A Great Time To Be a Philanthropist
Policy changes over the years by the Department of Finance have significantly boosted tax incentives for charitable gifting. Many of the changes involve the opening of charitable structures and tax incentives for gifts of publicly traded securities, mutual funds and assets such as cultural and ecological property. The build-up of charitable foundations and donor-advised funds directly impacts communities in positive and sustainable ways.
How You Can Give
- Gifts by Will – the gift can be cash or property, such as a work of art or securities. If adequate instructions are given in the will and a specified charity is chosen, the gift can be deemed to be made by an individual immediately before the date of death. A tax credit becomes available towards tax payable on the terminal return for the year of death. Any unused tax credits can be carried back and used to reduce taxes payable in the prior year. The credit is available to offset 100% of net income in the year of death and the year prior.
- Cash – an annual cash contribution is an easy way to give. Lifetime cash gifts can provide a tax credit towards tax payable on your annual income tax return. However, it is important to keep in mind that other gifting methods can produce better tax results and thus provide an opportunity to enhance your gifting plans.
- Annuities – A cash amount can be donated to charity in exchange for a stream of blended taxable and tax-free annuity payments to the donor. The donor may receive a significant tax receipt in the year of payment.
- Gifts of Residual Interests – CRA allows gifts to be made to charities of a residual interest in Real Property or an Equitable Interest in a Trust. This may be of particular interest if you have a real estate property you desire to use during your lifetime or a work of art that you wish to retain possession of but wish to eventually pass on to charity. This type of planning can raise a number of technical issues so professional advice should be sought before embarking on this type of giving.
- Life Insurance – there are several ways that charities can benefit from gifts of life insurance. Gifts can be tied to annuities. Annual life insurance premiums can be gifted for charity owned policies. For donor owned policies the death benefit can form a substantial gift for the charity and tax credits for the full amount of the death benefit will mirror those discussed above for gifts by will. Life insurance is most effectively used as part of an overall strategic gifting program.
- Qualifying Securities – publicly-listed securities (such as shares, bonds, warrants, debentures and mutual fund units) can effectively be donated to a charity. Selling securities and donating the cash proceeds results in full capital gains taxation to the donee, whereas donating a qualifying security directly allows for a reduced capital gains inclusion rate of 0% (from 50%). Qualified securities given “in-kind” make for the most tax-efficient way to make meaningful gifts and to save the maximum amount of tax. Tax-sheltered life insurance can also be used as part of this effective strategy to compensate for lifetime gifts that otherwise would form estate assets earmarked for family members.
- Cultural or Ecological Property – similar rules and tax breaks are available for these types of properties. CRA administrative positions and rules must be followed. Professional advice and the involvement of certain government agencies are necessary for these gifts.
- RRSPs and RRIFs – These can be directly designated to charity with a tax credit available for the full amount of the gift. RRSPs and RRIFs can roll over on a tax free basis to a surviving spouse. On the second death, the balance of RRSPs or RRIFs are treated as taxable income in the year of the death of the survivor recipient. The credit for gifting this balance to charity will effectively eliminate tax that would otherwise be payable.
- Privately Held Corporations – a corporation that makes a gift to a charity may be entitled to a deduction from its taxable income (subject to limits). Canadian Controlled Private Corporations can get multiple tax benefits by donating qualified marketable securities and can receive a “double dip” on its tax-free capital dividend account by combining a life insurance funded distribution of proceeds to the estate/shareholders.
- Other Structures – you and your family can also participate in the build up of a charitable family foundation or a donor-advised fund to directly impact your chosen area/community in a positive and sustainable way.
If you have an interest in charitable giving or donor advised funds, please take the first step and initiate this discussion. Contact us for Founder and contact information and to request further information.