your wealth, tapping into other components of strategizing. Of the five ds, two of them defer and divide to help alleviate the system that is on, in terms of the income tax system. Now, again, based on the position that you are in from a tax standpoint, you may not be able to position this. Generally, employees who receive a t four have very limited options or choices available because it's just so ground based on designed on them. So just thought I would throw that comment out there.
Now, after going through that grade of income, just to walk through a little bit of a high level of the income tax table, we move towards that annual contribution. So the number that I wanted to share is the CRA's government registered program. As it pertains to an RSP, they allow a maximum of 18% to go into earned income. So from your earned income, you can contribute to a maximum of 18%. Now, if you don't contribute to the maximum of that 18%, you are able to defer and accumulate the rollover to the next amount. So just to kind of give a first basis of 18% of the 50,000 is 9000. So if you are earning 50,000, you can contribute 9000 to your RRSP. Or if you're earning 250,000, you can contribute 45,000 in that year to the RRSP. Now beyond that, that's when you enter into no go zone with the CRA, and you can get penalized for over contributing into your RRSP if you under contribute. Let's just say for argument's sake, you've contributed 5000 so that 4000 can get added into the next year as your cumulative contribution room, which would be 9000 assuming you got no salary increase or compensation increase. So it'd be 9000 plus the 4000 of uncontributed room. That would be your next year's cumulative contribution room. And that amount keeps building based on the amount that you do not contribute. The other point to lay out is if you change your source of basis of income. So let's say for business owners, one of the tax planning methods is to transfer from becoming earned income as salary into a form of dividend. Dividend is actually not earned income, so it does not contribute to giving you contribution rules for CRA.
Now the next part is highlighting that. Here is an example of an RRSP contribution program. Now, an RRSP contribution program is usually what employers will provide employees with their incentive to save for their quote unquote, retirement. And the mechanism or shelter to do that is to use an RRSP program. And these are predominantly popular programs that a lot of corporations may provide to incentivize their employees to think long term. And what I'm going to share with you is an example of an RRSP program. Not every program is the same, again, depending on the provider and everything along those lines, but this is again just a basis of reference for our discussion.
[00:22:31] Speaker A: One other key thing to understand, because you mentioned the word incentive, Henry, is from an employer standpoint, what's one of the number one issues or concerns that employers face daily? In fact, it's been even more of an issue here in Covid and post Covid environment, and that is actually attracting talent. So getting people to come to work for your company, stay with your company long term, become long term valuable employees. There's a lot of investment that goes in to acquire and attract and then maintain keeping an employee. I have a trade background, so people used to trade or move organizations fairly quickly depending on how jobs went up and down. But when you had key people, you wanted to try and keep them. And one of the things that was always a topic of conversation if you worked for that organization. As an example, I'm recovering electrician well, at the lunchroom table, everyone's talking about, oh, well, what does so and so pay for their benefit program? And oh, well, here's the wage. Sure, everyone's looking at the wage number, but then they also, after they isolate that, they then start to look at comparing at the other smaller features such as what are the benefits? What about medications for my family? What about the RSP or the incentive for savings and et cetera. So those are all categories that people who are daily looking for work are assessing as some incentivized benefit to go and work for one company over another. So I think in the competitive marketplace, the incentive on the employer is less about helping that person save for retirement as it is about how do I keep and attract this person to stay with my business for the long term so that I get back the capital I'm investing to get them as an employee to begin with.
[00:24:13] Speaker B: Yeah. And everyone's needs is different, and it all depends on the type of culture your corporation or company that you're working with has. And basically, there's a different way of incentivizing and maintaining people to stay and stick within the company. So again, going into specifically the RRSP program, the one that I'm going to highlight here is related to what's a matching program of 4%. So the concept that most people will recognize with RSP programs is if you contribute to the company partnered with the government RRSP program at a specific amount of a percentage of contribution that will activate the employer to match the amount that you are going to contribute. So this ties back to the beginning of our video where we talked about is this really free money? Because they are really going to match it. But I want to talk about the high level perspective in the environment, the context of this program as it participates. You can't forget about the fact that there are tax implications actually for this RSP program that we need to talk about. And the other part we're going to talk about is economics as it pertains to the purchasing power. So let's just dive into a little bit more of the information here.
So as an example, the employee, in order to activate the 4% contribution from the employer, they must contribute at least 5%. So if you were 50,000 as an employee, 5% of that would be 2500. Notice how it is less than the 9000 maximum. So you will be able to carry over 6500 into the next year. But let's just say the employee, because of, let's say, lifestyle costs or cost of living, that we're living in Ontario right now, that they can only dedicate and prioritize 2500 as part of their contribution to the RSP so that they can activate the 4% match. And there's actually a reason why there's a 4% match that I'm not going to dive into very specific details why it's done that way, but it'll kind of reveal itself as I go through this. And if you were 250,000, you activate 5% of it. So 12,500 and the employer again will match 4%. So what does that look like? Actually, before we do that 4%, when you deposit money into a government program like the RRSP, the incentive that is often described is you will get a refund for the over contribution of source deductions that have happened to your taxes. It's not a refund because you've earned it. It's actually a refund because after one year of filing your tax returns, the government, based on how the system is currently deducting money from your paycheck, they have over deducted that amount. So more money was sent to the government than what it should be, and now it's just being returned back to you. It is kind of extra money to spend, but it was actually really yours to begin with. You've just lent it to the government for a year.
[00:27:20] Speaker A: What's interesting on this too, Henry, I think terminology is probably important in our perception of terminology. So again, the word refund sounds good. It has this warm, fuzzy feeling that's attached to it, and I think it tends to distract people away from what else is going on. Additionally, when you're making that deposit into an RSP account, you're getting a deduction against earned income in that year. So now we're using the word deductions getting thrown in there. And so the word deduction assumes, oh, I'm deducting, therefore I'm paying less tax. However, the word that actually should be utilized is the word deferral. But the word deduction, which is true and accurate in what's happening in the incremental aspect of the one year tax scenario. And the word deferral don't get put into the same sentence very often. In reality, that deduction is only for that one year, but you're actually deferring tax. It really should be just called deferral all the time. If we use the word defer exclusively in speaking about these programs, people would automatically have the perception that, oh, if I'm deferring it, that means I must pay it later. Right? But because we confuse terminology and the way it's utilized when talking around these tax qualified plans, I believe this happens both in the US and in Canada. It's creating a false sense of security with people thinking, wow, I saved tax. But in reality, all you did is temporarily mitigate tax in one calendar year to create a tax problem in some future year yet to be determined. And when we get really clear on that, and if we say things for what's actually going to happen, our brain begins to think differently about the program that we're involved in. That's my perception. Would you agree?
[00:29:06] Speaker B: Absolutely agreed. I think absolutely agree. The terminology that accurately reflects what's happening is a deferral, not a deduction. Because a deduction represents for most people in terms of paying less taxes, it's not true. You're just deferring it to a future state that has to be solved in that future. So absolutely agree that it should actually be. And words are extremely important. Deferral versus deduction.
[00:29:36] Speaker A: Become your own banker and take back control over your financial life. Hey, is this even possible? You may be asking, can I even do this? Well, you better believe it. In fact, it's easy to get going. So easy that we put together a free report. Seven simple steps to becoming your own banker. Download it right now. Go to seventeps ca. That's seven steps ca. Now let's get back to the episode.
[00:30:05] Speaker B: Now, the next part to highlight is from that deduction or deferral in what I would rather represent it as the employer is going to match 4% of that. And these programs are typically designed for that reason because actually, sorry to take a step back, that 2500, that 5% from your savings was taken from your gross income, the employer will match 2000 of that. So in total, an amount of 4500 goes into your RRSP. If you are 250, then 22,500 goes into your RRSP. Now, the first wake up call that most people may not realize is actually this deferral creates in the income tax system because it's a program that is helping employees. That is extra compensation. That activates in the Income Tax act what's called a taxable benefit. This taxable benefit is based on that income that you were earning. And that taxable benefit means that you have earned an extra 2000 presently from the employer who contributed to your RRSP. And remember that bonus comment that I made? The employer contributed an extra 2000. That's incremental. So that's why it's on the marginal tax rate that you are gaining taxed at at the present. And that 2000 is getting socked into an RSP which has again, its withdrawal limitations because when you withdraw it, that would activate income, it would trigger a taxable event. So just to kind of share with you that your RSP source deduction is coming from your older previous tax bracket and your employer match is coming from your marginal tax bracket. So there is some slight delta to be aware of in the positioning of the tax bracket. So the first wake up call is the employer match is actually incremental income on top of what you're earning. So if you are earning what you notice is a yellow highlight. This is the example we're going to dive into a little bit more detail. But that 150, the extra income you're actually earning, the equivalent of 156, that is being socked away in the RSP program from the employer.
[00:32:26] Speaker A: Yeah, I think it's really important. And this is something that I know for me I didn't really truly understand because it's not something that, it's not really well described anywhere in my opinion. You just hear about the employer match. We think, okay, that's good, they're going to match something. I'm going to get extra money from the employer. This is great. But it's not communicated that that match amount increases my taxable income. And it's certainly never described that it increases my taxable income based on the next tax rate of every future dollar that I earn at that point in time. So one of the things people always juggle and talk about is, oh, how do I stay at my certain tax bracket so I don't jump into the next tax bracket? Well, here's now something that a lot of people in the country, certainly in North America, receiving these employer match programs that could very effectively, unknowingly be pushing them into a new bracket just because they're taking advantage of that program. So again, it's just bringing a light and an awareness and shining a light on things that are generally unclear and not well described in the open marketplace.
[00:33:37] Speaker B: Yeah. And using some just simple again, I'm using 250 as the example, but using some simple numbers, you contribute 12,500. Your source deduction as a deferral that you're getting back from the government is 4000 and 816, and the employer match would be 4% of it. So it's $10,000. And you can see that is incrementally being added into your taxable income because the employer is matching that. So as a difference that I wanted to highlight is if we take the comparison between how much you are actually saving from you depositing money or, sorry, deferring from you contributing to your RSP, combined with the employer's matched portion, with that taxable income, that incremental tax that you're paying, you can largely see that for certain income ranges, it roughly will match to break even.
But when it gets to a certain point, then it starts essentially kind of losing money in the present moment. And this makes sense because of the marginal tax bracket relationship with your average tax bracket relationship.
[00:34:49] Speaker A: What's fascinating as I look at this chart, so we're talking about, again, you get a deduction, you get a theoretical tax refund. Everything's all squared away.
Then you have this employer match. But because the employer match, it increases the taxable income, which increases tax payable. So the difference between the kind of refund amount and the tax payable, what you're showing us is this net differential. And there's almost no advantage, based on the chart that you have in front of us for people to do this. And in fact, in many categories, given this isolated amount of information we're looking at, it's actually a penalizing component to you in tax savings. You're not actually savings tax. You're actually losing out in the situation relative to just the tax scenario. Now, you also have an account with money in it. You have an RSP account that you can work with and invest. So we're not bringing that into the conversation just yet. But just looking at the fundamental match advantage, it actually looks on paper right now as a match disadvantage to this point, especially if you're in the higher income brackets. As an example, the $250,000 income level, which is the bottom line in the chart, we're seeing that the net disadvantage is actually $537. That is because every increasing amount of you add $10,000 of income, which is exactly the employer match amount here you're getting at that marginal tax rate, which is 53.53%. So most of that money is actually directly payable tax, a good chunk of that to the government and to some degree, it's almost like going backwards. Now, granted, you have an account with new money in it in RSP that you can invest. But in that tax year, your goal of doing it was to save tax. And the result of that behavior is that you didn't save any tax in that year. You have a large account with some money to invest, but you didn't save any tax. And so therefore, ergo, what was the point of putting it in, in the first place would be what I think what a rational person would ask the.
[00:36:49] Speaker B: Question about, well, just to kind of simplify the explanation, to get the 10,000 into the RSP, you are paying $537 to get that in there today.
So you're paying today $537 to get that money in there. And one of the things we talk about is when you put money in terms of an RSP, you're generally going to now also have to expose it to risk, potential risk. If you put it into a specific investment product that doesn't give you the desired returns that you're looking for, then you're probably going to lose value in a different way. And so you're chasing after value erosion. But if you're not going to lose it from value erosion, you're going to try to chase it for a rate of return. Then you're also exposing that principal to risk of loss in money.
So just in an isolated vacuum, you're paying 537 in this example to get $10,000 in there.
[00:37:50] Speaker A: And you're also exposing yourself to future tax risk. Because as we'll talk about later, we'll ask the question here now, and then we'll circle back to this later in our conversation is go ahead and type this in the chat box if you want, in your lifetime. What direction have taxes gone? Have they gone up or have they gone down? So consider that as we think about this conversation. You're placing all of the money that you contributed, plus what the employer contributed into an environment of an unknown tax future. And so you have as much of the investment risk as you have tax risk on the back end, where the theory is that you're going to pay or save money in taxes. What we've been taught over the last 50 years. But many people who are retiring today are finding out that is simply not the case. And I think we can prove that as we get to the end of our conversation today.
[00:38:40] Speaker B: Yeah. At a surface level, you will hear the comment that you will be retiring in a lower tax bracket or you'll have a lower income when you retire, let's say at 65. And we will see just today as we walk through this example that most likely isn't going to be realistic and reflective of the situation. So let's go back to a very specific example of what I've highlighted at 150,000. It's kind of in between of these ranges here.
And just to show that representation, that income in terms of how it's broken down, was 150,000. And the total taxes distributed amongst federal, provincial and CPPEI premiums. 47. 57. The after tax income is 102. 539. And that average tax rate is 31 64, marginal tax rate. So anything on top of the 150. So 10,000 on top of that is going to get taxed at 43. 41%. So this is that base case scenario, whether we layered in the RSP contribution or not. This is what you generally would be paying approximately in Ontario for taxes after you've earned that 150. So now let's walk through the mechanics of when it's layered in, in terms of the next illustration. So if you did not get an employer contribution program, you're just contributing to a standalone individualized RRSP of that 5%, that 5% would attract a 32 56. In terms of a quote unquote tax savings. I again would use it as a return of excess withdrawals from your source deductions. So again, very similarly, instead of that 102, now it's that 15794.
Now let's just change the landscape and put it, instead of it going to an individualized RSP program, we're putting it into the group employer benefit offering and from that group benefit offering. What ends up happening is that ends up grossing up the income because they're matching it. And, sorry, the amount of contribution for 5% was 7500. So that will gross up the income to 156 from the employer's contribution, which is that 6000. And together it does create that tax savings of 59. 44. However, the amount of taxes that you will end up paying is much higher to get the money in, in terms of that contribution. So that was the key point that I just wanted to highlight as it pertains to the RRSP matching program. Now, the other part to talk about it is actually from a qualitative standpoint, and we've kind of loosely talked about it earlier.
[00:41:31] Speaker A: Before we even get there, Henry, I need to make a comment on this, because in the first example you had 150 of earnings and a net income of around 102,000, give or take some pennies there. So 102,000 is what you have to spend to be able to support your family.
Now, in order to make that contribution to the group plan or to your personal RSP plan, the amount we're talking about is $7,500, which means you have to come up with that money. Well, that money isn't on the back end, it's coming out of gross income. But on the front end, if you want to put it in, you have to have the money sitting somewhere. If you don't have the $7,500, well, then maybe it's coming off your paycheck, which means you had 7500 less dollars to go and buy groceries with, with your family.
Now, yes, you're putting money away. There's nothing wrong with that. We encourage everyone to put money away for the future, but recognize that there's less money flowing in your day to day budget for the things you want, especially in a high inflationary, cost increasing environment like we've been experiencing here in North America of late. So the $102,000 goes down to an amount of around $95,000 of actual spendable money because you had to put $7,500 away now. Yes. Then a few months later, you file your tax return, and then you get your quote unquote refund, which is prepaid taxes that you already did. So you're getting some of the tax money back. That number was $3,256. So you go from $95,000 in income and you add back the refund, which happens months later in the next tax year. And now you have $98,000 of income. So effectively, you still went down in net income for the year. You have a nest egg being built somewhere else that you can't touch, because if you needed the money, you're going to be paying a high tax amount to get the money out of the RSP. So effectively, you're sort of locking it into a prison. Most people that we speak to feel that way. I know I felt that way when I have one of these accounts years and years ago. So I just want people to understand that although the net income might have been 102,000, the actual spendable money goes down because you also have to come up with the money to put in in the first place. So if we think about that, there's roughly $4,500 worth of capital, $4,300 worth of capital that is no longer available in that annual budget because it's trapped somewhere else, effectively in the RSP, that works out to about 300 and $380, $350 a month, roughly in monthly cash flow, net cash flow that's a trip to the grocery store right now, today for the average one trip to barely fill your cart with the groceries once a month for every month of the year because you've trapped it into a prison of an RSP. That, yes, it's for your future, but you basically can't access it without some form of.
Effectively, it's not exactly a penalty in Canada, but we'll just call it that for what it is. It's a prepayment of tax at an egregious rate. So you really want to be mindful of that when you think about your day to day spending.
[00:44:47] Speaker B: Yeah. And just to share what you were referencing to Richard. So in that 102, in order for you, that 102, from that net income, net disposable income, you have to contribute the $7,500 to activate that. So 102, subtract the 7500. Is that 98,000? And in reflection, if we kind of think of it, yes, 6000 is going into it from the employers matching perspective, but you're also paying about $232 just to take advantage of that. So you are essentially losing more money in a different way to save for the future that can't be used today. I mean, there's some things we'll talk about where you can use your RRSP, but just generally when money is socked in, when you want to re access it back out, you're going to enjoy a taxable event of including that income additionally on top of your current source of income.
[00:45:55] Speaker A: So the average Canadian is being incentivized and told in all areas of life pretty much from when they get their first job, for the most part, to put money into this program because it's being marketed to them every January and every February by all the major institutions that provide these programs. And it, it's almost to the point where it becomes this thing. Oh, well, of course I have to do that because it's almost an expectation and we kind of get beaten up over it over the years and have these water cooler conversations with other people we work with. Oh yeah, I had to get my RSP. Oh yeah. Make sure I'm doing great on my rsps and all these kinds of things. There's nothing wrong with that. However, to some degree, although you're being quote unquote incentivized to put it in there by the system, by the marketing, by the environment in which we live in the financial world that we currently operate, depending on your income category and most of the ones you showed us, you actually might be being penalized to use it when you add in the match program in that given year. So you're being penalized to save for the future that they're trying to incentivize you to save for. It's a very weird dichotomy happening there, and I think people need to have more awareness of it. And I'm so glad that you put this together, Henry, because I really think we're doing a service for people to get them to challenge what they're learning and to think about it from a different lens and vantage point.
[00:47:12] Speaker B: Yeah, a lot of the times, what's really good and sounding for a group individually, it may not be reflective or be appropriate to your situation. So again, if you are earning a higher amount of income, then following part of the group, you are actually starting to fall into the progressive disincentivizing system where it's actually hurting you in that standpoint. And the other part, just to take into that consideration too, is that when the employer is contributing on your behalf, that is actually counting towards your contribution room. So even though you were putting 5%, the employer's component that they're adding into it is also taking up that annual contribution space.
This was just on the mechanics of the shell of this type of program. But there's other things that you have to think about, because when the particular service provider that's providing these programs, they typically do not give you the ability to individualize and choose what you want to put those funds in. So the programs also will put you into generally what is quote unquote most popular or whatever it may be. I mean, you may be able to choose selective categories of balanced fund, aggressive fund, safe fund, whatever makes sense to you and your risk tolerance, but it's still a group category.
[00:48:49] Speaker A: It's always going to have the word fund on the end of it. And further, that is that there might be restrictions on what your quote unquote investment options are. And most people, by the way, don't look at those anyway. In my experience, meeting with people for the last, well, really, even since he was in this position as an electrician, years and years ago, even people I worked with didn't even know what their money was going into. They never actually looked into it. They didn't actually go make their choices and selections because they didn't know what to do. They were often somewhat fearful about making those selections, and they certainly never looked at them on a day to day basis. Everyone's a little bit different, but that was very common in the construction trades that I was in. Here's what's fascinating in many of these group provider scenarios, these are often put together by insurance carriers because they also provide the group benefits for your medications and whatever else that you have. So it's a one stop shop for the employer to bundle everything together with a company that manages all that. So it simplifies life for the employer. Now, every employer group is different, and they have different rules and restrictions. One of those restrictions is that in some cases, maybe I put my money in, I made my contribution, the employer makes their contribution, and that money vests in my name, and it's now under my name. Okay? Now, sometimes I could go and I could transfer that money from the group provider over into my individual personal RSP account at some other institution, and I could do that right away. In my experience, that's less and less common. When I was working in the trades, that was common for the types of companies I work with. And in fact, I did that on a regular basis. I would build up an amount. Transfer, take control, transfer, take control. However, for many employed individuals, they can't move that money from that group plan until they leave the employer.
Or maybe there's a one year vesting period where then they can move what's gone in, maybe the year previous over to a different. So you're creating a lockup time frame where it reduces your decision making power to go and choose how you actually might individually want to go and invest that capital. This all comes down to control. We're very big about control, personal, individual control and autonomy, and we want to maximize that at all level. For our clients, at least, that's kind of what we're known for. So every instance where you can have a higher level of influence and control over your own financial life is good. And the more that we can understand those options. So if you don't know what your options are, you have one of these plans. Pick up the phone, call the group benefit administrator, and start asking a bunch of questions, because the more you understand what you can do, the better you are. People think that it has to stay with the group, and that is not always the case. Often it can be moved. So consider understanding what your options are and get really clear on it.
[00:51:36] Speaker B: And a big part of that is what we like to empower Canadians when they're watching or working with us, is the element of control. Ask yourself, how much control will you be able to get once you have your funds in these type of programs and in these locations? Now, I think what we've put together very accurately provides the incentives of why the government would want to cooperate with it because they get incremental taxable benefits contributed by you.
The investor program who's sponsoring this program enjoys from that. And the government also enjoys from the future tax deferral that is coming in the perspective that is being put there. And the employer, not to knock on the employer, but would enjoy that because that is what the market of employees that they've been able to attract in terms of retaining that talent. So there's a win win for those three individuals for you. That is what we want to make sure that you are able to identify whether or not you are actually winning. In this scenario, all three of the other parties are winners. But we've got to make sure you are winning too, as it pertains to your journey.
And the final point that we kind of want to talk about and just resurface is so should you contribute to an employer matched RSP program? We can't give you any of that specific advice, but one thing that you need to know for yourself or your individualized circumstance is really some things related to what can't be shown numerically. We will show some of those examples, but there's a lot of it that you can't. What's the cost of predictability in the future? What does that even look like? What does the future look like? And we all don't know what that's going to look like. The other component is that control of the withdrawals.
Everyone talks about how easy it is to get the money into the system, but how about when you want to get the money out? What's the cost of it to you in losing that control on that withdrawals? The other component is the cost of freedom of your capital, which is the money that has gone into the system. Now, when we talk about becoming your own banker, when we deposit money in the form of premium into a properly designed whole life insurance participating, dividend paying whole life insurance policy, we encourage people to practice the process of banking, access the money immediately to make themselves get further ahead in their life. Now, when you put money into an RRSP, you generally have two programs that you are able to restrictions and how you can withdraw that money. And you withdraw it in the form of a loan, again in the form of a home buyer's plan, which is about 35,000 that has to be repaid in 15 years. Otherwise it gets included in your taxable income or you put it into 20,000 or 10,000 per year for a lifelong learning plan. Those are the two limitations that you can get out of the RRSP when you want to withdraw it. So you have very clear information looking at the cost of these withdrawals to you when you are to make it. And you have very limitation, a lot of limitations in how you can use it without triggering taxable events. The key advantage is that you get.
[00:55:06] Speaker A: The ability to work with capital, while capital can also be growing for you on the side. And that's where the becoming your own banker methodology really comes into play. And in our example, going back to the $150,000 income earner, that $150,000 income earner had to contribute before the employer gave them anything, the amount they had to contribute was $7,500. They had to find the money. Unfortunately for a lot of Canadians, and I would imagine our friends south of the border have a similar issue where people are actually going and getting marketed to for one year tax qualified plan loans. So actually take a loan from an institution to make the contribution because they think it's better. So now they may or may not be getting a tax savings, it seems like not based on our conversation today. And they're also paying interest to the third party. So they're making the wheels of the government system and the banking system turn more in their favor than they themselves are receiving in benefit often is the case, and that's part of the cycle that we're hoping to break people free from. Whereas if you were going to commit to $7,500 anyway, what about getting quality protection to make sure your family is looked after so that heaven forbid something happens to you. Everything is looked after and you have access to a good chunk of that capital through the methodology of a policy loan, while the capital is working for you on a constantly improving basis for the rest of your natural human existence, regardless of what tax year you're in on a tax free growth basis, and something that will pay a tax free death benefit. So we can check off a lot of boxes that the methodology that Nelson Nash taught us, becoming your own banker when you utilize the tool for it, dividend paying, whole life insurance, well structured, as Henry identified, we can accomplish a lot of the same objectives that people want to accomplish. They hope they can accomplish with an RSP program, but we can actually get them done without the restrictions and limitations that the RSP program often provides. So that's part of one of the distinctions that we're helping people can really take away from our conversation today.
[00:57:21] Speaker B: Instead of thinking about, should I contribute to an RSV matching program with your employer? The question that I would always ask people is, do you have a withdrawal plan, because how is it in the circumstance where if you do not have a clear plan of withdrawal and the tax implication around that, then that's really the conversation that needs to be dove into. Because if you do not have a plan to withdraw, your objective was to get back some taxable refund from the government from the over deductions that they've taken. And that can come in the form of let's round it in what we saw, around 20% to 40%. Let's just say, however, there is one thing that we do not generally know, which is our best before date, and when it comes to our best before date, and when it comes to the situation where there is a second death, the final death, and there's an outstanding RSP balance that is very significant, that amount can get trapped and get payable in the form of a deemed disposition tax to the government of 50%. So you're getting an annual refund of about 20% to 30%.
And in return, when you pass away, that mountain that was built is going to pay a 50% tax.
You have also lost in that equation.
[00:58:53] Speaker A: Often because it's a higher balance that's being paid out. And in fact, in our book, keep taxes away from your wealth. Henry, you relate a very personal, significant story about your own family situation with exactly that challenge that had to be overcome.
[00:59:08] Speaker B: That's correct. And this is where I just kind of for a fun exercise for everyone to relate with, because inflation is a very difficult animal to define. And one of the things I wanted to highlight was an interesting screenshot with how much a McDonald's Big Mac extra value meant meal is in today's 2020, $3, which is $11.59. This is a Big Mac with fries and a drink. I remember being a child about 20 years ago with buying a Big Mac. And one of the things we would do as a family where we could afford it, when we could afford it, we didn't always eat out, but one of the ways we would treat ourselves was a Big Mac meal. And I remember at that time, 20 plus years ago, it was 399 for that extra value meal. Then it became program coupons to get the 399. And then now it's become about 1159. So in 20 years, just around it, and nice dollars, $4 of what it used to be is now $12 today and over 20 years. And if we were to look at compensation, so the amount of money you need to spend to get the same on a Big Mac extra value meal, I'm sure other places like lettuce and other things are much cost much more than what it used to be. It's at least three times the price. Now.
That's a very big impact to the value of your dollars today.
[01:00:44] Speaker A: In fact, there's even a website called bigmacindex.org where you can learn all about the price of a big Mac in different countries in past years. So you can see the impact of the inflation impacting the most popular hamburger in the world. That is definitely not the most tasty.
And in relation to that, I love that you've got the screen share up here, Henry. This is talking about, to a degree, inflation, but also the impact of taxes. And so we asked you to think about, as we went to this conversation, what is the impact of taxes over your lifespan? Well, let's take a period of time and some data from Canada, and we'll actually assess the impact of those taxes. And I'll let you walk us through this here, Henry. But I think this is fundamentally, critically important for people to really understand.
[01:01:32] Speaker B: What.
[01:01:33] Speaker A: Has transpired over the last 19 to 20 years, and then put yourself 20 years into the future and consider where are you placing capital? Are you placing it in an always taxed account or in a never taxed account? And think about this as we go over this part of the example.
[01:01:49] Speaker B: I mean, a lot of our conversation was focused specifically on possible alternatives and whether an RSP matching program would suit you. And a lot of what we want to just make sure that gets taken away is we want to make sure you think about how much control do you have as it relates to your needs and your capital, and is your money being put to motion rather than staying stagnant? Now, the other concept we're introducing here is as it pertains to economics. And if we look at $150,000 today, and the latest or the earliest I could go to is 2004, as it pertains to the taxable income brackets. And now what you see here is a lot of details that I'm not going to dive into, but the key takeaway from this standpoint is for $150,000. Remember, the example that we started with, the amount of taxes you would pay was 47,461. Now, if we take the economic data of what inflation has been today and roll it back to 2004, what was 150,000 equivalent to, and this is a site, and the link was just in. We'll have the link in the show notes and the link on my screen. But you will see here in terms of 150,000 today as it pertains to that salary, 97,000, that's equivalent to 97,000 in 2004.
So in that 2004 salary of 97,000, what I have exercised in terms of the calculation is the amount of taxes. The equivalent of what you would end up paying at that time for those tax brackets would be 32,330, because the structure of the brackets are much different than they are today. And if we look at the equivalent of how much taxes are being paid in today's dollars, is 15,131. And again, from 2023 to 2004, that's 19 years of hindsight that we're looking at. That is a 47% change in terms of how much taxes you are actually paying.
[01:04:13] Speaker A: In other words, 97 grand in 2004 is the equivalent to 150 grand today. Same standard of living, same canadian individual family making the equivalent of 150 grand. In 2004, they would have paid 32 grand in tax. Today, at 150 grand, they're paying 47 in tax. The result is the tax.
Equivalent amount of tax on the equivalent amount of income has gone up. Therefore taxes have gone up. If we were to have this conversation 19 years ago, and I asked you, Henry, are taxes going to go up in the future? You probably would have said yes then, too. But now we can actually prove that that's the case, given this data. So consider now, 20 years from today, as you're listening to this, what direction are tax rates going in your life, and what direction do you expect they will go, given the unfunded liabilities that governments around the world have to deal with? The only source of revenue for those government coffers is the tax man. It's a taxable population, and so the tax man is going to come grabbing for more tax to pay for these unfunded liabilities. It's the only economically viable way that they have to solve that math problem. Therefore, it is reasonable to think that taxes will probably increase in the future, just as they did in the past. And so if you're placing your money and your employer's money in an always taxed account, and the tax rate is technically lower today than it's going to be in the future, because that's what you believe, then is that a sensible reason for you to keep putting capital in there so that it can be taxed at some future unknown rate when you are forced to take it out versus when you want to take it out? That is the challenge that North Americans are facing, and that's what we need to get really clear on. Where do you stand in relation to what you want your future to look like do you want a future of certainty or uncertainty? That's fundamentally the difference you're looking to make, the decision that you're trying to get to terms with.
[01:06:18] Speaker B: So not only is it, from a quantitative standpoint, showing whether matching makes sense at a certain point, the element of control that you have as it pertains to your capital while you are alive to use it, and not being tied up in investments or locked into taxable events triggering withdrawals, and also the uncertainty of the future in terms of showing here's how much money that is being trapped in there. Are you getting a 47% return of your dollars in 20 years because there's an erosion of value that's happening, because what used to be 399 for a Big Mac combo is now not 399, it's $12. Those are very different economic circumstances. So this is the marginalized perspective that is coming not just from an isolated, one moment question of should I contribute to an RRSP? Should I find a different way to bring much more control back to me?
[01:07:26] Speaker A: Love it. Well, Henry, this was amazing. Thank you so much. Again, we always value your expertise here on the podcast and speaking to all our amazing podcast listeners. Boom right there. If you're on YouTube, check it out. There's a whole nother amazing video right there that just popped up. It's probably got Henry and my face on it. Go ahead and dig in. That's some great stuff. Thanks for tuning in. Have an amazing rest of your day. Thanks for listening to the wealth without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about. Join us on the next episode where we continue to uncover the financial tools, strategies, and the mindset that maximize your wealth.
