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TAXFlash News from IncomeTaxCanada.net
:: Cost of smoking? Might as well just burn $100 bills because a young smoker could have accumulated $230,000 by age 65
:: According to a September 1997 study conducted by the B.C. Ministry of Health and the Heart and Stroke Foundation of B.C. and Yukon, the vast majority of smokers start before the age of 19 - 83 per cent, or six out of every seven. June being grad month and with yet another increase in the cost of cigarettes, I thought this would be a good time to revisit a topic I wrote on a little more than four years ago – the cost of smoking. Intuitively most people know that smoking is expensive but just how expensive is it? Well, on a simplistic level, consider that when I wrote my original article in 1998, the cost of a pack of cancer sticks was $5.25. Now, four years down the road, that cost has risen to roughly $7.00 a pack. That’s an annual increase of 7.5 per cent or two to three times the rate of inflation over the same period. Looks to me like the real cost of smoking has gone up and our government is digging a little deeper into the pockets of smokers in recent years. For purposes of example, allow me to reintroduce Johnny B. Cool, the quintessential dude who quite literally defines “cool”, at least in the eyes of his schoolmates. Cool picked up his first cancer stick four years ago at the age of fourteen. Cool is now eighteen years old and heading out to set the world on fire. Unfortunately, Cool is also smoking, on average, a pack a day. Cool is young and invincible so he really doesn’t care about the health consequences nor has he given a modicum of thought to the cost of his addiction. As long as he can scrounge up enough money for the next pack of cigarettes he’s a happy guy. But Cool also knows that cool ends at school – the moment he leaves grade-school behind the notion of “cool” will become increasingly irrelevant. With the prospect of diminishing returns, Cool has recently wasted a brain cell or two mulling over whether it will be worth it to keep on smoking for the sake of being cool. The possible scenarios are limitless so I’ll make some basic assumptions for purposes of example. There may be better “deals” out there but let’s set the cost of a pack of cigarettes costs at $7.00. Since it’s highly unlikely that a person could set aside this amount each and every day, I’ll assume that Cool commits to setting aside $210 per month ($7 per day for 30 days) that he otherwise would have spent on cigarettes. Cool checks around and finds that he can open up a CDIC insured savings account and earn 2.75 per cent with no minimum balance and access to his money at any time (ING Direct and President’s Choice Financial, for example). At the end of each month Cool diligently transfers $210 from his chequing account to his new savings account. Ignoring taxes for the moment, I calculate that Cool will have saved about $10,600 over the next four years. So Cool has a decision to make? Will he look cooler riding a bike with a cigarette in his mouth at age twenty-two or driving a shiny car (albeit a used car at that price)? Keeping the facts constant but looking ten years down the road, Cool will have amassed over $29,000 in time for his twenty-seventh birthday. So what’s Cools decision this time? Will he look cooler smoking a cigarette on the balcony of his rented apartment or sitting, smoke-free, on the patio of his very own townhouse? Looking far into the future, Cool could accumulate more than $230,000 (that’s almost a quarter-million) in time for his retirement at age sixty-five. What’s Cool’s decision now? Be cool and live for today or forget the cigarettes and live for tomorrow with something to live on. With the kind of wealth Cool is able to accumulate he isn’t likely to be satisfied with a 2.75 per cent rate of return on his money. If Cool manages to earn a return of 5 per cent instead of 2.75 per cent he’ll be looking at over $450,000 when he retires. Factor in inflation at 2.5 per cent and by his retirement Cool will amass nearly $400,000 at a 2.75 per cent return or over $700,000 assuming a 5 per cent return. Now let’s introduce income tax into the equation. If you assume that Cool pays tax at the lowest rate of roughly twenty-five per cent, his rate of return will drop from 2.75 per cent to around 2.15 per cent. Ignoring inflation, Cool will have accumulated tax-paid dollars of $10,500 after four years, $28,000 after ten years or $198,000 at age sixty-five. So income tax will reduce the amount of cash Cool can accumulate. Cool has no problem understanding that but he is surprised to learn that because of income tax the real cost of a pack of cigarettes is much higher than the $7.00 he pays at his local convenience store. Without income tax Cool had to earn $7.00 for each pack he bought but now, at a twenty-two per cent tax rate, Cool needs to earn almost $9.00 to have $7.00 left over after-tax to buy a pack. That looks like pretty much an hour of work at today’s minimum wage of $8.00 per hour. In other words, Cool will spend one out of the seven or eight working hours in his day simply earning enough money to buy cigarettes. As Cool moves into a higher tax bracket the real cost of his habit increases. In the forty-four per cent bracket Cool has to earn $10.60 to buy that same pack of cigarettes. The inescapable conclusion is that smoking is expensive. Although the ultimate cost of smoking may not be financial, a life chained to cigarettes is guaranteed to lighten your wallet. In closing, the same 1997 study on smoking in B.C. found that the less money you make, the more likely you are to smoke. And if you're unemployed, the chances you smoke are greater than if you're working full or part-time. So not only is smoking extremely expensive, it’s a habit of those who can least afford it. Go figure!
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
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Jim Maroney