Somethings Gotta Give
Looking at the current situation in the United States we see an interesting concept called the debt ceiling. The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds. If the U.S. government can’t meet the interest payment obligations to bondholders the United States government would be in default, lowering its credit rating and increasing the cost of its debt.
So how bad is the situation?
The U.S. government has run a deficit averaging nearly one trillion dollars every year since 2001, meaning it spends that much more money than it receives in taxes and other revenue. As of June 2023, the U.S. total national debt stands at more than $32 trillion.
The historic solution to this dilemma has been to simply raise the debt ceiling but politicians are becoming increasingly reluctant to continue to push the problem further into the future.
Why Do I Care?
Canada is not excluded from the problems associated with a large national debt. Our government paid handsomely to get through the pandemic, and it continues to make promises that are expensive. So what happens when our government spends more money than they have available? Since the government raises money through taxes they must find innovative new ways to extract more taxes out of their citizens.
You simply can’t meet financial obligations with money you don’t have; somethings gotta give. While many people live their lives with little interest in political affairs we certainly perk up fast when the subject of additional taxation is raised.
So What Could Potentially Happen?
We live in a system of progressive taxation here in Canada. Simply put that means the more money you earn the higher the rate of tax you pay. The Federal government sets the tax rate according to the amount you earn in brackets with upper and lower limits. As your earnings increase you move up into a new bracket with a higher tax rare.
As an added complication each Province and Territory has their own brackets with their tax rates alongside the Federal rates. Since the Federal and Provincial governments set the tax rates and amounts for each bracket they can simply adjust these amounts and VOILA you are paying more tax. These taxes are applied to the money you earn and come right off your paycheck before you even see the money.
What About the Leftover Money You Spend?
In Canada there are two types of sales taxes collected: the Provincial Sales Tax and the Goods and Services Tax (GST)/Harmonized Sales Tax (HST). Without going into details you can quickly see the government certainly has the power to simply raise the rates.
The harmonized sales tax (HST) is a combination of federal and provincial taxes on goods and services in five Canadian provinces.
France has recently seen violent protests over the government raising pension eligibility ages as a cost savings measure. Again there’s no reason our government couldn’t consider these same measures to the Canada Pension Plan (CPP) or Old Age Security (OAS).
In addition the Old Age Security currently has a yearly income cap set at $86,912. If your net annual income (line 234 on your tax return) exceeds that amount you’ll have to pay a portion of your OAS back as the OAS recovery tax (known universally as “the clawback”). Currently there’s no cap on your CPP pension or a recovery tax, but who knows what the future may bring??
One of the greatest tax shelters still in place is the exclusion of tax on capital gains when selling your principle residence. So if you purchase a home for $500,000 and sell it for a million dollars you keep that profit tax free. It’s starting to become very attractive for the government to consider taxing that profit as a capital gain.
Naturally these options are very unpopular with politicians but they’ve been playing this game for a very long time. Once elected, new taxes are often introduced since the governing party has a four year term. In an election year tax breaks often magically appear as an incentive to vote them back in.
What Does this Mean to You?
As the government takes on more debt you the taxpayer will face more pressure to service that debt. Knowledge is power. There are programs designed to shelter your income from tax such as the Registered Retirement Savings Plan and the Tax Free Savings Account. In Canada these registered programs are currently underutilized by the masses (56% have RRSP’s and 54% have a TFSA).
Your ability to keep more of your hard earned money will be challenged more than ever. You must keep your resolve and be all the more determined to save for today to ensure a better future for tomorrow.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.