Donate life insurance, save tax

Fewer Canadians are donating to charity. Statistics Canada reports donations fell nearly 2% to $8.3 billion in 2012. What’s worse, the number of people giving slipped 1.4% to 5.6 million.

Advisors can help reverse this trend by telling clients their charitable aspirations can be tax-efficient. And, thanks to Budget 2014, it’s become easier for people to donate via their wills.

Before February 11, 2014, CRA would deem a donation from a person’s estate to have been made immediately before he died, and the tax credit could only be applied against the estate’s income in that calendar year, or in the preceding year.

Budget 2014 proposes that for deaths occurring in 2016 and later, CRA will deem charitable donations (including cash, life insurance, and the proceeds of RRSPs, RRIFs and TFSAs) as made by the estate when they’re transferred to charities, rather than automatically before death.

The estate’s trustee will also be able to allocate the donation to the taxation year in which it is made, an earlier taxation year of the estate or the last two taxation years the deceased was alive—before, you could only carry donations backwards. The only catch is the entire donation must be declared within 36 months of the taxpayer’s death.

These changes help both philanthropists and charities. They simplify the legal requirements for allocating the benefits of a charitable donation on death and provide greater flexibility. They also ensure tax benefits of large gifts on death are not wasted, including those arising as a result of life insurance proceeds. For instance, if someone dies early in the year and has little reportable income as a result, the donation credits could exceed her tax liability.

For the year of death, or the preceding year, donations can be 100% of income, rather than the usual 75%.

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Donating life insurance

A couple aged 60 can leave a $100,000 charitable gift on the death of the last survivor by paying a $150 monthly premium for whole or universal life policies. These types of policies usually work best, because premiums are based on a joint equivalent age and are therefore lower than for single-life policies.

Also, since more capital gains and income tax on RRSPs and RRIFs usually arise on the second death, the charitable donation is more useful when applied against the income of the last survivor.

There are two ways to set up the charitable gift.

1. Reap tax benefits while alive: if the beneficiary and owner of the policy is the charity, then the donor will receive a tax receipt for the annual donation in the same amount as the premiums paid.
2. Reduce tax on the estate: if the beneficiary is the donor’s estate, the donor will receive a charitable tax credit for the death benefit when the donor dies.

The client can include a clause that stipulates if the charity is no longer around when he dies, another one with a similar mandate can replace the original as beneficiary. The client can also name a backup charity.

Wealthy Canadians will donate

Clients with more than $1 million in investable assets plan to leave 3% of their money to charity, says a BMO study. The rest will be divided as follows: 60% to a spouse or partner; about one-third to children; 4% to other family members; and 3% to a board or company. Most of those polled (80%) say their children are ready to manage inherited wealth. That’s largely because more than half (65%) have spent time educating their children about money management. Still, only 26% say their children will be more financially successful than they’ve been.