My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, November 5, 2012

The Income Tax Cost of Working Overtime or Businesses taking on New Clients/Customers

Today, I want to discuss what I consider one of the most nonsensical comments I hear at this time of the year; that being, there is no point in taking on any extra work to make more money, since the Canada Revenue Agency will take most of it away in income taxes. I hear this comment from employees who have been asked to work overtime, self-employed consultants offered new projects and shareholders of corporations who have landed new customers/clients. This comment makes no sense on two levels:

Future Earning Power

From a work/business perspective, your employer will never be happy to hear you are not willing to work extra hours or overtime. Any consultant or corporation that turns away work may have made a costly long-term error when you consider the potential work one client can provide over the course of your business's/corporation's lifetime. From an income tax perspective, even at the highest marginal rate in Ontario, where each additional dollar is taxed at 46.41% (or 47.49% if you make over $500,000) you are still approximately 53% better off, by taking on the extra work.

There are times when work should be turned down. Those may include the following:

  • You have so much work that you are overwhelmed and if you take on the new client/customer your service or product will be sub-par and your reputation will suffer.
  • You are working so hard that your family life is suffering. In this case the extra dollars may cost you something more important than money.
  • The new client does not meet your minimum standards for client acceptance.
  • You are financially comfortable and the extra money is relatively meaningless to you; not a realistic reason for most of us.

Marginal Income Tax Rates Increase, "Marginally"

Secondly, I just want to make sure everyone understands the marginal income tax rate issue (use the Ontario rates listed below to follow). If you were going to make $80,963 this year, but take on say $4,000 in extra work that results in your income going from $80,963 to $84,963, you will be taxed at 39.41% on that extra $4,000 of income, meaning you will keep 60.59% of the extra income. To put that in perspective, the last dollar you had made before the new work was taxed at 35.39%, meaning you kept 64.61%. Thus, the new work really only raised your marginal income tax rate 4.02%, not enough tax in my opinion to turn down work unless you meet one of the criteria above.

If you were making $130,000 before you took on a new job for $10,000, the first $2,406 of the extra income is taxed at 43.41% (income between $85,415 to $132,406 is taxed at 43.41%), the same rate as the last dollar you made before the income on the new job was taxed. The excess income over $132,406 will be taxed at 46.41%, or 3% higher than your last paycheque was taxed.

It is interesting to note that according to Statistics Canada, the average Canadian salary for 2010 was $49,553. Using the Ontario 2012 marginal rate chart below, that means that the average Canadian employee taking on extra work will be paying tax at the rate of 31.15% on their next $19,000 or so of extra earnings. Of course, the 31.15% rate will vary from province to province; but I use the Ontario rate just to give an approximate marginal tax cost.

I would suggest that anyone who turns down new work because they feel they will be taxed too heavily really does not understand the way the marginal income tax rates work and is making a big mistake. Some people may argue it is the cumulative income tax burden that breaks the camel's back, not the marginal rate. While I understand that argument, in my opinion, work should only be turned down where you meet any of the criteria I list above.


2012 Combined Income Tax Rates Ontario
                               

Tax Bracket                  Marginal Rate*

Up to $39,020                     20.05%
$39,020 - $42,707                24.15%
$42,707 - $68,719                31.15%
$68,719 - $78,043                32.98%
$78,043 - $80,963                35.39%
$80,963 - $85,414                39.41%
$85,414 - $132,406              43.41%
$132,406 - $500,000            46.41%
Over $500,000                     47.97%

* Includes all surtaxes                   

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

5 comments:

  1. Thanks for this post, Mark. Not taking on business for tax reasons is odd indeed.

    The simple way to eliminate tax is by eliminating income. That's an unusual form of tax planning :)

    ReplyDelete
    Replies
    1. Hi Promod:

      It was nice meeting you a couple weeks ago at the conference.

      It does seem counter intuitive, however, many people these days feel overworked and over stressed and some just feel the net benefit after tax is just not worth it.

      Delete
  2. "...the median Canadian family income in 2010 was $69,860."

    Does that refer to an individual, or a family? So a family could have 2 or more wage earners. Thanks for clarifying.

    ReplyDelete
    Replies
    1. Hi Anon

      Thx for pointing that out. You are correct, it is the median family income and thus can have two wages earners, I will note that in the blog. I should have picked that up in the first place.

      Delete
    2. I was worried that I was way, way, WAY under average! Now it's just a little,... *chuckle*...

      Delete