Why Being Employed is the Most Expensive Way to Make Money in Canada

A start of a new year and I`m sure many people are making resolutions, not least of which is probably to save money , make more money, or for almost all investors, to recover some money. I spent New Year`s with a group of thirty-somethings and the conversation turned to the topic of money. Being an ambitious group, they were also discussing career opportunities and advancement possibilities in the new year. Being at least a decade older than them, they asked me for my opinion. What I said to them about employment and money startled them, but changed the way they perceived the two topics.

My opinion which would be considered to be radical by many, is based on an unemotional analysis of the numbers, and does not take into consideration things such as employment benefits or the social aspects of working within an organization. Nevertheless, my opinion is that being an employee is the most expensive way to make money in Canada. Below is my list of the most cost efficient way of making money.

1) Tax-free Savings Account. Totally tax free and extremely flexible, the only downside being the limits to how much can be put into this account. Otherwise everyone should open one and put money into it.Note, I am not including things such as proceeds from a life insurance policy which is tax-free, but is not something that is accessible to everyone and as well, involves the hardship of losing a loved one.
2) Capital Gains. Whether you sell your principal residence with no taxes levied on it, or whether you sell investments (at a profit, obviously) that attract taxes on only half the gains, this is the second most effective way to make money.
3) Dividend Income. The dividend tax credit makes it more efficient earning than interest income. And depending on what type of investment vehicle you are using, not always riskier than a bond (ask anyone who purchased corporate bonds, mortgage-backed securities or even some money-market nutual funds)

4) Self-Employment Income. Because of the deductions allowed, self-employment income usually places the entrepreneur in a lower tax bracket, thus attracting less tax than someone doing the same job as an employee. I was a consultant with an organization and after awhile, I was required to become an employee to comply with Canada Revenue Agency guidelines. Even though the company had to increase my remuneration by 20%, I still wound up taking home less money than when I earned less money as a consultant.

5) Interest Income. Fully taxable, yes, but usually involves little cost in earning this interest.
6) Employment Income. Fully taxable, but many people underestimate how much it costs to earn this money, i.e. just getting to work costs money in the form of transportation (whether it is using public transport or maintaining a car), lunches, coffees, daycare, drycleaning and laundry costs etc. All this adds up, and the underestimation results from the fact that most of it is paid for using after-tax resources. So, in order to pay for a $150 monthly transportation cost, about $2,500 to 3,000 of your annual income will be spent just to get to your desk.

Obviously, the trade-off is that a job provides security (not as much as many people might think), comeraderie in a social setting, and employment benefits (some that self-employed or unemployed people may have to pay themselves). However, Canada`s social safety net is such that the gap is not as large as might be perceived.

So, think about how much it costs you to make money, and you might think twice about landing that job.