Careful charitable giving - benefits benefactors
Cash is always good, but there may be better ways to support your favourite causes.
Whether you’re interested in donating now or through your will, with a little help from your financial security advisor, you can not only exercise benevolence, but provide for your own needs and reduce your taxes as the same time.
Philanthropists today have many options. Here are a few:
Cash gifts
Cash gifts are probably the easiest way to support a charity. Most charities issue receipts for amounts $10 and over.
The Income Tax Act (Canada) allows donors to carry forward donations in excess of the annual limit in any of the five succeeding years. CCRA (Revenue Canada) allows either spouse to claim all donations on one tax return.
Gift of increasing size achieve proportionally greater tax savings.
Donors can claim an annual tax credit for donations up to 75 per cent of their net income. The 75 per cent limit does not apply to gifts made in the year of death and the limit increases to 100 per cent of the taxpayer’s income for the year.
Donation of securities
Gifts of qualifying securities are not subject to capital gains tax. You can donate securities that have bulit up capital gains, pay no tax, yet receive a tax receipt for the full value of the donation.
There are two qualifications to this rule. It does not apply to gifts made to private foundations. Also, gifts must be of shares, bonds or rights as listed on prescribed stock exchanges, shares of mutual fund corporations, units of mutual fund trusts or interests in segregated funds. The actual securities must be given to the charity.
The donor would receive a tax receipt from the charity for the fair market value of the securities on the date the gift was made.
Bequests through a will
Charitable donations made through a will are deemed made in the year of death and the estate can claim them on the deceased’s final tax return. One method is to set up a life insurance policy with the beneficiary being the estate. The will would direct that funds equal to the death benefit be donated to a charity. But a downside is that probate fees apply to the gift.
Beneficiary designations to charities
You may want to designate a charity as the beneficiary of a life insurance policy, a Registered Retirement Income Fund (RRIF) or Registered Retirement Savings Plan (RRSP). When the policyholder dies, the charity receives the proceeds, the deceased’s estate owes taxes for any registered funds and the estate receives a charitable tax credit.
Note that the policyholder will have to be the life insured of the contract for this to apply. Insurance proceeds will bypass the estate when policyholders designate the charity as beneficiary so probate fees are not payable.
This gives you flexibility in planning your estate by taking advantage of available tax credits to reduce taxes owing at death.
Immediate gift of a life insurance policy
A common way to donate to charities is to contribute a whole life insurance policy with a cash surrender value.
To donate an existing policy, transfer the ownership of the policy to the charity and name the charity as the beneficiary. This transfer of ownership cannot be changed. You receive a donation tax receipt for the cash surrender value and any accumulated dividends and interest, less any outstanding policy loans as of the time the ownership transfer is made.
On the death of the life insured, the charity receives the proceeds directly. They are not subject to probate in your estate.
The transfer of ownership is a taxable disposition, so you would be liable for tax on the difference between the surrender value and the adjusted cost basis of the policy. Normally, the tax credit from the donation receipt will more than offset the tax liability that was created.
If you continue to pay the policy premiums, you’ll receive a charitable donation receipt from the charity.
Another option is to set up a new policy where the charity is named as owner and beneficiary. In this situation, tax credits are based on the premiums paid.
Deferred gift of a life insurance policy
You can name a charity as beneficiary of a life insurance policy without changing the ownership from your own name. The charity receives the death benefit directly without being subject to probate in the deceased donor’s estate at the time of your death.
Since you could change the beneficiary designation at any time, you won’t receive tax credits until the year of death and the prior year.
Charitable gift annuities
Charitable gift annuities are irrevocable annuities that charities can either issue themselves or buy from insurance companies. You can use them to give a lump sum to a charity and receive a periodic income on which you’ll pay little or no tax.
Charitable gift annuities are probably most beneficial for people age 70 or older who have a sum of money over which they are willing to give up control. It is an opportunity to donate now instead of postponing the gift until after death. To ensure your married clients can provide for themselves and their spouses, you may suggest they buy “joint and last survivor” annuities that pay until they have both died.
In its simplest form, if the amount paid for the annuity exceeds the sum of the expected annuity payments, CCRA views the difference as an immediate gift. The donor is then entitled to a charitable donation receipt for the excess from the charity. The payments to the donor are tax-free annuity payments. This type of payment has no impact on the various clawbacks and income tests for government benefits since the payments are essentially a return of capital.
Where the expected annuity income exceeds the annuity purchase price, there is no charitable donation. Each fixed payment is a blend of capital (that is returned tax-free) and a taxable interest portion. Naming a charity as beneficiary ensures the charity receives a donation if the annuitant dies within the guarantee period.
Charitable remainder trusts
Charitable remainder trusts may be standard in the United States, but they are not yet routine in Canada. They are an irrevocable inter vivos trust, established by a donor making a contribution. The charity is named as the trust’s capital beneficiary and the donor, while alive, receives the trust income and pays the income tax resulting from that income. After the death of the donor, the rest of the trust passes directly to the charity that was named as beneficiary.
A lawyer who specializes in estate planning should establish these trust instruments.
The amount of the tax credit increases with the age of the donor. Clients in their 80s may receive a tax credit for as much as 70 per cent of the value of the gift. Since the capital stays intact and goes to the charity upon the death of the client it bypasses probate.
Charitable foundations
Foundations are established with the purpose of raising funds to support operating charities versus other organizations that focus on carry out charitable activities. There are two types of foundations, public and private.
Private foundations are controlled by people who are not independent of the foundation.
Public foundations are a pooling of donors in one charitable organization established for charitable purposes, and run by an independent board of directors.
In both cases, the foundation is required to make annual grants to registered charities.
You are issued a tax receipt for any donations into a foundation.
Charitable giving/donor advised funds
This is a relatively new option for Canadian philanthropists. Charitable giving funds use a public foundation to allow you to create a private foundation experience without the cost and complexity. They offer you a choice of investments and the flexibility to name your account, select a successor as the advisor on the fund, and choose the charities that will benefit from your fund.
You receive a tax receipt for any donation made into a charitable giving fund.
Whichever method you chose for your legacy, your financial security advisor can help you plan your giving.
For more information contact:
J. Paul Wilson, CFP, CLU, CH.F.C., TEP
2-33 Thorne Avenue, Dartmouth, Nova Scotia, B3B 2E7
Halifax/Dartmouth (902) 420-2696 ext. 225 Toll Free 1-877-429-2696 ext.225
Web site: www.jpw.ca Email: paul@maritimewealth.com
The information contained in this article is intended to provide general guidelines only. The application and impact of the law can vary widely from case to case based on the specific or unique facts involved. Accordingly, the information in this article is not intended to serve as legal, accounting or tax advice. Users are encouraged to consult with their professional advisers for advice concerning specific matters before making a decision.
