You may be considering making a bequest to your favourite charity. If so, this page may help you decide the best way for you to make such a bequest, and to discover how your gift might be used by the charity. Although Revenue Canada treats churches as they do all charities, if you are interested in giving to your church, please visit Gifting to your church. Please don't rely on this page for accurate legal or accounting advice. As you see it was written in 2000 (before Revenue Canada became the CCRA) and I have neither the time nor resources continually to research new information in the field. Nevertheless the general principles are valid and will help you in your broad decision making. First, let us define charitable giving. This includes: making gifts prior to death making charitable bequests through a will setting up an inter-vivos charitable remainder trust (a trust set up during the donor's lifetime) using life insurance purchasing a charitable gift annuity. The policy document covers two areas: Financial planning and investment aspects Ways to make gifts to charity The writer of this paper is greatly indebted to Rev. Jim Lawson, the United Church of Canada Special Gifts Officer, and the author of two helpful resources: "Special Gifts Program" and "Will Workbook," for visiting Glen Cairn United Church during 1999 and encouraging us to formalize these matters. He also acknowledges the expertise of Bob Allebone, B.Math., CFP, R.F.P., who suggested many valuable improvements. Financial planning and investment aspects There are several ways to accommodate charitable donations in an estate plan, many with significant tax advantages for the donor. The majority of such giving is unfortunately done without taking account of potential reduction of personal income and estate taxation. Accounting basics Income tax credit The Canadian Income Tax Act grants a federal tax credit of 17% of the first $200, and 29% of the remainder of the gift up to a gift size of 100% of net income in the year of death and the preceding tax year; and up to 75% of net income during each year prior to the year preceding the year of death. The federal tax credit can be carried forward five years. This tax credit is valuable in that it also reduces provincial tax and any surtaxes. However, this can only be used to offset taxes owing; not to create a tax refund. Since either spouse can claim the credit, it makes sense for one spouse to claim all the donations to avoid doubling up on the 17% low level credits. Generally it doesn't matter which spouse makes the claim if both are earning, but there are some circumstances when it is beneficial for the higher-earning spouse to make the claim. Capital gains on a charitable disposition Normally, when a taxpayer disposes of capital property by gift or bequest to anyone other than his spouse, he is deemed to have disposed of the property at fair market value, and thus he could realize a taxable capital gain if the property has appreciated above its adjusted cost base. This deemed disposition also applies to charitable donations. (A spouse receiver of the gift may elect to keep the adjusted cost base as it was, thus deferring tax till the second spouse death.) On (deemed) disposition, capital gains taxes are due therefore based on an inclusion rate of 50% of the difference between the adjusted cost base (approximately what you paid for it originally) and fair market value at the time of sale (what it was sold for if a sale took place). The 50% of capital gain is added to income for the year, resulting in increased income tax. However, the income increase also allows for a larger donation to be made and used to create a tax credit for the year of the donation (see previous paragraph). Furthermore, the 75% of net income limit for donations is further raised by 25% of any taxable capital gain arising from the donation of appreciated property to ensure that any tax liability arising from the donation of such property can be offset by tax credits in the year of donation. These provisions ensure that capital gains tax resulting from charitable gifting of property will never exceed the tax credit. The government appears to have heard the complaints of groups such as the Canadian Association of Gift Planners, which have been lobbying for a total exemption from capital gains tax on gifts of appreciated property. Although the government is still unwilling to concede on this issue, the federal budget of February 2006 made significant concessions for donations of appreciated securities. Since then, the volume of gifts in Canada has risen significantly. Gifts of publicly listed securities (stocks, bonds, mutual funds, segregated funds) made to a charity now qualify for a capital gains inclusion rate of 0%, versus the normal 50%. In other words there is no capital gains tax on such gifts. This can result in significant benefit to donors who choose to give securities instead of liquidating the securities and donating the proceeds. Charity income is non-taxable The "income" of non-profits may come in the form of donations, grants, interest payments, dividends and capital gains from investments, rent, and other payments for goods and services. However, that income can not be spent in the same way that it could be spent by for-profit organizations. The organization cannot spend its funds to earn more "income" or profits, but only to fulfill the public good written into its mandate. The non-profit organization is required to spend virtually all it gets in pursuit of the public good in its mandate. It can accumulate funds only as necessary to meet its purposes. Some investment planning concepts Advantages of giving some time before a benefactor dies Statistics show that the great majority of charitable giving is done through wills. However, if you have no intention of dying for a while yet, but would like to arrange your affairs in good order, there are reasons to consider giving some time before death, which are beneficial to you and your charity. Where any sizable sum is considered as a bequest, it may well be currently invested in growth vehicles. This would include stocks, bonds (not Canada Savings Bonds), and mutual funds, which are collections of stocks, bonds and other investments. It is likely that these investments will incur taxable capital gains on disposition. For an investment that appreciates 10% a year the growth will have been 100% over the previous seven years. Had the gift been made seven years earlier therefore, the capital gains taxation of the donor's estate would have been halved, while the charity would either have had the use of the money seven years sooner, and if not fully used for immediate purposes, would have enjoyed the growth - and the charity does not pay tax on the growth. Note: with a gift of publicly listed securities (see below), the charity still benefits from the growth. The benefit is the reduction in tax liability to the contributor by giving now rather than the higher tax liability on the appreciated security later. Some of the gifting methods described below take advantage of this. The problem, or course, is that people don't know when they are going to die, so they do not know how much they can afford to give away. In many cases, however, some can be given, leaving enough for all likely contingencies. Their financial planner can advise in this area. Ways to make gifts to charity 1. Wills As described above, the donor will receive a tax credit offsetting any capital gains tax, making this the most popular method of gifting to charities. Sadly, nearly half the population do not have a will, and when they die without one this often causes sheer misery for their surviving family members, vainly attempting to sort out the mess often in an acrimonious environment. The estate administrator appointed by the court will not allocate any part of the estate to charity. It is in a charity's interest to encourage the use of wills. 2. Gifts of Life Assurance A gift of life insurance allows a benefactor to arrange a future gift for the charity at low cost to the benefactor. This can be arranged through your insurance agent. For premiums to be tax-creditable, the policy must be irrevocably assigned to the charity. The life insurance policy is owned by the donor. The premiums are paid by the donor. The donor's estate is designated beneficiary. The donor's will is then amended by a lawyer to instruct the executor of the estate to donate the life insurance proceeds received from the policy specifically described in the will, to the charity specifically listed in the will. The donor has control of the policy during his lifetime, and can access the cash value, cancel the policy or change the beneficiary at any time. No charitable receipt are generated during the lifetime of the donor. At the time of death, the tax-free life insurance proceeds would be paid to the estate, then be used to carry out the instructed donation. The charity would then issue a charitable receipt to the executor who would in accordance with the Income Tax Act be able to apply the receipt towards the calculation of a charitable tax credit in the deceased's final Income Tax Return. Life insurance policies, RRSPs and RRIFs should never have a charity as their designated beneficiary, since the charity will be prohibited from issuing a charitable receipt. For a charitable receipt to be issued following death, the donation must be made by the executor or administrator of the estate in accordance with a specific bequest direction in the deceased's will. The executor or administrator cannot elect to make a donation without such a bequest appearing in the will. There is a second type of charitable life insurance, where you make a gift of an existing policy. If you have an existing policy which is no longer needed for your family or business, you can donate the policy by making the church the owner and beneficiary. The charity would issue a receipt for an amount equal to the cash surrender value, plus each year issue a receipt for the premiums paid, once it receives proof of the premium payments. The receipt is then used to calculate the resulting tax credit. No further tax credit is generated at the time of death. The life insurance proceeds upon payment are received tax free by the charity. The charity has the right to partially access the cash value of the policy at any time; to cancel the policy at any time; or, to continue to pay the premiums if the donor ceases such payment. The great advantage of life insurance is that it does not decrease the size of your estate. 3. Charitable Remainder Trusts and Gifts of Residual Interest If you have cash or an asset that you have considered leaving to the charity in your will, but you would like a tax benefit now, then a charitable remainder trust may be your answer. You make an irrevocable gift of the asset to the charity. The charity issues a receipt and the donor uses it to claim a tax credit. Calculating the size of the receipt is somewhat complex. It is based on the present value of what the charity expects to receive when you die. This depends on your life expectancy and a discount interest rate - the corporate bond rate related to the life expectancy in years is a good guideline since Revenue Canada does not direct that a specific interest rate be used . The charity may wish to consult with a tax accountant and Revenue Canada for guidance in this matter. Thenceforward the Trust must pay to you at least annually all income generated by the contribution to the Trust; the principal amount reverts to the charity upon your death. A Gift of Residual Interest allows you to donate an asset today (eg. personal residence, work of art, investment property) , and enjoy the use of it for the rest of your life. Again, you receive an immediate tax receipt for the present value of the donated asset. (Gifts of appreciated property can be structured to reduce capital gains, however the resulting charitable receipt will be reduced. Due to changes in tax laws within the last few years, as mentioned earlier, which now ensure the resulting tax credit will more than offset the resulting tax on any capital gains incurred by the donation, this strategy of reducing the deemed donation amount in order to reduce the capital gain is no longer relevant. ) The value of your trust can be replaced in your estate with a life insurance policy funded through the income from your trust and by the value of your tax credit. 4. Major cash gifts and Interest-Free Loans The special gift which offers the most immediate benefit to the donor and to the charity is a Major Cash Gift. Cash gifts qualify for an immediate tax receipt which can offset tax payable on income and capital gains. The receipt can be used over the next five years if needed, since claimable charitable donations cannot exceed the limit of 75% of net income in any one tax year. For those who have no immediate need for the principal, but would like to reclaim it after a number of years, perhaps to pay capital gains taxes on death, then an interest-free loan to the charity will provide needed income from that principal directed to charitable needs. The income from the principal is not taxable either to the charity or the individual. If the individual forgives all or part of the loan in the future, then an immediate tax receipt is issued for the amount. 5. Gifts of Publicly Traded Securities Inform the charity that you wish to make a gift of securities (stocks, bonds, mutual funds, segregated funds), then instruct your stock broker to transfer the securities to the charity's account. You receive a tax receipt for the value of the securities as of the day they are received by the charity. As detailed in the section "Accounting Basics" above, the normal taxable income inclusion rate of 50% for capital gains is reduced to zero for transfer of publicly traded securities. This is a significant concession, making the gift of securities attractive, particularly if it is not a good time to sell. 6. Charitable RRIF Acquire life insurance equal to the expected value of the RRIF. Provide for a testamentary gift equal to the value of the RRIF at time of death. The charitable credit offsets RRIF income tax liability. This strategy is preferable to leaving the (after tax proceeds of the) RRIF to the charity. 7. Gifts of Strip Bonds A strip bond (as all bonds) is purchased at a discount and redeemable at par on a certain future date. A strip bond, or "zero coupon" bond, is a bond that as been divided into two parts. The coupon, or interest, from the bond has been separately sold, leaving the principal portion. Strip bonds tend to out-perform GICs in terms exceeding five years. Unlike GICs they can be sold at market value before maturity. There are two ways of making a gift of a strip bond: Give one which you already own to the charity; Give the charity money to buy a strip bond for you. You will receive a tax receipt right away for either the value of the bond at the time it is received by the charity, or for the amount of money that you give to the charity to buy the bond. Strip bonds are high security, using only top quality bonds; They have a guaranteed return if kept to maturity; The maturity date can be chosen to be from 10 to 20 years; They can help the charity plan. In fact the charity may encourage the gift of strip bonds with staggered maturity dates to meet expected needs over several years. ---------------------------------------------------------- Summary Congratulations on reading down this far! This document is necessarily detailed, but we trust you are able to extract from it the answers to specific questions. Charities have many needs, immediate, intermediate and long term. These needs can be met through caring stewardship of your bequest. Teach and you shall receive by Robert T. Kiyosaki Gifting to your church If you are in the Ottawa area and would like to invite the writer of this web site to present "The Many Ways of Giving" to your group or church please e-mail your request. Tony Copple wrote this when he was Chair of Stewardship at Glen Cairn United Church, Kanata, Ontario. January 24 2000 Tony's favourite charities Disclaimer. Financial planning is an exercise which should be conducted with a qualified professional, who will make recommendations only after assessing a client's individual situation. Information on this page is general in nature, and no responsibility is accepted either by the writer for the results of decisions taken after reading this information. Further, the accuracy o