A question I’ve been pondering the past couple of weeks: Why do low income earners pay even more taxes? Can’t catch a break. Can’t get ahead. Not when good old Revenue Canada wants us to pay up even more.
How did everybody do at tax time?
I’m a low income earner, low enough that when it comes to paying for medical premiums, I’ve pretty much always been on premium assistance. For most of the past 10 years I’ve been on 100% assistance. And I’ve had my battles with the MSP village idiots that the Medical Services Plan hires to administer this program. You wouldn’t think a low income earner like me would have to cough up more tax money.
We all pay taxes. Conveniently, the boss deducts taxes each pay period. It’s when we earn a little side income to make ends meet that we get taxed to death even more.
Why do lower income earners have to pay even more taxes?
2018 taxes
2018 was a shocker to me. Usually I have a small amount of money refunded. A couple hundred bucks, maybe less. There’s been one time I think I owed Revenue Canada a couple of hundred bucks but that was a few years ago. In other words, in my lifetime I’ve always been pretty close to the zero break even point when it comes to a refund or paying taxes.
This past year’s tally? My 2018 taxes left me owing $1100. Yikes! How could that be?
Too much dividend income? Never!
I invested most of an inheritance in stocks that pay dividends because I need the income just to survive, pay my basic living expenses.
That dividend income was the killer, said my accountant.
It sucks that low income earners can’t get ahead. We struggle financially and we’re still hit with a tax bill in April.
Looking ahead to next year
I expect this year’s income to be approximately the same as last year’s so I asked my accountant if I should put money into an RRSP, Registered Retirement Savings Plan.
For those unfamiliar with RRSP contributions, they’re tax deductible and are claimed on our income tax forms.
Any interest or dividends accrued in the RRSP account are tax free, and not included on tax returns. Compounding interest or reinvesting dividends to purchase more stocks can help money in this account grow faster.
Last year, between me and the company I worked for, my RRSP contributions were around $3,000. My priority is funding my TFSA. I’m still putting $500/month away towards next year’s TFSA, anticipating the $6000 contribution limit again, and I don’t want to divert monies into an RRSP.
This year I’ll be funding any RRSP contributions out of my own pocket. No employer help. I don’t have benefits where I’m currently working.
My accountant crunched some numbers and said I’d need to put about $5,000 into an RRSP this year to bring me closer to zero on the refund/amount owing.
How does this happen to someone who makes less than $20/hour and struggles just to make ends meet? My deadbeat ex sure isn’t paying support. If he was, that’s the money I’d be socking away into an RRSP.
Crunching numbers
So I crunch the numbers and decide it’d be easier for me to come up with $1100 next year to pay the taxes, rather than $5,000 to contribute to an RRSP. Out of which I’ll be taxed 20% when I withdraw the funds.
Fortunately, I set up a savings account a few years ago for taxes and had more than enough money to cover what I owed Revenue Canada. Moving forward I’ve decided $50 from each paycheque is going into the tax savings account. I’ve also decided $100 from each pay is going to an RRSP.
I’ll see how long I can keep that up. That’s $300/month when I’m already stretched pretty thin.
Goodbye CPP at age 60?
Something else has become clear: I can’t take on much more income without figuring out how much more in taxes it’s going to cost me. For the past few years I’ve been deciding whether I should start taking my Canadian Pension Plan – CPP – when I turn 60. And that’s less than 18 months away. Yikes! I’ll soon be eligible for benefits due to my age.
There are many articles online about when you should take your CPP – at 60, 65, or older. From what I read, higher income earners should defer taking CPP due to being taxed. Also, the longer you wait, the higher the benefits when you finally start taking them.
Here’s some extra reading if you’re still deciding at what age you should take your CPP:
My Own Advisor chats with a CPP guru about when to take your CPP.
Money Coaches Canada answers whether you should take your CPP at age 60.
Boomer and Echo weighs in on why you should wait until you’re 70 years old to collect CPP.
Service Canada lets you look on their webpage to estimate how much you’ll receive depending on the age you apply for CPP.
https://www.canada.ca/en/employment-social-development/services/my-account.html
Service Canada
If you’re a Canadian reader, definitely sign up for your access to Service Canada – it’s free to sign up and access the info you need! If you have to apply for Employment Insurance benefits, Service Canada is where you do it.
Service Canada tells me if I start taking benefits at 60 I’ll get $381/month, adding up to a few thousand dollars more added to my annual income that I’ll be taxed on.
If I wait till age 65 CPP will pay me $595/month. If I’m still working, and I can’t see why I won’t be, I can delay taking it.
The other thing to keep in mind if waiting until at least 65, especially if I’m still working this same job, is that I’m at the highest level of earnings in my entire working life right now, and CPP is calculated based on the highest 34 years of income. If I’m remembering correctly. I don’t know how much of a difference that makes, but similar salary for the next 6 years might add an extra $100 month to my benefits if I wait until 65.
The average monthly CPP payment is around $640. Clearly, I’m going to be under average!
Which brings me back to low income earners being taxed. Who knows what life will bring me in 18 months? Maybe I’ll be forced to start collecting CPP because I’ll need that money just to survive. Which means I’ll be taxed on it.
Low income earners can’t get ahead
Whether it’s getting taxed on investment dividends/interest or getting taxed on CPP, it’s still a tax advantage to have the extra income. Even though it doesn’t always make good tax sense to us when April rolls around!
More reading:
