Save taxes by timing donations strategically
When it comes to charitable giving, when you donate can make a big difference to the amount of tax you save. A “deferred gift” allows you to plan ahead to give in the future, at the right time to maximize the tax-effectiveness of your donation.
Deferred gifts tend to be larger than “current gifts” (given and received now). They may include specific property (such as cash or publicly listed securities) or a collection of properties (such as the residue of an estate). Their objective is generally to realize philanthropic objectives and take advantage of available opportunities to save taxes.
A deferred gift is most often structured as a bequest in a will, a beneficiary designation on a registered plan, a gift of life insurance, or a donation administered through a donor-advised fund.
Bequest in a will
To establish a bequest in a will, also known as a “testamentary gift,” all you have to do is include a clause in your will that names a charity as the beneficiary of certain assets. Assuming the charity is a registered Canadian charity, the resulting tax credit can be applied against up to 100% of income in the year of death and in the preceding year. Since 2016, a donation made at death via a bequest by will is deemed to have been made by the estate. For Graduated Rate Estates (GREs), a gift made within 60 months of the date of death may be claimed in any year of the GRE, or former GRE, against up to 75% of net income.
Without appropriate planning, registered plans such as Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) can result in a hefty tax bill on death since registered assets are fully taxable as income on an individual’s final tax return. Naming a charity as the beneficiary of your RRSP or RRIF means that the money inside those plans will flow directly to charity and generate a tax receipt to the estate. The tax credit from the donation can, fully or in part, eliminate taxes due on those registered plan assets. On top of that, the funds won’t pass through your estate and be subject to probate fees (where applicable).
Gift of life insurance
Many people use life insurance to protect family members’ standard of living or to pay taxes due on death – but it can also be used to make a significant donation to charity if you find yourself with a policy that is no longer needed. By transferring ownership of an existing policy to the charity, your gift results in a donation tax receipt for the fair market value of the policy minus any outstanding policy loan. A donation tax receipt will also be issued for any premium payments you continue to pay. Another consideration is to gift a new policy to a charity. This is a great solution if you want to make a large gift to charity but do not feel comfortable or have the means to make the gift during your lifetime. If you prefer to retain ownership of the life insurance policy, naming the charity as beneficiary of the policy will also provide for a large gift to your favourite charity at death and means your estate will receive the tax benefit for the full amount of the insurance proceeds donated.
In the past, philanthropists who wanted to establish an ongoing giving program and invest any still-to-be-allocated assets had to create a private foundation. Today, donor-advised funds (DAFs) such as a Charitable Giving Fund with the Raymond James Canada Foundation is a much simpler solution that can facilitate any of the other three deferred gift strategies. After an initial donation of $100,000 or more to establish your DAF (this can be either a donation made now or a deferred gift), you receive an immediate tax receipt for the full gift amount – but you don’t have to choose the charities to grant the funds to right away. Instead, you can keep the donated money invested and over time determine which charities will receive grants. If the DAF is established with a deferred gift, you can choose a Successor Advisor(s) or leave a Letter of Wishes, to direct grants from your fund. A DAF is a great way to establish a charitable legacy and facilitate tax-effective donation strategies while working with your financial advisor to grow your charitable fund.
Can you take advantage of better-timed donations to save taxes? Speak with your Raymond James Ltd. Financial/Investment Advisor and your tax professional about which strategies are right for you.