(December 2005) The holiday season is a time when many of your clients will be wondering how they can give back to their communities and will look to you for advice on how they can contribute to the causes closest to their hearts without breaking a sweat. bank.
In the first two parts of this series, we considered different approaches to charitable giving based on a range of client profiles, from Bay Street baron to art lover, finding creative ways to help each client achieve their charitable goals in a way that is meaningful to them. The second part of this series outlined several approaches that can be used with clients to structure their life insurance products to benefit their favorite charities.
In the third and final part of the charitable giving series, we’ll look at several advanced charitable giving strategies, including charitable giving trusts, charitable annuities, and registered giving accounts.
Charitable funds
An individual may make an irrevocable gift to, e.g Inter vivos A trust under which a charitable organization is the beneficiary. This arrangement is commonly referred to as a charitable remainder trust. The income earned from an investment in the trust is paid to the donor over his or her lifetime. On the death of the grantor, the trust terminates and the assets are distributed to the designated charity. (While the donor is alive, the charity has no access to the trust assets.)
The donor will receive a tax receipt from the charity after making a gift to the trust, but the amounts shown on the receipt will be less than the amount of the gift. This is because the grantor retained the right to receive the trust’s income. The amount shown on the receipt will be equal to the “remaining interest” on the gift, that is, the present value of the amount the charity will ultimately receive from the trust.
Annuities from charitable donations
A lifetime charitable gift allows the donor to make a gift to a charity while receiving a guaranteed lifetime income on the amounts donated. For a charity to benefit, the amount a donor is willing to give to the charity must exceed the premium amount required by the insurance company to provide the donor with the desired level of lifetime payment. The charity will issue a gift receipt to the donor equal to the difference between the amount of the gift and the contribution required to provide the desired level of annuity payments.
The “income” portion of the annuity payments will be taxable income to the donor, but the “capital” portion of the payment will be tax-free.
Gifting registered accounts
If the owner of an RRSP or RRIF dies and there is no surviving spouse, the value of the RRSP/RRIF is taxable to the decedent in the year of death. It is possible to significantly reduce or eliminate this tax liability by naming a charity as the beneficiary of RRSP/RRIF assets. This can be done directly or through the donor’s will. The charity will issue a gift receipt to the estate on behalf of the deceased for an amount equal to the value of the RRSP/RRIF estate at the time of death.
As discussed in the first article in this series, More than cash… Considering alternative ways to give to charityIndividuals may also consider donating publicly traded securities or works of art:
Gifts of publicly traded securities
A potential donor may want to make a gift to a charity, but to make a cash donation they will need to sell some unregistered investments. In this case, any capital gains on the investment will be triggered and 50% of such gains will constitute the donor’s taxable income.
However, if the investments are publicly traded securities (stocks, bonds, mutual funds, or segregated funds) and the investments are given “in-kind” to a charity, only 25% of the capital gains constitute taxable income for the donor. So, although the donor receives the same amount of tax relief when making a gift in kind, the tax liability applicable to capital gains is half that of making a cash gift.
Donations of works of art
A person who has an art collection of paintings, drawings, sculptures and other works of art may donate such items to a charity and will receive a donation receipt showing the estimated value of the item. Depending on the estimated value of the artwork and how much the donor paid for it, there may be a taxable capital gain. It is important that the donor or charity obtains an independent appraisal of the value of the artwork from an expert in the field who is a member of the Canadian Association of Professional Art Dealers to reduce the risk of the validity of the gift receipt being questioned by the Canada Revenue Agency.
Dave Ablett is Advanced Financial Planning Support Manager at Investors Group and is an expert in charitable giving, tax and retirement planning.
(16/12/05)
