Everyone knows about the standard charitable tax credit procedure. You save the receipts and then make a credit claim when filing your annual tax return. But there's a lot more to charitable giving than that.
Many adult Canadians made financial or in-kind donations to charities and non-profit groups during 2011. That high proportion is due partly to tax laws that encourage such giving.
Even if you're among the minority who do not currently support charities, there are sound financial reasons for leaving a charitable legacy. Death will trigger a deemed disposition of your assets. With certain exceptions, unrealized capital gains on assets and the fair market value of registered investments such as RRSPs and RRIFs will be treated as income earned in the year of your death.
This could direct a substantial portion of your assets right into the taxman's pocket. If you'd prefer to see this hard-earned wealth benefit charities that provide essential services to your family and friends, consider planned giving. That's a term used to describe gifts transferred to charities usually, but not necessarily, at the time of the donor's death.
Under the Income Tax Act, you are allowed a 15% federal tax credit on the first $200 of donations made each year and a 29% credit on the remainder. The total credit (federal plus provincial) depends on your province of residence, but can be greater than 40% on donations in excess of $200.
The maximum amount of charitable donations eligible for this tax credit treatment is usually limited to 75% of your net income for the year. But this maximum does not apply in either the year of your death or in the immediately preceding year. In those years, this limit is 100% of your net income. In other words, a gift made in the year of death - including a gift made "by your will" - can be used to offset tax liability in either that year or the preceding year.
Planned giving makes use of several options and techniques to combine charitable giving in life with estate planning and the inherent tax savings. Planned gifts can be either outright for immediate use or planned now for completion at a future time - after you die, for example.
Among the options are gifts in the form of cash, life insurance, RRSP/RRIF, capital property such as real estate or publicly traded securities, and charitable gift annuities. Here's more detail on these alternatives:
Cash gift. As you might expect, this is the most straightforward way to donate. Your estate receives a charitable donation tax credit for the amount you give.
Life insurance. A gift of life insurance can mean a significant future gift at an affordable current cost. You set up a life insurance policy, say with a face value of $100,000, naming your chosen charity as the beneficiary. This lets you claim the annual insurance premiums as a charitable donation, even though the money is bequeathed only upon your death.
If you don't need the charitable tax credits right away, but anticipate a large tax liability at the time of your death, you could name your estate as beneficiary of the policy. The estate could then claim $100,000 in charitable donations for your year of death to offset taxes owing. And, in your will, you would name the charity as a beneficiary of your estate in the amount of $100,000.
Another option is to name the charity as both owner and beneficiary of the policy. In this case, you make an irrevocable donation and receive a tax receipt today for the cost of the premiums and the cash surrender value of the policy. The death benefit does not then qualify as a tax deduction to your estate.
RRSP/RRIF. These make excellent charitable gifts, because the charitable tax receipts offset tax otherwise payable on the RRSP/RRIF deposits upon death. The best route is to make the charity the direct beneficiary of the RRSP/RRIF, rather than cashing the plan and then giving the proceeds to charity. A direct gift circumvents probate fees, but your estate still receives a tax receipt for the full value of the investments.
Publicly traded securities. "In kind" gifts of capital property that consist of publicly traded securities (stocks, bonds or mutual funds) given directly to a charity, rather than the estate selling it and donating the proceeds, results in better tax treatment for the donor. While the inclusion rate (the proportion that has to be included in your taxable income) for capital gains is normally 50%, the inclusion rate for publicly traded securities given to charity is now non-taxable.
For example, if a security with a capital gain of $100,000 is sold at the time of your death and the proceeds then donated, $50,000 is included as income for your estate. But if you give the security directly to a charity, no amount is included as income.
For example, under the new rules, if you sell a house with a fair market value of $400,000 to a registered charity for $100,000, for tax purposes you are making a gift of $300,000, and the charity would issue a charitable tax receipt in that amount. If this property happens to have a mortgage of $100,000, for tax purposes your gift then would be only $200,000 (i.e., $400,000 FMV minus $100,000 sales price minus $100,000 mortgage owing).
One very attractive planned giving tool, the charitable gift annuity, is negatively affected. Some retired people have bought annuities from a charity as a way to generate a tax-free source of income that does not put their OAS payments at risk of claw back. Historically, the excess of the purchase price over the amount expected to be received as payments from the annuity qualified as a charitable gift. And the annuity payments were considered a tax-free return of capital.
Under the current rules, you get a much larger up-front tax deduction, based on the excess of the purchase price over the price that must be paid for a commercial annuity from an insurance company. But the attractive 100% tax-free element of the annuity payments disappears. Annuity payments in excess of the amount permitted as a charitable gift are included in income over the guaranteed period.
By now you're likely feeling a little confused and surprised to find that a simple thing like a charitable donation is maybe not so simple. Don't worry if you can't grasp all the finer points of this discussion. We're talking about a complex area of the tax system. The key message is that how and when you make charitable donations can have huge tax implications. The usual rule applies: when in doubt, get professional advice before making an irrevocable move.
One final point about planned giving: always educate yourself about the specific organization you want to support. First, make sure it's a registered charity. This means it adheres to strict Canada Revenue Agency (CRA) policies, which in turn means donations to it are eligible for official tax receipts. Ensure also that the majority of the charity's income goes to providing services, with only a small percentage spent on fundraising and other administrative costs such as large salaries and expense accounts for paid managers. You don't want your gift squandered on ski trips to Switzerland.
Finally, check how closely the charity's services match your personal values and concerns, as well as needs in the community it serves. Need more information on a charity? CRA provides a list of registered charities at www.cra.gc.ca/charitylists. Alternatively, call CRA's charities call centre at 1-800-267-2384.
Read the following Knowledge Centre articles for more information on family gifts as well as charitable gifts: