Ever wondered how the cryptic language of finance can be decoded, specifically for Canadians? Looking to navigate the maze of tax-related terms and financial jargon? This episode will aid you in your quest.
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Hello and welcome back to the Canadian Money Roadmap Podcast. I'm your host, evan Neufeld. On today's episode, we are going to be talking about the language of money and investing specifically for Canadians. We're looking at jargon. We're looking at acronyms and some of the terms that you may have seen and heard before, but maybe not quite had a good understanding of what they actually mean. Thanks so much for joining today. This episode is geared towards those of you that are trying to learn more about the financial system in Canada and the language that we use, and sometimes, even when you're reading the news or looking at things online or even listening to my podcast, you might hear a term that's like I don't really know what that means, and so I started testing out this concept a little bit on LinkedIn, posting things about what I think are jargon type terms, like industry specific terms that are widely used in our industry and by other advisors and by financial media, but I don't think people have a really good understanding of what they are, so I'm going to tackle a few of those today. Some of them are related to tax, in particular today, so let me start off with the first acronym. The first acronym that I'm going to focus on this episode is CRA, that's the Canada Revenue Agency. Many of you who've watched movies or TV shows that are based in the US or read books or anything like that, if they're ever talking about money or people getting into financial trouble, you'll often hear about the language of the IRS, that's the Internal Revenue Service. That is US specific. That is nothing to do with us here in Canada. Yeah, unless you're a dual citizen or you have some sort of like rental property in the US. But here in Canada the CRA is the organization that's affiliated with the government that administers tax laws and collects taxes, but also administers social and economic benefits and incentive programs that are delivered through the tax system. This agency used to be called Revenue Canada, so if you're someone that's maybe around my age and you're talking to your parents or someone that's referencing Revenue Canada, they're not entirely wrong. It's just the name changed a number of years ago and it is now called the Canada Revenue Agency. The government that's in power at any given time is connected to the CRA and works with them. However, they are not a specific voice of the sitting government at any given point. So they are a government agency, but they're not necessarily specifically working at the behest of Justin Trudeau or whoever our next Prime Minister might be. So when you earn an income, you have to pay taxes on it and your employer will automatically send some of your income to the CRA, so the Canada Revenue Agency, for you. That way, when it comes time to file your taxes at the end of the year, you don't have a massive bill that you need to come up with and save, because the CRA and everybody else knows that saving money is difficult, and if everybody was left to their own responsibility to just do it and save the money and pay your taxes at once at the end of the year, it would never happen. And so that's the next term that I'm going to be talking about is withholding tax. So when you earn an income from an employer, they will withhold, meaning they will not give it to you, they will send it to the CRA automatically for you. So part of your income is withheld, meaning they hold on to it, and it is already paying the taxes that you're going to owe on that income that you earn. If you're someone that's already retired and you're withdrawing from your RSP accounts, or if you're receiving a pension or things like that, withholding tax would apply in that case too, meaning if you are withdrawing from your registered retirement savings plan or if you've already converted it to a registered retirement income fund. I'm bringing up some more jargon here that I should maybe clarify. But anyways, if you're at that stage of your life where you're withdrawing from your investments that are intended for retirement, withholding taxes will apply there too. So your broker or your bank or your investment advisor will have to hang on to some of the money and send it to CRA for you to pay those taxes. Okay, so that's the idea of withholding tax. The next concept around tax is your marginal tax rate. Sometimes you might even see an acronym of MTR. That's not super common, but MTR, that's what it's referring to. So the idea of margin or marginal, that is in reference to what happens on the next thing. So in the case of your marginal tax rate, that means how much tax do you pay on the next dollar that you earn? Not on everything, just on the next dollar. Okay, so this is marginal. Marginal is on the next dollar. So why does that matter? Here in Canada we have something called a progressive tax system, which means that the more income you have, the more tax you pay, but it's paid in chunks. Every province is slightly different, but the way that it works is on the first chunk of money that you make, you typically will pay 0% income tax on it. That's about $15,000 here in Canada. Then on the next chunk, you're going to pay a little bit of income tax. So that might be 15%, it might be 20%, depending on your province, and the next chunk will be a little bit higher yet might be 30%. The next chunk again, it might be 35%, then the next chunk might be 45%. Right, your marginal tax rate is just in reference to how much you would pay if you earned another dollar. So let's say, for example, you were making $75,000 and you live in Ontario. If you make $75,000, your marginal tax rate is 29.65% in this scenario. So that means if you make $75,000 and then you make another single dollar, you will have to pay about 30% of it in taxes, 29.65% in income taxes. Okay, but because of that concept of paying income tax on different chunks of money that you make, you always get the benefit of the lower tax rates as well. So that's where a concept of your effective tax rate comes in. I prefer the language of average because no one understands effective Average makes way more sense because everyone understands averages. So just think of your average tax rate. If you ever see effective tax rate, that's all it means, and it just means your average tax rate. So what it does then is it takes all of the different rates that you pay, so zero in the first 15,000, 25% on the next 30,000, 30% on the next 30,000, whatever it is in your province and whatever income you're at, and then you just average it out together to figure out what your average tax rate would be. So let's go back to this hypothetical example. You're making $75,000 in Ontario, your marginal tax rate is 29.65%, but your average tax rate is 19.25%. Again this is because you will always be able to take advantage of the lower tax rates in your province. You don't pay your marginal tax rate on every dollar that you earn. This is where people get tripped up on getting bonuses or getting raises. They say, oh well, if I take the bonus, then I go up a tax bracket. No, that will not impact the money that you earn in the lower tax brackets, it's just the additional money that's taxed at a higher rate if that's the case. So it's always beneficial to take the raise. It's always beneficial to take the bonus. However, to go back to a previous concept, something that might happen with your payroll is that your withholding tax rate might change. This is mostly dependent on the payroll system that your employer uses, whereas If you get a bonus, your payroll system might say oh my goodness, you're on pace to make $200,000, as if you're gonna get that bonus every single month, and so what I've seen before is that sometimes, payroll will then hang onto too much tax on your behalf. If that's the case, you will get a refund at the end of the year based on you overpaying on your taxes. I would talk to your HR person or your payroll person and see if there's a weird thing that's going on there. But that's one thing that can really trip people up because it's like well, I'm suddenly getting less take home pay because I took that bonus. Like well, no, you're withholding tax rate on, your payroll system is just thrown out a whack and so you can fix that and you can talk to your payroll person about that. But you will only pay your marginal tax rate on the bonus, but your average tax rate is what you pay on average on every dollar across the board. Let's use a slightly different example so you can kind of see what I mean a little bit easier. We'll stay in Ontario here. I'm in Saskatchewan, but I know most of you listening are in Ontario and BC. So let's say you're making 150,000 in Ontario. That means your marginal tax rate at that point, if you were to get a bonus or a raise or whatever is 43.41%. But your average tax rate because again, you always get the benefit of the lower tax brackets your average tax rate is 28.92. You don't need to remember these numbers, but just know that your average tax rate is always gonna be lower than your marginal tax rate. The average is probably more important to know, just so you can see approximately how much tax you're paying. So there are very few provinces in the country where you make 150,000 and you pay a third of your income in taxes. So here in Saskatchewan, for example, your average tax rate at 150,000 is 29.3. Bc it's 27. Ontario it's 28.9. Alberta's 27. So a lot of people get hung up on this idea of paying half of their income to the government. It's like no, even if you made a million dollars in salary like an employment income, a million dollars your average tax rate would still be below 50%, meaning you'd still get to keep more than half. In BC, alberta, saskatchewan, manitoba, ontario, new Brunswick, pei, northwest Territories, yukon and Nunavut, newfoundland, nova Scotia and Quebec are the only places where you will pay Slightly more than 50% in taxes if you have a million dollar salary. So there's almost no world where your average tax rate is going to be over 50%. You always get to keep more of your money than the government does. Your marginal tax rate might be higher, but on average, what you're actually paying in income tax, you get to keep more of it and for those of us that make more average incomes it's even better. Okay, so those are the ideas of marginal tax rate, average tax rate or effective tax rate. I'm gonna change gears out of tax here for a second and loop in two more Money-related jargon-y terms. The first term is. First term is liquidity. This is something that I use relatively often. Liquidity or liquid Some sometimes gets paired with liquid assets. The reason I'm gonna bring this one up is because it is widely misunderstood or not understood, and it's a great video online. That was kind of funny. Even if you don't know what this means, you'll probably get a chuckle out of it.Speaker 2:
Here it is as you all know, I'm 23 and I have reached financial freedom, and one of the ways that I grow my money every single day without doing a single thing Is by liquidating my assets. And if you don't know what that means, it means that I do not let my money just sit in my bank account doing nothing. I put it into liquid form every single day. I do not let my money just sit there. I put it into either a McDonald's diet Coke or I'll put it into the Starbucks app the Starbucks app I love because I can see my money grow. I can see myself get those rewards and put it into a brown sugar shake and espresso. Whatever liquids you do, just liquidate your assets. It is such a waste to have your money just sitting there when you could have it in physical form, getting immediate value out of it right away. Like right, watch this. Richer, so much richer. Liquidate your assets. Thank me later. Do not let your money just sit there. Spend it on liquids.Speaker 1:
This is from a creator on tiktok named Macy Thompson. Thanks for the laugh, macy. That was pretty good. I like it, because the term liquidity, we know it from a different place, right? Like we know it from getting coffee or McDonald's, diet Coke or whatever, and so we don't obviously make that transition to understanding what liquidity means in the case of assets, or liquidating assets. All that that means in the world of money is the ability to Spend, so that's how I describe it. So if you have a liquid asset, that means that it's something that you can spend. Liquid assets means cash, usually, right. So if it is cash or it can be cash very quickly. So, for example, that would be like ETFs that you might have in your TFSA. I would call those liquid assets because you can sell it today and even if it takes a couple of days to make it to your bank account, I would still call that a liquid asset. So something that is not a liquid asset would be your house, because you can't spend your house, right? That's kind of how I explain it to people. You can't peel off a couple of shingles and go to Hawaii or bring in your front door to pay that car repair bill, right, those are things that require a bit of a process to to sell and in that case you are Liquidating it, right? So if you have a car and you sell it and now you have cash, you liquidated because the liquidity implies the ability to spend. So the idea of liquidity, as opposed to liquid liquidity, is more so your ability to convert things that you have to cash and the speed at which you can do that. So if you have high liquidity, that means that you can turn what you own into cash very, very quickly. If you have low liquidity, that means it would take you a long time, it might involve other parties, you might not get the price that you want for it. All those different kinds of things. So that's the idea of liquidity, liquid assets and those terms. Last one I discovered recently in a number of news articles and things like that is the idea of basis points. This one is classic financial jargon, because the things that I think of are classic financial jargon are things that are replacement for terms that everyone uses and it just replaces it with a term that no one uses or no one outside of an industry. So basis points is just a different term for percent, right? So 100 basis points is 1%. You will see this coming up in articles about inflation all the time, because we're largely now dealing with differences of fractions of a percent, or when interest rates change and they go up by fractions of a percent. So you might see an article that says the Bank of Canada raised interest rates by 0.25%, or what you're sometimes more likely to see is they raised interest rates by 25 basis points. Which one makes more sense to you? Okay, so now you can read the news and understand what the heck people are talking about. Basis points are just fractions of a percent, so one basis point is 100th of a percent. Okay, so 200 basis points, 2%, 50 basis points, 0.5%. Just move the decimal over. That's all it is. I often will see this type of language used when the news outlet or the investment firm or whatever is trying to make things sound bigger and more impactful, whereas percentages are used when trying to make things look smaller. So it's a little bit of marketing, it's a little bit of, I think, statistics lying to you a little bit. But just be aware that's what it is. If you ever hear someone talking about oh yeah, I'm up, 700 basis points this year, it's like no, okay, you're up 7%. That's all that that one means. So, anyways, thanks for sticking around for this edition of my jargon busting podcast. We covered a number of things. So CRA, that's the Canada Revenue Agency. We do not have the IRS here. It is not affiliated with the IRS, it has nothing to do with that. That is a US-based thing. So the organization that administers tax in Canada is CRA. It used to be called Revenue Canada, but it is no longer so. That is the Canada Revenue Agency. We talked about withholding tax and that's the amount of tax that is sent to CRA on your behalf when you earn income or when you withdraw from retirement accounts. That is not necessarily the total taxes that you have to pay. It might be too much, it might not be enough, but that is determined by our next term, your marginal tax rate and your average tax rate. Average tax rate is also known as your effective tax rate. A little bit more double jargon there for you. Finally, we talked about liquidity and how. That is the idea of cash and how quickly you can turn what you own into cash. And the last one is just this silly term of basis points and how. That is just another term for percentage. If this was interesting to you and you've ever heard different terms that you're like I don't really know what that is, please email me. There is a no stupid questions policy. Send me the terms that you've heard before that you don't really quite understand, maybe the ones that you've Googled before and you'd like a human to explain it to you. I will gladly add some of these terms to my next edition of this podcast. Thanks for listening and we'll see you next week. Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.