I read an article online in a Canadian newspaper today that had the headline:
$89,000 puts Canadians in top 5% of tax filers
Of course, I had to stop and read this article because it interested me so much.
The information comes from the latest Canadian statistics data (Census 2004) showing the percentage of tax filers at different income levels. For comparison, the Median United States household income in 2006 was $48,201 (from Wikipedia)
Where’s the Money?
When I read this article the first thing that jumped out at me was that there was no mention of exactly how these top 5% made their income. Did they pull it in from real estate investment income or was it pure salary from one job or another?
Depending on the method of declaring this money two different people who each have a total income of $89,000 could lead very different lives.
Consider that a salaried employee who receives $89,000 (including bonus) per year will pay approximately $25,000 in taxes which leaves a staggering $64,000 to play with ($5,333 per month). Depending on their lifestyle choices, this may result in a small positive or negative saving each month. After a number of years of 40+ hour weeks, they are able to retire with a nice investment account, reduce their monthly expenditures by half and live their remaining 30 years slowly reducing their life savings.
The Cash Flow
Canadian #2 has made some great investments in positive cash flow properties and businesses. Although his annual income is $89,000 he then includes a significant number of deductions each year. Here is a short list of his annual expenses that are claimed before he pays taxes on income:
- Travel to and from his rental properties on the Texas, California and Florida coasts: $5,000
- 15% of his household expenses are declared for home office use: $1,000
- Pens, paper, printers and computers are all declared: $1,400
- Vehicle expenses repaid: $500
- Property depreciation: $6000
All in, the investor pays approximately $21,000 in taxes and has approximately $4,000 more due to the business deductions. That’s over 6% of the total that Canadian #1 has coming in. The best part is that each of the items on the list are things that the investor wanted to do anyways. Travel, have a home office and supply it. All paid by legal government deductions.
The definition of retirement that I promote is that once your passive income is greater than your monthly expenses, you officially don’t ever have to go to a job again. After reading the above examples you may say that $4000 isn’t enough. Consider this: Canadian #2 doesn’t go to an office each day. She probably puts in 4 hours per week in maintaining her properties or businesses and spends the rest of the time playing, volunteering or doing whatever else she loves.
Also, upon ‘retirement’ the investor will actually have more income than they did before because of appreciation and the ability to refinance and remove thousands of dollars from their equity – tax free.
Canadian #1 spends 2 hours commuting on a dirty train each day and gets a solid 2 hours of quality time with his kids each work day. Do you know anyone who spends more time with fellow commuters than their own family?
Now which one is more attractive?
I wrote an article recently called Automate Your Multiple Steams of Income that looks at creating a lifetime stream of income that will allow you to fulfill your financial goals. Have a read and really think about where you are dedicating your energy. Is it to creating wealth for yourself, or for someone else?
* Given the recent explosion in value of the Canadian dollar $89,000 CDN is almost exactly $89,000 USD. Back in 2004 it was more like $65,000 USD but let’s not dwell on the US dollar…
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