Fixing Interpretations:  Donors and Tax Strategies

Ian Wood, CFP, RWM, MFA-P, FDFS

As a financial advisor, a common query you might encounter is how clients can improve their financial position through charitable donations, particularly from sources like RRSPs/RRIFs or investments.  While there are tax-efficient strategies to encourage gifting from these sources, the suggestion that a donor can end up in a better financial position after making a gift is inherently flawed. Here’s why:

While the Canadian tax system does provide incentives for charitable giving, primarily in the form of tax credits, these incentives are not designed to put the donor in a better financial position than they were before the gift, especially now that we have a more punitive federal Alternative Minimum Tax (AMT) in place for higher earners.

It’s also important to note that the available donation tax credit differs depending on the donor’s province or territory of residence.  In short, one rate, and the resulting after-tax benefits, does not apply to all!  Income level will be a big factor in after-tax results. 

The purpose of tax credits for charitable donations is to reduce the cost of giving, thereby encouraging generosity. However, these tax benefits cannot exceed the value of the gift itself. The fundamental principle here is that a gift, by its very nature, involves a transfer of property without receiving a benefit (other than the tax receipt) in return. This principle is clearly outlined in the Canada Revenue Agency's guidelines, which state that a transfer of property must occur for a donation to be considered a gift, and this transfer must be voluntary and unconditional and properly valued a well​​.

It's true that the tax credits available to individual donors can significantly reduce the net cost of their donation. However, these credits will only ever offset a portion of the gift's value, not exceed it.

For instance, if a donor makes a $1,000 donation, they may receive a tax credit that reduces their tax liability, but this credit will not be more than $1,000. Therefore, while the donation is tax-efficient, the donor will always end up with fewer assets after the gift, even when considering the tax benefit.  For more information and tools on how to calculate the tax specifics, there are three important resources, from Knowledge Bureau:

• The MFA-P™ Designation Program
• The Introductory Personal Tax Course in the DMA™ Tax Services Specialist Program
• The TaxTip Tookit™ which includes a donations tax software calculator and income tax estimator.