Peter Boys, Boys Financial Services

Understanding Tax Freedom Day


As a follow up to my recent article “Will CRA be the big winner when you die”, I thought it would be helpful to explain why Canadians should understand what Tax Freedom Day means. The Fraser Institute annually calculates Tax Freedom Day in order to provide a comprehensive, easily understood indicator of the overall tax burden faced by an average Canadian family.

Tax Freedom Day is the day in the year by which an average Canadian family has earned enough money to pay all taxes imposed on it by the three levels of government; federal, provincial, and local. If we had to pay all our taxes up front, we would have to give governments each and every dollar we earned prior to June 10 which is Tax Freedom Day this year.

An average Canadian family might be shocked to find they pay $44 of every $100 they earn to taxes. What the Fraser Institute doesn’t mention, and many Canadians are unaware of is the tax time bomb in many family’s future, their ultimate estate’s tax liabilities. And many also don’t know that these can be reduced to zero with proper planning and sufficient lead time.

Successful people accumulate wealth usually by obtaining good advice from a variety of advisors such as lawyers, accountants, mentors, investment advisors, tax advisors, etc. But I have found that in many cases, no one is looking at their estate and risk planning from a defensive perspective or a high level viewpoint. And despite all their professional experts, many still have no will, or one that’s improperly drafted, or is out of date. Which of these categories do you will fit into?

In the 18 years that I’ve been dealing with farmers, small business owners, professionals, retirees and high net worth families, I am still often surprised to discover their ultimate tax liabilities look something like this:

  • The government will grab $390,000 per $1 million of a couple’s RRSPs or RRIFs on the last death.
  • About $300,000 on every $1 million of their company investment holdings will be paid in taxes on the last death of both spouses.
  • Almost $975,000 per $5 million of accumulated capital gains from investments, real estate, farm land and business equity will be lost to taxes on the last death of both spouses.

This means that much of the money people salted away into savings won’t be passed on to their heirs. The good news is, with proper planning today, all these nasty taxes can be reduced to zero, rather than waiting until forced to act by disability or death.

If you have charitable inclinations, your tax dollars can become charitable donations. Would you prefer to be remembered as a philanthropist who donated a substantial legacy to a worthy charity, or as the taxpayer who left an unnecessary gift of money to the government?

True lifetime tax freedom occurs when your final estate plan leaves more for your heirs and nothing for CRA. The first step to help you preserve the net worth that you have worked so hard to build is to sit down with a trusted advisor and get a handle on what the potential estate tax shrinkage would happen on the last death.


Image licensed through Shutterstock

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