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ARE CANADIAN BANKS AND THE CRA IN A COMPETITION

September 5, 2017

To see which can take the most of your money!

Tax Freedom Day was on June 26th this year – that means that every single penny you earned up until that date went to the government in some form of taxation.

With that knowledge and some other government statistics let have some fun with numbers.  To start with we’ll make a few assumptions:

Our first assumption is that, like me, you live in London Ontario. The average house price in London is about $278,000. Then we’ll assume you have income at the median rate $27,600 is the median income level in Canada.  The government prefers the Median rate because it is always higher than the Mean rate – but there’s more on that later in this blog.  And like most tax paying citizens you pay the government (meaning that since you pay your debts with “after tax income” Debt Freedom Day must follow Tax Freedom day).

We’ll also assume that you are carrying the Canadian Average (unsecured) debt load of about $29,000. Given that interest can vary on that debt load from about 9% to around 32% we’ll use 21% (the average) for our calculations.

So you, like the average Londoner, own a house worth $278,000 and like the average Canadian you have less than 20% equity in your house. You are therefore carrying a mortgage of about $222,400. The interest rate is set at 4% – so over a five year amortization you will pay $28,678 in interest – we’ll not complicate things too much and call that $5,726 per year.

Then you have to pay interest monthly on your unsecured debts which is about $508 per month. But let’s not forget that every penny you earned up until June 26th went to pay taxes. You also have to pay your bank fees that are about $15 per month (for how ever many accounts you have) – assume a mortgage account (because you got talked into that totally unnecessary fee) a savings account, a VISA account, a line of Credit Account and a checking account! You go Champ! You are staring down the throat of some $90 per month in bank fees, including some miscellaneous fees. But since that is after tax dollars, and you can only pay it after all your taxes for the year have been paid, that comes up to $180 per month.

O.K. ready for the calculations? Here it comes ready or not:

You are paying…

Are you sitting down?

 $12,902 per year to your bank of choice – in after tax dollars – in interest and bank charges, including the mortgage and all lines of credit. At the median level of income you would only be bringing home $1,894 per month but your pretax monthly income is a whopping $2,300 and that is what you have available after June 26th and Tax Freedom Day.  So I have some really bad news for you!

YOU ALMOST RAN OUT OF YEAR BEFORE YOU RAN OUT OF DEBT PAYMENTS!  

Debt Freedom Day would be at or about October 4th.  And if you owe more than the national average, there is NO debt freedom day for you my friend – you are indentured to the government and the banking system for life.  When you die they will pick over the bones of your estate.  Your post October 4th income is what you have to pay the rest of bills including food an groceries.

CHANGING UP THE STATS A LITTLE

Of course the median is a number that lies exactly in the middle of a range of numbers and doesn’t really tell us very much – if 95% of the people over the median earned $27,601 or $100,000 per year the result would remain unchanged.  So let’s think about using the “mean” instead!

We know for instance that the top 2% of income earners in Canada have incomes at more than $100,000 per year and when we take the mean of the remaining incomes Canadians, on average, have average incomes of less than $20,000 per year.  Notice that I am avoiding using the term “earn”  or “earnings” because about 40% of the available workforce is Canada is unemployed (including government statistics for non-EI recipients).

Debt loads too are unevenly and unfairly distributed.  Poorer people tend to carry relatively higher debts and pay higher fees, both in real and relative terms, than the top income generators who are privy to reduced interest rates on credit cards and mortgages.

There is little that we can individually do about the CRA and government taxation but there are things that we can do about the costs of servicing debt.

1)  get out of debt

2)  stay out of debt

3)  live within our means

4)  use cash instead of debit of credit cards

5)  have only one bank account

6)  don’t try to keep up with the Joneses