Give your assets directly.
By Pamela Mundell, CFP, CLU, CHSÂ | Nov/Dec 2018
Give money to your favourite registered charity or church and reduce your income tax bill due on April 30, 2019. Now is the perfect time to consider which charity deserves your donation and make a charitable donation before December 31, 2018. Any donation made to a charity that is registered with Revenue Canada will issue a charitable donation tax receipt. This creates a non-refundable tax credit (not a deduction) to reduce taxes owing on April 30, 2019.
Consider giving a Current Asset
If you own stocks or mutual funds that have a significant capital gain, consider giving this asset directly to your registered charity. If you are reluctant to sell these securities because of the tax owing, perhaps giving this asset directly to your registered charity is a better option.
Consider Tom
Tom is retired and receives an employer pension plan and also collects Canada Pension Plan (CPP) and Old Age Security (OAS). Tom has $124,000 in four different stocks that he purchased almost 22 years ago for $25,000. Tom is no longer interesting in keeping these securities and wants to sell them and give the proceeds to his favourite charity. If he sells the stocks today, he will incur a capital gain of which 50 per cent is the taxable capital gain and this will create a significant tax liability. (For simplicity, I am ignoring commissions and fees that Tom may incur selling the securities). In addition to paying additional taxes, Tom will also have a portion of his OAS clawed back as a result of this capital gain inclusion. Or, Tom could give the securities directly to his charity. Tom will not incur a capital gain and his charity will receive the full value of his securities. Tom will receive a charitable donation tax receipt for 50 per cent of the market value of his securities at the time of his transfer.
Consider Giving Existing Life Insurance Policies
Jean is a 78-year-old retiree and she owns a life insurance policy that she feels she no longer needs. She has no children and is considering making her church, a registered charity, the beneficiary of the policy and wonders if this is a good option. She has a permanent whole life policy that she took out just before her 40th birthday to pay for her funeral expenses. Currently, the policy has a death benefit of $37,875 and she no longer pays premiums for this policy. This policy will continue to grow, the death benefit will continue to increase, and the life insurance company will pay the benefit when Jeans passes away. This is a permanent policy. There is a current cash surrender value of just over $14,000 and this amount will continue to grow.
Jean has a few options. The policy is owned by Jean and she is the life insured. She can continue to own the policy but change the beneficiary from her niece, Jessica, who is her executor and sole beneficiary of her estate, to her church which is a registered charity. At the time of her death, the proceeds of the life insurance policy would be paid directly to the church and the church would issue a charitable donation tax receipt for the full death benefit. Jean’s executor, Jessica, could use this charitable donation tax receipt to reduce the income tax which is owed on Jean’s final tax return. This offers significant value as Jean has other taxable assets which would create a tax liability to her estate. In particular, Jean has a sizeable Registered Retirement Income Fund (RRIF) of which the full market value will be included in income in the year of her death. In essence, offering the life insurance policy to her church has provided a legacy and has dramatically reduced the income tax payable by her estate, which preserves more for her niece, Jessica, who is both her executor and sole beneficiary.
Option Two
Jean could also transfer the ownership of this permanent policy to her church now, while she is living. She is the current owner and has the authority to change both the ownership and beneficiary to the registered charity and the church would be able to immediately issue a charitable donation tax receipt for the fair market value of the life insurance policy. The fair market value is based on several factors; the cash surrender value of the policy, policy loan value, face value, state of health and life expectancy of the life insured and any other features and benefits of the policy. full cash surrender value of the life insurance policy. The church would continue to hold ownership of this policy and when Jean does eventually pass, the full death benefit would be paid directly to the church. However, the church would not issue a charitable donation tax receipt for the life insurance proceeds at death. This strategy is effective if Jean is looking for a tax credit now, to reduce income tax owing. Jean is also giving up ownership and control of her life insurance policy if she chooses this option.
Discuss your Plans with a Trusted Professional
If you are looking for ways to support your favourite charity, discuss your options with a trusted professional before you make any changes to your financial position. Consider all of your options carefully to ensure you are making the best choice for yourself and your favourite charity.
Pam Mundell is a Certified Financial Planner (CFP) a Chartered Life Underwriter (CLU) and a Certified Health Insurance Specialist (CHS) and is the sole principal of Pam Mundell Financial Planning Services in Kingston, Ontario. Pam can be reached for questions or comments at pam@pamelamundell.ca.
