Maximize After-Tax Income to Improve Future Income

Paying taxes is a sign of good fortune in Canada. You may be surprised to know that about one third of Canadians do not pay taxes, but of the two thirds that do, an average of 84% of income was left after taxes.

This statistic is according to information on the 2010 tax filing year, published in the National Household Survey on Income in Canada, last September by Statistics Canada.

What will you be doing with your 84%? January is a good time to invest in your TFSA (a maximum of $5,500 for 2014). If you have unused TFSA contribution room, try to top that up too. An RRSP is a great investment for those under 72. If you’re contributing for 2013, your maximum contribution is shown on your 2012 Notice of Assessment. For 2014, your maximum contribution is the sum of your unused contribution room plus 18% of your 2013 earned income (to a maximum of $24,270)   Spousal RRSP contributions are a good idea, too, in some cases. Discuss your eligibility with your financial advisor before March 1.

But one of the most important investments you can make appears to be in yourself – your education, specifically. According to the Statistics Canada study, 67.1% of the top 1% of earners in Canada have a university degree.
Almost 88% of these folks work in one of  five occupations:

• 38.8% - management
• 14.3% - health care
• 13.7% - business, finance and administration
• 11.0% - occupations in education, law and social, community and government services
• 9.9% -  natural and applied sciences and related occupations

This is important because incomes in Canada have stagnated since 2008. The median after-tax income for families of two or more people has been $68,000 unchanged in the four-year period ending in 2011, according to a study published by Stats Canada in June 2013.

This could be happening because of our drop in productivity recently. According to a Report by the Conference Board of Canada, Canada’s labor productivity was much lower than that of the US and we placed a disappointing 13th out of 16 peer countries in a comparison of productivity. In fact, Canada’s productivity level has dropped from a high of 91% of the US level in the mid 80s to only 80% in 2012, according to the study.

The opportunity? Two things you can do immediately to secure your future prosperity and beat the trend:  

1. Review Source Deductions. Mid-January 2014 has already passed and this is a good time to review your source deductions on your first pay of the year. Are you moving ahead or falling behind after tax? Should you be adjusting your source deductions to take into account new personal circumstances? How much will be left to do what you need to do to secure peace of mind? Use Forms TD1 and T1213 to request your employer to adjust your income tax withholding.
    
2. Invest in Yourself. Strive to improve your education and your productivity. Investing in an RRSP (then tapping into the Lifelong Learning Program under that plan) and your TFSA (which provides you with tax free savings opportunities) will help you smartly accumulate the resources to do so.