If Romney were filing Canadian taxes, we estimate he would have paid even less, even though Canada’s tax rates are generally considered to be substantially higher than the U.S. Running the U.S. numbers on a Canadian return, assuming no foreign currency adjustment and assuming his dividends would be Canadian dividends had he lived in Canada, Romney would have paid $2,973,021 of Canadian federal tax in 2011 on his $20.9-million of income, which translates to an effective federal tax rate of only 14.2%, more than a percentage off the 15.4% he is forecast to pay.
Romney and other rich Americans and Canadians are able to pay a lower tax rate because of how investment income is taxed as well as the value of the charitable donation tax credit.
In Canada, dividend income is eligible for a dividend tax credit while capital gains are only half taxable. In other words, for a top income earner, Canadian dividends are taxed a top federal rate of only 17.72% (2011) while capital gains for a high income earner would be taxed at half the top marginal tax rate or 14.5% (i.e. 50% X 29%). Charitable donations above $200 are eligible for a 29% federal donation tax credit.
When we consider that Romney’s 2011 income was made up of US$3.1-million in dividends and $10.7-million worth of capital gains, combined with $4-million of charitable gifts, it’s possible to see how Romney or, for that matter, anyone who earns the bulk of their income from investments, ends up paying very little tax.
The Romney story also serves as an important reminder of the difference between your marginal tax rate, which is the amount of tax you pay on each additional (“marginal”) dollar of income above a certain level and your effective tax rate, calculated by dividing your tax liability by your income.
For most Canadians, your average tax rate is significantly lower than your marginal tax rate, especially if the bulk of your income comes from tax-preferred investments. (My thoughts, most Canadians I know, do not have the bulk of their income coming from tax-referred investments so I suspect that the marginal and the effecting tax rate is not as low as the rich in Canada.)
But the last word goes to Romney himself. As he said in Monday’s debate on the eve of releasing his tax returns, “I pay all the taxes that are legally required and not a dollar more … Will there be discussion? Sure. Will it be an article? Yeah. But is it entirely legal and fair? Absolutely.”
(Sorry, but I have to disagree, yes it is legal, but this system is very far away from being fair. Perhaps the bankers and others, think this system is fair, but they are wrong as the system penalizes the poor because they cannot use the taxloopholes the rich uses and makes a mockery out of the idea of a progressive tax system.)
Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto Source: Financial Post