We are all hearing the calls to tax the rich. The assumption being, if you are rich, you will pay a lot of tax, but is that always true?
Here is an example of a couple with a net-worth of $10 million who are set up to pay exactly $0 in tax in 2015.
Here is how they would do it.
Tom and Mary are a recently retired, 65-year-old couple, living in Vancouver. British Columbia isn’t the only part of Canada where a $0 income tax bill is possible, though — the dream is alive in Alberta, Saskatchewan and the Territories, too. In Ontario, they would have no tax, but would pay $1,500 for the health premium, which is essentially a tax.
In West Vancouver, they live in a $3-million home, which they bought 20 years ago for $400,000. They also have a $1.4-million cottage near Whistler, B.C., and a $600,000 house not far from Phoenix, Ariz. That’s about $5 million of real estate assets.
They will pay no income tax on the growth in value of their home, but will ultimately have to pay capital gains tax on the Whistler and Phoenix properties — but only when they sell. Of course, they do pay property taxes, but no income taxes.
Tom is a retired lawyer and Mary is a retired accountant. Despite being tempted over the past few years, neither decided to set up a corporation. They wanted to keep things simple. As a result, their $5 million of investments looks like this:
— $4 million in a joint non-registered investment account: This account primarily holds stocks, roughly two thirds of which is Canadian stock. They don’t aim to have very high dividends on the account, but they still end up with a dividend yield of about 3.75 per cent. This is expected to translate into $50,000 of Canadian dividends and $25,000 of foreign dividends for each of them.
Typical stock holdings would be BCE Inc., Royal Bank of Canada, Enbridge Inc., Apple Inc. and Johnson and Johnson.
They still manage to generate about $5,000 each in interest income from money market funds and high interest savings accounts and their total investment income from dividends and interest on the account is $160,000. Because it is a joint account, all of this $210,000 in investment income can be split equally between Tom and Mary.
They left the income in the account to be reinvested, but for cash flow they sold and withdrew $240,000. This generated a total of $50,000 in capital gains.