[TempoTrader]

Hi everyone,

As a newcomer to this forum, I'd first like to say thanks for all of your informative posts and blogs, a number of which I've been following for some time now. The collaboration is helpful, constructive, and appreciated.

I have a question concerning the tax breaks given for charitable donations and RRSP contributions. Consider the following -- how much would I have to give to a) a charity, or b) to RRSP, or c) to both, to minimize/eliminate capital gains taxes in the following stock investment situation:

Initial investment: $3000.00
Sale: $12,000.00

Location: Ontario

I realize that you are taxed on 50% of your capital gains (i.e., capital gains being the net "profit" once your initial investment and brokerage costs are subtracted). For ease of calculation, and to allow a financial buffer, I assume the highest possible taxation rate (i.e., approx. 47% in Ontario...and I round it to 50%) which basically means that 1/4 of your profit will actually be tax that you have to pay (50% tax on 50% of the net profit).

Given the case above, I would have to pay approx. $2250.00 (50% of 50% of a profit of $9,000.00) in tax as a result of that sale transaction. Now, how can I allocate the profits, and in what proportion, to a charity and/or RRSP to minimize/eliminate the tax liability of $2250.00?

Thank you in advance for your help!

 

[lb71]

To pretty well eliminate any taxes, you would have to contribute the half the amount as your gain. You gain is $9k, so contribute exactly half that much to your RRSP. You taxable income then becomes $X + $4500 - $4500 = $X, where $X is your other taxable income before capital gains and after RRSP deduction. Note that the capital gains still affects other government benefits such as OAS, since it is based on $X + $4500.

 

[FrugalTrader]

Tempo, your capital gains tax calculations are correct.

If you wanted to offset the tax with a RRSP contribution, assuming a 50% tax bracket, you would need to contribute $4500 ($4500x50%=$2250 tax refund).

With regards to the charity, anything above a $200 donation will give you a tax credit at the highest marginal rate for your province (assume 50%). Therefore, you would need to donate approxmiately $4625 to get a tax credit of $2252.50

 

[TempoTrader]

lb71 and Frugal,

Thank you for your replies - that's exactly the clarification I was looking for.

Cheers!

 

[msj]

You do realize that if you donate the security to a registered charity (rather than sell it and donate cash) then the tax gain is exempt from tax to begin with? (At least from federal tax).

A bit dated but still useful: Donating Securities isn't easy... [PDF]

 

[cardhu]

Note that the capital gains still affects other government benefits such as OAS, since it is based on $X + $4500.

No ... most gov’t benefits would be based on ... X = X + $4500 - $4500
OAS would be unaffected.

 

[leslie]

Although I agree with all the math above, it is measuring cash flows only. If your purpose is only to zero out the cash cost of the tax on the gain then they are correct.

But the charitable donation is a permanent tax benefit whereas the RRSP tax credit is only temporary until the plan is collapsed... at which point all the original tax credit PLUS all the income it earned is taken back by the government.

Watch the 2nd video at least of this series. https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg

 

[cardhu]

all the original tax credit PLUS all the income it earned is taken back by the government.

Rubbish .... leslie, you are misunderstanding some things ... firstly, there is no tax credit for RRSP contributions, there is a deduction ... not the same thing ... secondly, many people will not only end up keeping all the income earned on their original tax break, after tax, but will also keep part of the original tax break ... in other words, the tax break may very well grow tax-free.

Don’t believe everything you read on the internet ... that retailinvestor page that you found, is wrong.

 

[leslie]

TempoTrader has to realize that cardhu has a hate-on for every thing I say. Essentially, the RRSP is no different from the TFSA. I presume you did not consider the TFSA in your original list of options, but did include the RRSP because you believe the the tax credit/deduction (difference irrelevant) is a 'value' to you. But the tax credit is a red-herring.

The only difference between RRSPs and TFSA (over its lifespan) in that the RRSP exposes you to an increase/decrease in benefits if your tax rate for withdrawals is lower/higher than the rate for contributions. This issue is shown on the spreadsheet but is of no relevance to the discussion here.

 

[stephenheath]

Leslie... you have said in this thread:

The only difference between RRSPs and TFSA (over its lifespan) in that the RRSP exposes you to an increase/decrease in benefits if your tax rate for withdrawals is lower/higher than the rate for contributions.

Which is absolutely correct (aside from a tiny difference when the RRSP credit is added to the RRSP in the year of the tax return instead of the initial contribution year, which gives the TFSA a slightly higher return), but you have also said in a couple threads now:

RRSP tax credit is only temporary until the plan is collapsed... at which point all the original tax credit PLUS all the income it earned is taken back by the government.

Which is not only incorrect, it contradicts the first statement from you I quoted, because if that were true, the TFSA AND RRSP WOULD NOT PROVIDE EQUAL RETURNS given equal tax rates, and it is this assertion that you have made in other threads that is frustrating cardhu. It is also obviously false, because to acheive that, you are talking about a 100% tax rate on withdrawal, and the maximum rate is around 50% for top earners.

 

[cardhu]

Leslie, you have an active imagination.

From time to time, I point out errors, invalid claims, or the use of weak logic in many people’s posts, not just yours ... if you feel like you’re getting more than your fair share of those comments, rest assured that I let many of your errors go by without comment ... who has time for that? ... on the other hand, if you feel uncomfortable having your errors pointed out, the simple solution is don’t keep repeating them, and don’t post so many of them.

Incidentally, you’ve done it again ... the tax break on contribution to RRSP is not a red herring at all ... it is the single strongest reason that the RRSP succeeds in outperforming most other approaches ... to suggest that it has no value is simply wrong ... for the majority of the tax-paying population, it has significant value ... this is a well-established financial truth that has been amply proven and that you can’t disprove ... ironically, the very spreadsheet that you point to as a reference, flawed though it is, proves that your assertion is wrong.

Stephen, thanks for your efforts, but I’m afraid its quite futile ... I actually find it more fascinating than frustrating to see the same absurd views reappear over and over and over again, in unrelenting repetition, despite their having been disproven so many times over ... unfortunately, though, the sort of thing that a newbie might not immediately recognize as bunk.

 

[leslie]

Stephen's argument ignores that the spreadsheet allows you to prove it to yourself using any tax rates you want. His making the argument proves that he never looked at the spreadsheet. Of course his opinion will never change if he refuses to even consider the argument.

Both posts above have lost track of what the issue being argued here is. The original poster seemed to be under the impression that the RSP contributions's tax credit would offset her capital gains. I made the point that although it would indeed net the immediate cash flow, the benefit of the tax credit is only temporary. All the credit plus all the income earned by the credit is taken back on withdrawal. There is no 'benefit' from the credit.

 

[stephenheath]

Leslie, YOUR argument ignores the fact that (a) you are contradicting yourself, (b) you are mindlessly believing something you found on the internet as gospel and (c) when many people have pointed out that you are wrong and providing false information to people, your response is always "prove I'm wrong" instead of doing the intellectually honest thing and working it out yourself. It is ESPECIALLY irritating because if you looked one cell to the left of your "proof" you would also notice that the spreadsheet claims EVERY SINGLE RRSP CONTRIBUTION pays ZERO PERCENT TAX on withdrawal in EVERY CASE. It is so obvious it either means you are either so out of your depth with financials you should not be providing advice to ANYONE OR you couldn't be bothered spending two brain cells to double check your own assertion when the error was pointed out to you. Based on some of your other posts, I assume the latter, but either way, SHAME ON YOU!

Here's your problem with the spreadsheet. Row 38 of sheet 3 is the tax calculations upon withdrawal. Column I is the tax calculation for the entire RRSP, the initial contribution + the refund and is correct with the formula -I37*H16 (I37 = Total Withdrawal, H16 = Tax Rate). Column H is supposed to be the tax on the withdrawal of the credit and should therefore be the formula -H37*H16 (H37 = Credit Withdrawal, H16 = Tax Rate), but whoever did it screwed up and just set it as -H37, which is ONLY the Credit Withdrawal without applying the tax rate. Column G is supposed to be the tax on the withdrawal initial contribution, and could either be calculated as -G37*H16 (G37 = Contribution Withdrawal, H16 = Tax Rate) OR as the spreadsheet author chose to do, I38 - H38... in other words, the total that is already calculated minus the other number already calculated, so take whatever is left. This method avoids rounding errors, but because he screwed up the second total, it screws up this one as well.

All you have to do is fix the formula in cell H38 to the proper -H37*H16 and surprise, the numbers work out correctly and show that both the funds arising from the contribution AND the refund (and all the resultant income) are all withdrawn at the withdrawal tax rate.

 

[stephenheath]

Leslie, you're doing it AGAIN.

Both posts above have lost track of what the issue being argued here is. The original poster seemed to be under the impression that the RSP contributions's tax credit would offset her capital gains. I made the point that although it would indeed net the immediate cash flow, the benefit of the tax credit is only temporary. All the credit plus all the income earned by the credit is taken back on withdrawal. There is no 'benefit' from the credit.

Aside from the fact that you're arguing the same WRONG WRONG WRONG information yet again (although I grant that you posted this edit while I was providing you the proof that you are wrong), what this basically does is give the original poster a loan from the government, giving the poster $2,250 in the RRSP that otherwise would not be available. Since that money grows tax free, the longer it is in, the greater compounding will be. This results in logarithmic gains when compared to paying the taxes, with the end result that when the original poster does finally pay the taxes on that $2,250, he will also be splitting with the government a portion of the gains, and the better he is at earning gains, the greater the logarithmic gains. In short, depending on how good the original poster is at generating returns, there could be HUGE benefits from the credit.

Again, I am assuming you would see this if your entire "RRSP" mindset had not been based on a completely erroneous spreadsheet.

 

[leslie]

The spreadsheet is correct.

You agree that the total tax calculation on draws is correct. The point of the spreadsheet was to show the allocation of that total tax, to clarify WHAT exactly was being taxed, to allow people to understand the system.

You say the withdrawal tax is meant to reduce equally BOTH the original tax credit as well as the 'true' after-tax savings that went into that contribution. (In other words both the first two columns should be taxed). But that is not the intent of the RRSP system.

The system is meant to PROTECT FROM TAX all the 'true' after-tax savings that go into each contribution ... as well as all the income earned on those savings...... just like the TFSA does.

The spread sheet shows that it does just that. There is NO tax on your savings (as long as the tax rates on contributions and draws is the same).

If you like, the calculations in the cells could have been set up so that the allocation of the total tax between the first two columns could have started with $0 against the true savings, and the remaining against the second column. The results would be the same (as long as there were no difference in rates between draws and contribution).

By allocating the total tax first against the tax credit, you see clearer
* how savings and their income is not taxed
* how all the original credit and its income is taxed away
* how the first column essentially equals what happens with an TFSA
* how changing tax rates affects the tax-sheltering of your true savings
* how to decide whether it is better to invest inside an RRSP or outside.

In sum, the model allows you to understand what is going on. Only when you understand that the original tax credit (and all its income) is temporary, can you properly make decisions like "how best to offset a capital gains tax bill".

 

[stephenheath]

Leslie, it is obvious you don't understand the spreadsheet you are using. First of all,

The spreadsheet is correct.

And the sky is green. I've shown you exactly where the calculations and cells are wrong (well, where they are wrong in the important part, the way it calculates the contribution is also wrong, the creator made it 44% of the total contribution, but it is not, the refund is 44% of the original contribution).

Your argument about how to allocate it is stupid. It is exactly the same as if I told you I have two jobs, one that pays $70,000, and one that pays $30,000. I pay $50,000 in taxes, therefore the second job I am paying 100% taxes on and the first I am paying 28% taxes on. Therefore, using your logic, just like I shouldn't use the RRSP, I shouldn't bother working my second job. The reality is that taxes are applied uniformly on my income, NOT on which job it was, and likewise, the tax on withdrawals from your RRSP is applied UNIFORMLY on your withdrawals, regardless of whether the money originally came from the original contribution or the contribution resulting from the refund.

You are also failing to understand the spreadsheet, the point of it is not to

show the allocation of that total tax, to clarify WHAT exactly was being taxed, to allow people to understand the system.

, the point of that section of the spreadsheet is to allow you to understand how much money you will wind up with after you have let it grow then withdrawn it. What this spreadsheet is telling you is that IF your tax rate is 44%, you make 8% return on your investments, you put $1000 (the sum of your contribution and the refund) into your RRSP, then at the end, when you withdraw it, you will have $12,166. If you correct the broken cell, it will also point out that you have an after tax rate of return of 6.4% on your original contribution, and an effective tax rate of 19.4%. If we did NOT put this money into the RRSP, we would have started with 540, and had it grown by (8% * (1-44%)) over 40 years... or 540*(1.0448^40) = 3116.88. So by putting the money into an RRSP, we have gained 12,166-3,116.88, or about $9,050. THIS is what the spreadsheet is showing you.

THAT is the key error of what you are doing wrong. While arguing that because of this error, the refund gives you $0 so you shouldn't do it, you are forgetting that this SAME error shows you that the RRSP grows 100% tax free and there is no tax on withdrawal. So since you don't seem to understand that point and have some massive mental block, just make everyone happy and just talk about the totals.

Here's a last, simple bit of proof that even you should be able to understand. On a T4RSP form (you know, the form you get when you withdraw money from your RRSP)... show me where it is indicated whether the funds come from your original contribution or your refund so the government knows whether to charge you 100% tax or 0% tax.

But don't worry, I won't hold my breath....

PS: You also say quite often that TFSA = RRSP. But the reality is that TFSA ONLY equals the RRSP when both the original contribution AND the refund are contributed to the RRSP, otherwise they do not equal. Do the math yourself, it's pretty simple... in fact, here's the formulas assuming 10% return, 50% tax rate, 30 years until ending and a $20,000 contribution.

TFSA = 20,000 * (1.10 ^ 30)
RRSP with refund thrown in = (20,000+10,000) * (1.10 ^ 30) * 50%
RRSP without refund = 20,000 * (1.10 ^ 30) * 50%

I'll let you do the math, maybe you'll learn something. Now... how can the TFSA only equal the RRSP if the refund is included if the refund is worth $0? If it can't, there's even more proof that your hypothesis is WRONG.

 

[cardhu]

Rinse and repeat.

leslie ... you did not read my post, and the fact that you continue to make these absurd assertions proves* that you didn’t ... repetition will not make your false assertions any less false.

(* applying the same Dr. Seuss distortion of the concept of “proof” employed by leslie in her posts)

As I may have mentioned previously, what you mistakenly perceive as “facts” are very often not, and what you perceive as “proofs” are often just self-serving constructs of the “A=A and therefore B” variety. This is what retailinvestor has done here, and you’ve swallowed his defective argument hook, line and sinker.

 

[leslie]

My, such anger! I'll let the original poster come to his own conclusion. And yes I will repeat the point in the future where relevant.

 

[stephenheath]

Leslie... I use this as an example not knowing if you are married or not. Let's say someone, as a joke, put on their myspace page, perhaps as a caption to a funny picture, that "Leslie is cheating on her husband". Now say I come across it and don't understand the context, so I start telling everyone who knows you that you are cheating on your husband (oh, and off the bat, if you happen to be one of those guys named Leslie, my apologies, feel free to substitute wife with husband). You come to me and say "wait a minute, don't tell people I'm cheating on my husband, it's not true", and I reply "yes it's true, I saw it on that myspace page". You swear it's not, prepare affadavits, and even provide alibis that you were WITH your husband at the time, and again, I say "I don't want to see those, I saw the website". Then you suggest I talk to your friend, who put up the myspace page directly, because there is no greater authority than the author, right? Again, I say "I don't have to, I'm right, I saw the webpage".

Now, most of the time, hopefully people are smart enough to not take information from anonymous people as gospel... but what if your priest isn't one of them, and because of my false rumor, you get kicked out of your church? Or even worse, what if your husband hears the rumor and just like you, takes anonymous information as gospel and starts divorce proceedings.

That would be pretty shitty of me, wouldn't it? Well, while I admit the misinformation you are providing is probably not going to ruin anyone's marriage, your blatantly wrong information could cost someone money and is exactly the same situation.

How about you lose that chip off your shoulder and that "I'm right" opinion of yourself and before you spread your blatant lies anymore, first consult with someone. For example, have you bothered emailing the actual creator of the spreadsheet to ask him/her if it was a bug or not and to explain what his numbers mean? Have you bothered, as suggested, to confirm your hypothesis with the government, to manually work out the problem yourself outside of the spreadsheet, or even just to verify the math that shows you are making two contradictory statements?

Or would you rather just screw over other people by feeding them false information rather than open yourself up to the possibility that just perhaps you aren't right every time.

(By the way, before I even began replying to you I not only worked out the numbers manually on a brand new blank spreadsheet, but confirmed the proper treatment in the tax code in case I had overlooked something. As you had requested, I gave you the courtesy of my time to analyze the spreadsheet you were using and pointed out exactly where it was wrong, and I also notified the author of the spreadsheet about the error in his formula as a courtesy. It should be noted that you have not responded to a single mathematical proof which either indicates that you have done it and it has proven you wrong, and you refuse to admit it, or you haven't bothered, and yet, either way, you still intend to spread your misinformation.).

 

[lb71]

TempoTrader has to realize that cardhu has a hate-on for every thing I say.

cardhu has found mistakes in my posts too. I don't take it personally, I take it as a learning experience. My original impressions were obviously incorrect. If it wasn't for him/her, people would then read my errors as truth (and I would still believe them to be correct), which is not my intent. This board is an educational tool, and mistakes will be made. No one likes to admit they are wrong, but it happens. Use it as a learning experience.

You have posted to that website on other threads. That information is not being used correctly, and in some cases is false. There are some good arguments against RRSPs, but you have not made any. RRSPs on the whole are a benefit to Canadians. You really need to step back and do some more research.