Category Archives: Finances

Four Overlooked Benefits of Charitable Donations and the Charitable Tax Credit

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When Morgan Fisher and his sister Laurel discovered hidden treasure worth $17,000 in their relative’s attic, they donated the loot to charity. The donation earned them a large income tax credit ensuring a win-win for themselves and the charity.

Written: 2012
Reviewed: 2023
Revised: 2023

First let’s review the obvious benefit of a charitable donation.

The Bonus of Supporting a Charity: A Generous Income Tax Credit
Donating to charity feels good, but it also helps donors at income tax time. Providing you have the proper paperwork, the donation can be claimed for a credit on your annual income taxes.

For example, say you donated $2000 to the local food bank and that the food bank is a registered charity listed by the Canadian government. If so, you or your partner can claim the entire donation or you can split the donation. Whoever claims it gets an income tax credit.

If that was your only charitable donation that year, the credit is calculated as (200)*.15 + (2 000 – 200)*.29 = 30 + 522 = $552.

That’s just for the federal portion of the income tax credit. Many provinces and territories also have tax credits.

Estimating the Tax Credit for a Charitable Donation

The government had put a handy calculator on their website to allow you to estimate what the tax credit might be for a donation. Unfortunately, they are not updating it any more.

But for historical interest, the calculator is at https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/claiming-charitable-tax-credits/calculate-charitable-tax-credits/calculator.html

It says, for Newfoundland for 2012 a donation of $2,000 is worth a combined federal and provincial credit of $806.80. For Ontario for 2012, the combined credit would be $762.98. (At those rates, maybe it would be worth moving to the Rock from Ontario if you’re planning to donate a few million to charity!)

However there are other often overlooked benefits to donating.

Overlooked Benefit 1: Another Reason to Donate: Avoiding Capital Gains Tax
Right now, the government is providing an incentive to donating to charity. Under current Canadian tax rules, you do not have to claim or pay taxes on the capital gain of an asset donated directly to a registered charity.

For example, say forty years ago Gramma bought 100 shares of CIBC stock at $20 each. Due to stock splits and reinvested dividends, she now has 300 shares with a current value of $78 each. It will take a lot of math to figure out her adjusted cost base and her capital gain on the shares if she sells them.

If she donates them all to charity, however, she does not have to declare the capital gains on her income tax. Instead, she can claim a tax credit for the donation of 300 shares at $78. (300 x 78 = 23 400) For her donation of $23 400, she would get a tax credit in PEI of $10 652 or in Alberta of $11 650.

According to the Canada Revenue Agency “Generally, your tax savings will be equal to the amount of the charitable tax credit calculated.” So Gramma could be getting $10- 12 000 in after tax dollars for her shares. And she’s helping her favourite charity a lot.

To make the claim, she would have to have proper documentation from the charity. The item being donated might have to be professionally appraised.

Overlooked Benefit 2: Donating Saves the Hassle of Finding a Buyer
The Fishers helped a charity, specifically a museum in PEI, when they donated their find. However, they also benefited because it might not have been easy for them to sell the antique money they found at its appraised value. By donating they avoided having to find an auctioneer or dealer to help them sell their find. They also avoided having to pay fees or commissions on the sale.

For valuable items that are more difficult to sell, such as works of art or rare books, donating them to a charity can also save time, effort and fees. You would not have to find a buyer or arrange an auction for the item. Generally, you would also avoid having to pay insurance costs to protect your asset while waiting to make the sale.

Overlooked Benefit 3: Another Bonus for High Income Earners
In some provinces, such as Ontario, the charity tax credit will also reduce the amount of provincial surtax to be paid. Fees such as Ontario’s Health Premium can also be reduced.

Overlooked Benefit 4: Charitable Donations from Estates
If a person dies, and the will permits it, the executor can donate some of their belongings to a charity. The donation can be claimed on the tax return for the Estate of the person who died. The resulting tax credit can be very useful in reducing the tax owed by the Estate.

Is the Charity Tax Credit Refundable?

No. The tax credit is applied against your taxes owing but if the credit is larger than the amount of tax you owe, it is not refunded. The Canada Revenue Agency states, “Generally, your tax savings will be equal to the amount of the charitable tax credit calculated.”

So if you have no or limited tax owing in a given year, you may wish to make a smaller charitable contribution, or defer claiming the charitable contribution till you owe more taxes. You can defer claiming a charitable contribution for up to 5 years. Consult a tax professional to optimize your taxes.

How Do I Know My Cause is a “Registered” Charity?

You can check whether an organization is a Registered charity using the list on the Canada Revenue Agency website at:

https://apps.cra-arc.gc.ca/ebci/hacc/srch/pub/dsplyBscSrch?request_locale=en

Does the Government Agree that the Item I’m Donating is a Charitable Donation?

A list of examples of acceptable donations is provided on the Canada Revenue Agency website at: http://www.cra-arc.gc.ca/chrts-gvng/dnrs/rcpts/dntn2-eng.html

You should get professional tax advice before making a decision to donate a valuable item to charity.

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The 5-year GIC Ladder Strategy

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Many financial advisors used to recommend setting up a GIC ladder of 5-year GICs to maximize GIC returns. Is this idea now outdated?

What is a GIC Ladder?

To make a GIC ladder, an investor would buy a GIC with a 1-year term, another with a 2-year term, a third with a 3-year term, a fourth with a 4-year term, and a fifth with a 5-year term. From then on, whenever a GIC matured, it would be re-invested for a new 5-year term.

Written: 2012
Reviewed: 2023
Revised: 2023

The idea was that this strategy would smooth out bumps in interest rates. Generally, the interest rate for a GIC that cannot be cashed for 5 years is the highest one offered for a GIC covered by CDIC insurance.

When the 5-Year GIC Ladder Strategy Worked Best
This strategy did actually result in optimized earnings for some investors. As interest rates fell year after year approaching 2010, investors found they were still earning good rates on their not-yet-matured long-term GICs.

However, when they went to re-invest, they could not get the same good rates for the new certificates. For example, one online bank was offering RSP 5-year GICs at 4% in 2008, but their best available 5-year had dropped to 2.3% in 2012.

When does the 5-Year GIC Ladder Strategy Work the Worst?
You can probably guess that this strategy is the most dangerous when interest rates are rising quickly and sharply.

If interest rates are increasing slowly and gradually, perhaps at 0.25% per year, then investors won’t lose too much by locking in for 5 years at a time.

However, if interest rates are increasing quickly, say at 1% per year, or sharply, say in a sudden spike of 3% one year, investors could lose a lot by being locked in for a long time at a lower rate.

Here are some examples of these scenarios.
Value of 1000 invested. For simplicity the interest is only compounded at the end of each year.

Year 1 Rate % Year 2 Rate % Year 3 Rate % Year 4 Rate % Year 5 Rate % Year 6 Rate % Year 7 Rate % Final Value
2.5 2.5 2.5 2.5 2.5 2.5 2.5 1189
2 2.25 2.5 2.75 3 3.25 3.5 1209
2 3 4 5 6 6 6 1366
2 4 4.5 4.5 6 6 6 1380

You can see that locking in for 5 years at 2.5% earns less than buying 1 year terms that increase by 0.25% per year. However, the difference is not painfully large.

Locking in for 5 years when rates are increasing 1% a year or when rates are spiking up 2% every few years however is costly. The investor was lost between $175 and $200 by locking-in. A loss of $200 on an investment of $1000 is a fairly considerable loss in income.

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