The Natural Wealth Process breaks the financial life planning process down into 5 elements: Vision, Wealth, Tax (and Estate), Cash (and Cash Flow), and Risk. We have been discussing Tax and Estate matters this calendar quarter; Person Tax, Portfolio Tax, and now Possession Tax.
Possession Tax is taxation surrounding buying and owning possessions; things like our homes, vehicles and other lifestyle assets. It is the sales taxes, both general and provincial, we pay when we purchase lifestyle assets and the taxes we pay on the asset while we own it (e.g. property taxes for houses and recreational real estate), and the taxes we pay for upgrades and services (e.g. sales taxes on insurances, renovation materials, services, and repairs). In the course of a year they can add up no matter where one lives in Canada or elsewhere.
A family spending even a modest $48,000 a year on purchase and ownership of lifestyle assets may have paid $5,000 to $6,000 or more in consumption taxes alone, or as little as $2,500 if they live in Alberta, Yukon, Nunavut or the Northwest Territories, depending on where they live in Canada.
Homebuyers purchasing new homes, either houses or condominiums, pay sales taxes on the purchase and additional development and impact fees incorporated in the price of new homes depending on the location of the home. New and used cars, trucks, and recreational vehicles are all subject to sales taxes too.
And remember, sales taxes and other taxes paid when buying and servicing lifestyle assets are on top of the income taxes we already pay on our person income and portfolio incomes.
As for vehicles and other non-property Possession Wealth items, we essentially “use them up” overtime and then replace them as “needed” (or wanted?). Although acquiring Possessions is not bad per se, buying and owning things without a well thought out purpose simply because you can, might be . . .
Then there are also the capital gains taxes that may be applicable when you sell a recreational real estate property (if it is not listed as your principal residence) or listed personal property item (collectibles, art, or antiques) which has increased in value while you owned it. Capital gains taxes are payable by the estate of an individual, or in the case of a couple on the last death, holding these assets if they are not otherwise disposed of prior to death.
While we are on the subject of possible capital gains tax on disposition generated by death let’s not forget probate fees that may be levied on assets, real and financial, at death. Probate fees are another form of taxation.
This is not to say taxes are somehow, inherently bad. Most Canadians would agree that we are blessed to live in this wonderful country. International surveys continuously point to Canada as one of the best places to live in the world. However, providing the services and infrastructure that makes up a significant part of why Canada is a great place to live costs money. Governments must raise this money through taxes and fees.
Nevertheless, it is wise to be mindful of the impact taxes have on our purchases of possessions and now much of net incomes goes to purchasing and maintaining lifestyle assets whether it be homes, vehicles, furniture, clothes or other tangible lifestyle assets.
Regardless of your political leaning or what you might otherwise think of the Fraser Institute, they have a useful tool in determining just how much tax we might pay in the course of a year. The calculator shows the number of days a Canadian works to pay taxes of all sorts including income taxes, sales taxes and property taxes (whether an owner or as part of the cost of renting). While the tool is far from perfect, it does help illustrate the impact of taxes in our lives and helps create awareness of how much person wealth or life energy the average Canadian expends to pay taxes before dollars are available for actual expenditures.
Here is the link to the Tax Freedom Day website if you want to calculate your own personal Tax Freedom Day for 2018: https://www.fraserinstitute.org/tax-freedom-day-calculator
According to the Fraser Institute, the average Canadian family has to work until June 10th in 2018 (or spend an equivalent amount of investment and retirement income) to pay the various taxes levied by federal, provincial, and local governments.
In the Natural Wealth® Process Vision outlines the idea of Be, Do, Have, which are listed in the order we suggest life goals and objectives should be considered. “Have” represents possessions, otherwise known around our office as the “stuff” of life. The challenge with stuff is that if we are not careful, it can own us and our life energy instead of the other way around. Be mindful of all the implications of more and newer stuff, including the additional tax implications, before making purchases. You might find yourself reconsidering the purchase and saving some tax in the process . . .
David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor
360 Private Wealth Management | Manulife Securities Incorporated
Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4
Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656