Create a Legacy
by Pam Mundell, CFP, CLU, CHS
Many Canadians are choosing to leave a legacy by making a charitable donation during their lifetime or through their will. This act of generosity provides a charity with funds to support and help the mission and provides a tax break for the donor making the donation.
Charitable tax credit – the basics
Donations to a registered charity qualify for the charitable tax credit which can reduce the amount of federal and provincial income tax you are required to pay for the year.This is a non-refundable tax credit which means this will reduce income tax owed, but will not create a tax refund in circumstances where the taxpayer does not owe any income tax for the year. However, you can carry forward any unused charitable donation tax credits for up to five years.The maximum contributions eligible for the donation tax credit generally cannot equal more than 75 per cent of your net income in any year except in the year of death and the year before death in which the limit increases to 100 per cent of your net income. Charitable donation receipts cannot be carried back to be used on the tax return of a prior year, except in the year of death when unused receipts can be carried back to the year prior to death.
Why should I do this? I don’t think I have enough assets.
Many Canadians will owe income tax to Revenue Canada on their death or on the death of the last surviving spouse in a marriage or common law relationship. The transfer of assets, however small, from the last surviving spouse or individual to the next generation, children or grandchildren, may create a tax liability to the estate. With a little planning instead of leaving money to Revenue Canada, you could leave money to a favourite charity and actually protect the remaining assets from income tax that eventually is left as an inheritance to your children or grandchildren.
Planned giving strategies
Charitable donations will result in a federal tax credit of 15 per cent of the amount under $200 and 29 per cent on any donations of $200 or more plus the provincial tax credit.
• If you and your spouse have both made charitable donations during the year, consider having one spouse claim all the donations on one tax return. If each spouse claimed separately, the $200 threshold would have to be reached for each spouse on each tax return.
• Consider carrying forward charitable donation receipts in years where you may have donated smaller amounts. Receipts can be carried forward to up to five years in order to take advantage of the higher credit once $200 is reached.
Make the donation in your Will
A charitable donation given in a Will is a strategy used to ensure the gift qualifies for the charitable tax credit and is issued in the year of death in the deceased’s name. The taxable income of a deceased person can be much higher due to the inclusion of
RRSPs and RRIFs and also the deemed disposition of capital property such as rental properties,cottages and stock portfolios,to name a few. If you plan to leave a gift in your Will please ensure you have the full legal name of the organization and also ensure this organization is a registered charity, and not just a non-profit organization.There are many non-profit organizations that do not have a charitable registration and therefore are not authorized to issue tax receipts.
Use life insurance for planned giving
Life insurance is a popular and effective way to fund a charitable gift and also arrives at the time that a taxpayer needs the tax credit. • Designating a charity as a beneficiary.You can purchase a new life insurance policy or alternatively change the beneficiary on an existing life insurance policy and designate the registered charity as the beneficiary of the death benefit.The donor (tax payer) would continue to own the policy and the policy would be on the life of the donor and the donor would also continue to pay the premiums for the life insurance policy.At the time of death, the full face amount of the life policy (death benefit) would be paid directly to the registered charity and the charity would then issue a tax receipt for the full amount of the donation.This substantial tax receipt could help offset the income tax payable by the estate and ensure the remaining assets are distributed to the beneficiaries with less income tax paid.
• You could also transfer the ownership of a life insurance policy to the registered charity who would also be the named beneficiary and the yearly premiums paid for the life insurance policy would qualify for the donation tax credit.This is more beneficial when a donor is looking at ways to reduce the current annual tax bill.The donor would make the annual or monthly payments to keep the policy in force and each year the registered charity would issue a charitable donation tax receipt for the premiums paid. However, at death the proceeds for the life insurance policy would not qualify for the donation tax credit.
If you have a favourite church or charity that you would like to support in your lifetime or through your will please take the time to discuss your wishes with a qualified professional. Careful consideration of your current assets with a tax professional or financial advisor can help you effectively plan the most advantageous structure for your unique set of circumstances. ■
Pam Mundell is a licensed independent investment fund and financial planner and can be reached for comment or questions at firstname.lastname@example.org. Pam is the principal of Pam Mundell Financial Planning Services in Kingston.
NOTE TO READERS: THE VIEWS OF THE AUTHOR DO NOT NECESSARILY REFLECT THOSE OF COYLE PUBLISHING. THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE, OR A SOLICITATION TO BUY SERVICES. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.