Evelyn Jacks: Wealth Planning: Canada a Sweet Spot for a Higher Bell Curve

Lots of great material has been released lately about global and Canadian wealth trends. Three works come to mind as must-reads...

The OECD has released its study,  FOCUS on Top Incomes and Taxation in OECD Countries: Was the crisis a game changer? and Stats Canada released its wealth of Canadians report Survey of Financial Security, 2012, as well as a report entitled Mortality Projections for Social Security Programs in Canada.

What’s interesting about these reports is the taxation potential that indebted governments see in the recovering incomes and increased net worth of high earners. Since the top 10% of Canadians pay 76% of all taxes, while the bottom 50% pay only 4% of all taxes, prohibitive taxation on one taxpayer group may be a mistake if not well thought through.

Looking at the characteristics of the top earners who are younger, we find post-secondary education is a big key to wealth; so is the acquisition of a principal residence, which accounts for about 30% of wealth. Pension assets are equally important, accounting for another 30% – a bi-product of landing good jobs.  

Older also means richer. Based on the mortality study, life expectancies at age 65 are projected to increase from 21 to 24 years for men and from 23 to 26 years for women by 2075. This means that Canadians are expected to live beyond age 90 on average in the future, and they will comprise a much more important part of our taxation base. Over time this means that a greater percentage of income and wealth will come from the capital a large, retired demographic owns.

This is where taxation policy requires caution. Both human capital and capital used for investment purposes is mobile, and both tend to move to friendlier jurisdictions when taxation is prohibitive.

It occurs to me that the optimal goal is to aim for a high bell curve when it comes to the creation of household net worth in Canada; that is, from a policy point of view, to aim for fewer households appearing at the top and bottom of the wealth scale, with the great majority earning a significant enough income to establish a sound capital base that will grow over time. That begins with the ability to acquire and maintain a tax exempt principal residence.

The good news is that over 60% of households in Canada do appear to own their own home, according to these recent studies; a fact that has certainly contributed to the wealth of our society. While income and capital inequality continues to be an issue, particularly for the single households, Canadians are wealthier than ever, and within an aging demographic have more time to experience compounding growth in their capital investments to supplement human capital. 

There is likely room for more tax on the top 10%. But, what if governments gave equal attention to stimulating innovation, productivity, and investment in the Canadian economy, thereby creating greater income and investment opportunities across all demographic lines? Both incomes and tax on incomes could grow in the short term.

It’s Your Money. Your Life. It takes a village to grow a world class economy. In Canada so much of the required framework for that kind of success can be found: substantive home ownership, great educational opportunities to grow top earnings, and access to tax-efficient retirement savings. Sharpening the focus to include all Canadians in a higher bell curve of net wealth is a real, achievable opportunity. Do you agree?

Evelyn Jacks is president of Knowledge Bureau and author of 51 books on tax and personal wealth management. She will be speaking on the national Distinguished Advisor Workshop tour May 21-June 3. Follow Evelyn on Twitter at @EvelynJacks.