Special Gifts to your Church
By Tony Copple.
November 1999

You may be considering making a bequest to your church. If so, this policy document 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 future congregation. The document is also designed to help church stewards plan for receiving special gifts in an efficient way. It is reasonable to expect that some members of the congregation, particularly those who have been attending for some years, may like to offer a financial gift to help sustain the church and congregation in their worship of God.

Please don't rely on this page for accurate legal or accounting advice. As you see it was written in 1999 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 "special gifts." The term "planned giving" is synonymous. 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 four areas:
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 would also like to thank Rev John Perigoe, Programme Officer with Mission through Financial Programmes, at The United Church of Canada, for expert technical assistance in the area of taxation. GCUC council members Barbara Reynolds and Hal Adams kindly gave their time and experience in the design of the unified giving schema, and as reviewers of the document. Finally, he acknowledges the expertise of Bob Allebone, B.Math., CFP, R.F.P., who suggested many valuable improvements.

Gifting experience in the United Church of Canada

Many people who find it difficult to make large charitable donations during their lifetimes take great pleasure in recognizing charities, including their church, in an estate plan. It has long been a tradition for members to make their church a beneficiary of a portion of their estates.

Although these stats come from the United Church, other denominations may find them helpful as a guide.

What could the church spend your money on?

The arrival of a special gift, which may be both substantial and unexpected, can be of great significance to a church's future if it has a clearly defined plan for growth and development.

Bequests may be "designated" to be directed towards the particular wishes of the donor, or may be undesignated or "unified."

The possible designations for giving should be as broad as possible, so as not to lock money into narrow uses that might become obsolete and less attractive to potential benefactors over the relatively long timeframes that can apply.

Larger bequests may be in the form of an endowment where the principle is invested and the interest is used for the purposes envisaged. Endowments may be relevant for larger gifts. Where a donor has not so specified, the church council or governing body may have the power to set up one or more endowments from the gift. As a rough guide to when gifts are considered "large," include those which, if resourced from regular funds, would be beyond the scope of the yearly operating budget.

Under circumstances where the church has no appropriate immediate need for the full amount of a bequest, the unused residue would be invested so that its value will be greater at a future time. When that time is likely to be will determine the nature of investment vehicle that should be used.

A suggested process for receiving a bequest

  1. News of a bequest to the church from a donor or from the executor of an estate should be communicated to a member of the Special Gifts Committee if there is one, or chair of the church council.
  2. Requests for annonymity will be respected at all stages of the process.
  3. Council will meet in a timely fashion on the matter.
  4. If the gift is undesignated, then the unified model will be used; see below.

      Unified Giving
      Here is a possible model for unified giving:
        A 10 / 10 / 40 / 40 split
        10% to pay down the church mortgage
        10% to Mission & Service Fund or equivalent;
        40% to capital;
        40% to programming.

      "Capital" implies building work, large or small, new roof, new church doors. ie. tangibles.

      "Programming" means anything that does not leave something tangible for the future. That does not make programming any less valuable! Programming would include sending people on a retreat; professional development, staffing.

      The church council will maintain an ongoing list of priorities in the capital and programming areas, and use unified gifts towards the top priorities in each.

  5. If the gift is designated, then the designated model will be used; see below.

      Designated Giving
      We would not wish to restrict anyone wishing to be generous to the church. If they have a vision for a particular aspect of worship life that they feel is limited by resources, they have every right to ask that their gift goes towards it. So long as their wishes do not contravene the laws of Canada, the policies of the denomination, the mission statement of the particular church, and are not contrary to the Christian faith, the gift will be acepted and the church council at the time will implement those wishes.

      An individual would also have the option to ask that the model for unified giving be modified and used in their particular case. Or they might wish to specify that none, or all, of the money in a particular sector be used to set up an endowment, or not. These options generate hybrids with considerable attraction both to giver and to the church. More common however would be a gift to be used to purchase a specific item or service. Worthy categories for directing money might include items such as those on the "Designated Giving List" below.

  6. Council will decide whether to accept the gift. If the gift is not acceptable (for any of the reasons given above), the church will write to the donor or executor and explain our position, in the hope that there may be some flexibility.
  7. The money will initially be invested in a memorial fund or similar fund to be set up for the specific purpose.
  8. Council will authorize the relavent committee chair(s) to manage the expenditure.
  9. A suitable expression of our gratitude will be communicated to the donor or their executor.
  10. An independent auditing process will be set up to confirm that the full amount of the money is used or invested.

Designated giving list
This list for possible designated giving is not prioritized or exhaustive, and offered merely to stimulate ideas for generosity.

   Capital needs of the church

   Programming needs of the church

  •    The worship programme, including music
          Guest ministers fees
          Sheet music
          Music licensing (CCLI)
  •    Staffing
          Church secretariat (full-time or additional)
          Assistant minister - full or part time
          Youth minister
          Christian counsellor
  •    The education programme
          Resources for the sunday school
          Learning materials
          Adult Christian education course materials and expenses (eg Alpha Course)
  •    The pastoral care programme
          Visitation
          Counselling
          Resources and materials (eg Care Notes)
  •    The outreach and mission programmes
          Congregational outreach
             - in the local community
             - in the region
          Ecumenical community outreach
              - eg support for Billy Graham activity
          Refugee sponsorship
  •    Communication, internal and external
          Newspapers and broadcast media
          Newsletter and bulletins
          Web site upkeep
          Advertizing, editorial content in local press

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.

Church 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 80% of special gifts are made in 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 to the church.

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 church 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 church does not pay tax on the growth. Note: with a gift of publicly listed securities (see below), the church 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.

What types of investments should the church consider?
Once a bequest is made, it may be used within a short period of time for specific needs. If immediate needs have been satisfied, and the church finds itself with money to invest, the questions of risk, volatility and safety become the subjects of much discussion by the committee entrusted with investing the churchs money.

To answer these questions here would be to trivialize an important area of this discussion. The best advice is to seek the services of a financial planner. This is their stock-in-trade and the committee would do well to be guided by a professional. They then avoid the classic problem of failing to beat inflation because they are terrified of seeing principal fall temporarily. Distinguish between money invested for less than five years, and more, and these should be invested in short and long term vehicles respectively. Long term vehicles may not provide interest. They may pay dividends, but most of their return is in growth of principal. The church is not taxed on the interest from, or growth of investments.

Ways to make gifts to the church

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 the church.

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 the Church. It is in the Church's interest to encourage the use of wills.

2. Church Annuities
Gift annuities are the most popular way of sheltering your income in your retirement from tax while providing the church with a future gift. The United Church pioneered the concert of charitable annuities, and most other denominations now offer similar plans. To create an annuity, you must be 60 years of age or older. You may create an annuity with your spouse or sibling which will continue to pay the survivor an annual income.

Here's how it works. A benefactor purchases an annuity from the church. The yield to the annuitant is based on current interest rates and is usually provided semi-annually. Anywhere from 55% to 100% of this income is tax-free, depending on your age. Upon the death of the annuitant, the residue of the annuity is delivered to the area of church work designated by the annuitant.

Depending on your age, the income you receive on gift annuities is competitive with bank rates and government savings bonds. Part of the original principal may be eligible for an up-front tax receipt. A charitable receipt can only be issued for an amount equal to the amount of the donation minus the sum of the annuity payments which are expected to be received during annuitant's life expectancy. That is, if the annuitant is expected to receive in total over the years less money than he donated, the difference is a gift which is receiptable by the charity.

Note: This method places the church in the role of the annuity payor. Certainly church denominations are an exception; but for many other charities it is possible the annuitant donor may outlive the charity. If the charity ceases to exist, the annuity payments would stop. From the donor's perspective it is a much more secure arrangement if the charity is compelled to use whatever portion of the donation is necessary to purchase an annuity from a life insurance company which pays the periodic income which the charity and the donor agree on. The charity then absolutely assigns the payments to the donor. The balance of the donation not required to purchase the annuity from the life insurance company is then immediately accessible by the charity for its work.

3. Gifts of Life Assurance
A gift of life insurance allows a benefactor to arrange a future gift for the church 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 church.

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 church 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 church. The church 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.

4. Charitable Remainder Trusts and Gifts of Residual Interest
If you have cash or an asset that you have considered leaving to the church 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 church. The church 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 church 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 church 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 church 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.

5. Major cash gifts and Interest-Free Loans
The special gift which offers the most immediate benefit to the donor and to the church 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 church will provide needed income from that principal directed to church needs. The income from the principal is not taxable either to the church 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.

6. 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.

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:

  1. Give one to the church which you already own;
  2. Give the church 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 Church, or for the amount of money that you give to the church 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 church plan. In fact the church can encourage the gift of strip bonds with staggered maturity dates to meet expected needs over several years.

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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.

If you are planning to make a bequest to the Church, thank you most sincerely on behalf of your congregation, present and future. Your bequest will be treated with the utmost care for the benefit of the congregation, following to the letter any specific designations made by you.

Your church has many needs, immediate, intermediate and long term. These needs can be met through prayer-lead stewardship of your bequest.

APPENDIX

The following resources were very helpful in the preparation of this paper:

"Special Gifts Program" by the Department of Stewardship Services, United Church of Canada

"Will Workbook" - an estate planning guide, by the Department of Stewardship Services, United Church of Canada

For information on taxation and the church, visit the tax page on the United Church of Canada Web Site:
      www.uccan.org/taxes04.htm

Other publications that can be obtained from the Ontario Ministry of the Attorney General are Powers of Attorney for Property, and Powers of Attorney for Health (living will).

Teach and you shall receive by Robert T. Kiyosaki
Version for United Churches
Version for Charities
Planned Giving - UCCAN Site
CNCF - Canadian National Christian Foundation

Tony Copple wrote this when he was Chair of Stewardship at Glen Cairn United Church,
Kanata, Ontario.
September 1999

Disclaimer. This page is not authored by or sanctioned by the United Church of Canada. 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, and taking current legislation into account. Information on this pag