On Wednesday the Bank of Canada increased their official interest rate from 0.75% to 1%. The BoC official rate is the rate available to the big Canadian chartered banks who wish to borrow from the Bank of Canada. This is normally for short term purposes, literally a day at a time. The chartered banks will set a “prime rate” which is normally 2-3% above the BoC rate for the base rate they begin lending their retail and corporate customers. The BoC rate is also used as a link to other rates such as the Canadian Treasury bill. Canadian investment interest rates will increase very slightly but dramatically higher rates aren’t likely for the foreseeable future.
At the same time the CAD US dollar exchange rate increased by 1.3% in response to the BoC announcement. The question arises: why is the Canadian dollar more valuable? The most obvious answer is supply and demand factors. An unreported side effect of this rate move was a jump in the market value of Canadian Government bonds. Currently, 5 year Canadian Bonds are slightly higher yield than the equivalent US Government bonds. Additionally, 19 out of 26 European nations have negative rates. Over 30% of all government bonds worldwide (worth $7.3 trillion dollars) have a negative interest rate if you cared to purchase them. This makes Canadian bonds more attractive to the global interest-seeking investor. Even with the BoC rate at a measly 1%, investment interest rates are at all time lows using financial engineering never previously recorded in history.
Charitable Giving Through an Estate
We always encourage people to be tax efficient when considering investment products and strategies, with the intention of controlling more of their money longer.
One idea is to consider donating the proceeds of a registered account (RRSP/RIF/LIRA/LIF) to a charity. This can be done either by designating a charity as a beneficiary of the registered account or by specifically designating said charity for a legacy in the will.
Registered accounts are fully taxable when redeemed while living or after death by the estate. All charitable donations receive a tax credit of the highest personal tax rate, which in Manitoba would be either a 46% or 51% tax credit on most estates. Generally, people are in a lower tax bracket throughout life but sometimes forget that their final estate could face income tax rates they wouldn’t have ever thought possible.
Charitable giving through an estate, whether as a beneficiary of a registered account or specified in the will is a good way to legally reduce some income tax while also supporting a charity doing valuable work.