This article by Sara Neely, Victoria Foundation’s Director of Philanthropic Services, first appeared in the 2013 issue of the British Columbia Planned Giving Guide (5th Edition). The Guide includes a listing of local charities and informative articles about why and how to support them. The Guide is available through B&C List (1982) Ltd at 1-800-663-1563 or www.PlannedGivingGuides.com.
Planned Gifts: Which Way of Giving is Right for You?
Starting the philanthropic conversation
As you take on the task of organizing personal, business and financial matters, there are many opportunities to help you answer the philanthropic question – what impact do I want to have in the community?
Scenarios can involve estate planning, writing or revising a Will, selling a business or other major asset, retirement planning, an inheritance and finally, what applies at different stages of life. Questions may include: How much is enough? To whom do you want to give? How do you want to give? How much control do you want to have? What are the tax consequences?
This article covers some of the ways you may support the causes that matter to you through planned giving.
Bequests in Wills
Bequests in Wills – whether of a specific amount, a portion or the entire residue of the estate – are the most common planned gift. Ensure the legal name of the charity is used in the Will and not the name under which the charity does their work in the public eye, a commonly used short form, or one that may be mistaken with another charity. If the gift is to be used for a specific purpose, it is important to include a variation clause, permitting the charity to use the gift for other similar purposes if the intended purpose cannot be met.
A donation tax receipt is not available to an individual or an estate unless the beneficiary entity is a Canadian registered charity or qualified donee. A searchable database of registered charities is maintained by the Charities Directorate of the Canada Revenue Agency (CRA): http://www.cra-arc.gc.ca/charities
Although in the majority of cases tax receipts are not fully utilized, the greater income (and the greater tax liability) is most often connected to the deceased’s terminal return, rather than the estate’s return. If the gift is by Will, 100% of the tax payable in the year of death and in the preceding year can potentially be eliminated. In addition, any carry-forward of unused charitable donations made in the five years preceding death may be applied against the year of death and preceding year tax returns. If the gift is not a gift by Will, the tax credit accrues to the estate and may be used to offset up to 75% of the income of the estate in the year of the gift.
Tax planning with life insurance gifts
Life insurance leverages a large gift with a relatively nominal contribution from the donor’s discretionary income. There are several methods with different tax results.
With an existing policy that is no longer needed for its intended purpose, the donor may transfer ownership of the policy to the charity and name the charity as beneficiary. The donor pays the premium payments on behalf of the charity and receives donation receipts for these amounts each year. If the policy has a value at the time of transfer, the valuation for tax purposes (as of 2007) is an actuarial calculation of the fair market value based on factors including the health and life expectancy of the insured and the policy terms.
Alternatively, the donor could retain ownership of the policy and name the charity as the beneficiary only. There is no donation receipt until the donor dies. The receipt for the full value of the policy proceeds may be used in the terminal return with a one-year carry-back. The proceeds flow to the charity outside the Will, thereby reducing probate fees to the estate.
The donor may choose to purchase a new policy which may be structured to receive the donation receipt during the donor’s lifetime or to receive it at death. This latter method is a way to deal with taxes payable on other assets at death. Rather than buying a life insurance policy to pay taxes, combine it with a charitable purpose and utilize the tax credit to offset taxes payable.
Another option uses a combination of the donor’s required withdrawals from a Registered Retirement Income Fund (RRIF) and life insurance. If the donor does not require the cash from the RRIF each year, he may use it to pay the policy premium. If the charity is the owner of the policy, the donor will receive a receipt for the premiums which will offset the income inclusion on the RRIF withdrawals.
Direct designation of RRSPs and RRIFs
A tax credit may be claimed on the terminal return where the charity is the designated beneficiary of a Registered Retirement Savings Plan (RRSP), including a group RRSP, or a RRIF. The donor retains ownership of the RRSP or RRIF and names a charity as the beneficiary only. This direct designation converts an asset that is heavily taxed into one where the tax is fully offset by the tax credit. It also keeps the asset out of the estate and any consequent claims and probate fees.
The estate reports the taxable income on the redemption of the RRSP or RRIF, but the corresponding tax credit will offset the tax payable. The transfer must be within 36 months of the donor’s death.
Direct designation of Tax Free Savings Accounts (TFSA)
The TFSA holder can designate a charity as the beneficiary after death. CRA considers this direct designation to be a donation on death; the donation tax credit may be claimed in the terminal return. Since the income generated in the TFSA is tax-free when withdrawn, the tax credit offsets other taxes payable on death. The transfer must be within 36 months of the donor’s death.
Donor Advised Funds
A donor advised fund is a fund established within a charity for which the donor receives an immediate tax receipt. The capital is generally invested in permanence although other terms may be put in place, for example, where the capital may be spent after a ten year period. The donor retains the right to advise the charity on how the annual distributions from the fund are spent. These annual grants are paid out to registered Canadian charities or other qualified donees.
A donor advised fund provides the donor with flexible, personal involvement in their philanthropy. Although the donor has received their donation receipt for the initial contribution, CRA permits the donor to be actively engaged with their fund through the annual granting choices. Final approval for the grants rests with the board of the charity (usually limited to ensuring the grant recipient is a registered Canadian charity).
Donor advised funds started with community foundations. In recent years, financial institutions have started to offer this opportunity to clients. There are many commercial donor advised funds including TD Waterhouse, BMO, RBC, and Scotia Trust and several investment firms such as Investors Group and McKenzie Investments.
Donors may establish a donor advised fund for several reasons. They may want to take advantage of the donation receipt at the end of the calendar year, but haven’t decided which charities to support – a decision they can make the next year. They can create a lasting legacy of giving in their family name and involve the next generation in their fund; or they may have no family and want the fund to be their legacy.
From an estate planning perspective, donors may add to a fund created during their lifetime or create a fund on death through a bequest gift, life insurance, or designations of their RRSP, RRIF or TFSA. At the donor’s death, the fund agreement may provide that the fund is to benefit named charities or follow the pattern of the donor’s lifetime giving.
Gifts of publicly listed securities
When publicly listed securities are donated to a charity, there is no tax payable on the capital gain. The donor receives a donation receipt for the fair market value of the publicly listed securities, which is the closing price on the day they are transferred into the charity’s brokerage account. The resulting tax credit can be used to offset taxes payable on up to 75% of the donor’s net income in the year of the gift with any excess credit carried forward for five years.
Gifts of land
Gifts of land may be made as an outright gift during the donor’s lifetime. Where there is a mortgage on the property, the tax receipt is adjusted to account for the advantage to the donor in the charity assuming the mortgage.
A gift may be a residual interest where the donor retains rights to the property for certain purposes. If a person donates a principal residence, the donor could retain the right to live there for life. Or, if the gift is income property, the donor may retain the right to receive the rents for a number of years. These gifts require the charity to retain ownership of the property until these obligations have been met. Donation receipts are issued according to market value appraisals and actuarial valuation of the donor’s retained rights.
Another option is a testamentary gift of real property made in the Will. If the property is a specified gift, it is valued at the date of death and a donation receipt is issued to the estate. If the property is disbursed in-kind by the executor in fulfillment of an unspecified or residual gift to a charity, then the donation receipt would be issued for its appraised value at the date of transfer.
There are other beneficial treatments for certain types of capital property including cultural property and ecological property. The capital gains tax is eliminated on the transfer in specie of these types of property. It is advisable to include an in specie clause in the Will to enable the full effect of these tax benefits.
This article is a summary of some options for charitable giving – for more information consult your local charities or the online resources noted below.
One resource that is particularly helpful is the Charities and Giving section of the Canada Revenue Agency web site which has several topics of interest for donors. A searchable list of Canadian charities, called the Charities Listings, can be used to confirm whether a charity is registered under the Income Tax Act and is therefore eligible to issue official donation receipts. You may also view a charity’s contact information and Registered Charity Information Return (T3010) which includes financial information and a description of the charity’s programs and activities easily accessible through the “Quick View” function.
You can learn how to calculate and claim your charitable tax credit. Details about donations that do or do not qualify for a tax credit are included. Examples of donations that do usually qualify for charitable tax credits include money; securities; ecologically sensitive land; certified cultural property; capital property; personal-use property (such as prints, etchings, drawings, paintings, sculptures, jewellery, rare folios, rare manuscripts, rare books, stamps, and coins); and inventory (such as art, antiques, rare books).
The following do not usually qualify for charitable tax credits: contributions of services, such as time, skills, effort; certain admission fees to events or to programs (e.g., fees for daycare or nursery school facilities); the purchase price of a lottery ticket or other chance to win a prize, even though the lottery proceeds benefit one or more charities; and the payment of tuition fees (although some exceptions exist).
Disclaimer: This information can help facilitate discussions between clients and advisors. It is not intended as legal or financial advice. Readers are encouraged to seek independent advice.
Canada Revenue Agency – www.cra-arc.gc.ca
Canadian Association of Gift Planners – www.cagp-acpdp.org
Community Foundations of Canada – www.communityfoundations.ca (including e-resource for advisors)
Imagine Canada – www.imaginecanada.ca
LEAVE A LEGACY™ – www.leavealegacy.ca
Muttart Foundation – www.muttart.org
Philanthropic Foundations of Canada – www.pfc.ca