High-income earners in Canada have been doing well lately, with the top 5% of individual earners experiencing dramatic income increases over the past 12 years. However, the other 95% of income earners have seen little change.

The gap is even wider south of the border. In Canada, the number of individuals classed as high income is significantly lower than in the U.S. And even the richest Canadians are generally far less affluent than the richest Americans.

Using tax returns and survey data, Statistics Canada analysts produced a report profiling high-income earners, looking at their sources of income, their net wealth and the effective income tax rates they face. In the very highest income group, it seems that about 100 tax filers paid no tax at all in 2004. Tax deductions, such as business losses and gifts to the Crown, are responsible for a number of these situations, the authors of the report say.

Brian Murphy and Paul Roberts of StatsCan’s income statistics division and Michael Wolfson, who is with the agency’s analysis and development field, point out that as Canada has a progressive system of taxes and transfers, high-income recipients contribute a disproportionate portion of total taxes. That revenue helps finance government activities, including transfer payments to those with lower incomes. That’s why the status of high-income earners is important, they say.

But how do you define “high income”? The authors present a range of options, including absolute measures, such as the top federal tax rate of $113,804 or the $100,000 used by the province of Ontario in its annual “sunshine list” of public sector salaries. Relative measures of high income relate incomes to the median — a measure in which half the individuals or families are below the amount of the median and half are above (see accompanying table).

Regardless of the threshold used, incomes at the top end, as well as the overall share of total income going to this group, increased substantially from 1992 to 2004. In contrast, individuals in the bottom 50%-80% generally saw little improvement in their incomes over this period, after allowing for inflation.

Relating incomes of the top 5% of individuals to the median in 1982, the report says they had incomes that were 322% of the median. By 2004, this had increased to 364%. A similar change was observed for families. Increases were even more dramatic for those in the highest group. For those at the very tip of the pyramid in 2004 — the top 0.01% — their incomes rose to 115 times larger than the median from 55 times larger in 1982.

The report also found that the average income of individuals in the top 5% of income earners jumped by 34% between 1982 and 2004 — to $178,000 from $133,000, after allowing for inflation. The average income of families in this top group was up by 50% in the same period — to $296,000 from $197,000. Income increases in the very top group of income earners were even more dramatic. The top 0.01% saw their average incomes more than double in the same period — to an average of $5.9 million in 2004 from $2.9 million in 1982.

The report focuses on three main sources of income: wages from employment and self-employment; investment income from dividends and interest; and capital gains. In the 1982-2004 period, the report found the highest-income individuals — the top 0.01% — increased the proportion of their income from employment to 62% in 2004 from 36% in 1982. For the top 0.01%, capital gains income also increased — to 24% from 21%. Income from investments declined in importance over the period, dropping to just 14% from 43% for this group.

In socio-demographic terms the high-income group is quite different from the overall Canadian population, the report says. For instance, three-quarters of the top 5% of income recipients are men, although men were a minority of individual income recipients in general. And the report notes the prevalence of high income peaks in the pre-retirement years. Those aged 45-64, for example, accounted for three out of five high-income individuals.

The report also found some lower-income Canadians have relatively high net worth, probably because this group includes older families who have had time to accumulate assets.

@page_break@In contrast, some high-income families have relatively low net worth, probably reflecting the inclusion of younger families in this group. But, all told, both the average income and average wealth of the top 1% are about 10 times that of the bottom 80%, the report says.

Not surprising, the elderly had a higher median net worth at all income levels. Their overall median was $214,000 — 2.5 times the $84,000 for the non-elderly. Even among lower-income elderly, median net worth was higher than for younger families who had not had the time to accumulate assets.

The report also notes the importance of housing and vehicular assets declines as income increases. Although housing and cars accounted for 31% of average net worth for the 80% of families with the lowest income, they accounted for only 16% for the top 1%. These top-income families had 61% of their net worth in financial assets, compared with 32% for the bottom 80%. Pension assets are far more evenly distributed — 21% of net worth for the top 1% of families, 32% for the bottom 80%.

The report also looked at tax rates, focusing on the effective tax rate or the ratio of taxes paid to total income. Using this method, the authors found fully 5% of individuals with incomes in excess of $3.5 million paid effective tax rates of less than 10% after deductions and credits. Tax rates vary quite a bit within a given income range. For instance, 90% of individuals in the top 0.01% group experienced an effective tax rate of between 9% and 46%. IE