The growth in Charitable giving in Canada

Reasons
· Cutbacks in government funding to charities
· An opportunity to increase donations while living
· An opportunity to create a legacy
· Ease the tax burden

Why is it so popular?
· Government cutbacks to charities
· Charities becoming more aggressive
· Tax benefits substantially increased
· 1995 - 20% of net income
· 1996 - 50% of net income
· Today - 75% of net income
· Unused credits can be carried forward five years
· Donation in year of death
· Deceased's estate may claim up to 100 per cent of net income in year of death
· 100 per cent donation may be claimed back one year from death

Statistics
For the 1993 tax year, 5.5 million Canadians claimed $3.37 BILLION as charitable donations on individual tax returns.
Source: Canada Customs and Revenue Agency

What is charitable giving?
· a voluntary transfer of property without consideration
· must be irrevocable (subject to new rules for life insurance, RRSPs, RRIFs)


Ways to donate
The majority of contributions are regular gifts.

Advantages
· Immediate use by charity
· Full control by donor
· Annual tax receipt issued for amount paid

Disadvantages
· May miss the objective, ends at death
Types of gifts
· Cash
· Non-depreciable capital property
· private corporation shares
· listed shares and debt
· land
· Depreciable capital property
· equipment
· automobiles
· Residual interests
· Life insurance

Gifting at death through a will

Advantages
· Assets remain available while alive
· Little or no cost to add to a will

Disadvantages
· No tax relief while donor is alive
· Without care, can be contested by heirs
· There may not be enough in the estate to make a meaningful gift
· Probate fees
· Creditors

Annuities

Charitable remainder trust
A trust is created, which the donor funds with an interest-only annuity.
· Donor receives discounted tax receipt for the donation
· Donor receives interest income
· Charity receives any capital after donor's death

Determination of receipt
For instance, a 68 year old male non-smoker transfers $500,000 to a charitable remainder trust and names himself as sole income beneficiary. Life expectancy is 14.9 years

Discount rate Donation receipt
5% $242,157
6% $210,341
7% $182,948
9% $138,935

Advantages
· Immediate tax receipt which can be spread over five years if desired
· Interest income to donor

Disadvantages
· Cost of setting up and running a trust
· Loss of use of capital
· Donor can't change the charity after setup

Prescribed annuities
The client buys a prescribed annuity and then donates the annual income over and above what he would have received if he had deposited the same capital into a GIC.

Advantages
· Client gets GIC income
· Charity gets prescribed annuity extra
· Donor receives tax receipt for amount donated
· Donor can change beneficiary and can control for life

Disadvantages
· The annuity is irreversible
· There is no capital remaining at the end of the annuity's term

Just donate the interest
Donate interest earned from GIC and receive tax credit.

Advantages
· Donor always has access to capital
· Tax receipt for all interest paid
· At lower tax rates, tax credit may exceed tax payable!

Disadvantages
· No disadvantages to donor since donor decides every year whether to give or not

The charitable annuity
· Charity "funded"
· Capital gifted to charity, with payments to donor
· Income received could be non-taxable
· Does not affect claw backs
· Difference between gift and deemed total payments is amount of donation

The charitable annuity-insured
· Charity "funded"
· Capital gifted to charity, with payments to donor
· Income received could be non-taxable
· Does not affect claw backs
· Difference between gift and deemed total payments is amount of donation
· Place life insurance on donor to replace investment for beneficiaries
The charitable insured annuity
· Purchase prescribed annuity
· Received tax credit from annuity payment, which can be used to pay insurance premiums
· Security of capital and payments
· Paid by direct deposits - monthly, semi-annual, annual
· Higher pre-tax interest than other fixed income instruments
· Estate capital paid directly to charity, avoiding estate costs

Life insurance

Advantages
· Immediate tax receipt for donating CSV (if applicable)
· Tax receipt issued for:
· Current premiums, repay policy loan
· Allows estate to continue to the heirs
· No trust expenses
· Large gift - small cost (is economical)
· Bypasses estate
· Confidential

·
· Proof of insurability
· Cannot undo an absolute assignment

·
· Assign an existing policy
· Often a good use for those old policies that are no longer needed.
· Purchase a new policy
· Have it issued in the donor's name, then transfer the policy to the charity

Other considerations
Charities don't pay income tax and so tax-exempt status is not an issue. This means that over-funding the insurance policy may be a good solution for some donors.

The 10-year rule
· Disbursement quotas
Govern how much of last year's receipted donations a charity must spend this year
Other considerations Public organizations = 80%
Other considerations Private foundations = 100%
· Without proper planning, annual premiums will get caught in the disbursement quotas.
· Under the direction of the donor, the charity should not disperse the donated premium for 10 years after payment of last premium.
· IMPORTANT: ensure that the charity knows
(Ref. CCRA Interpretation Bulletin IT-244R3)

Disbursements
· Excludes:
· gifts from estate
· Gifts subject to a 10 year letter
· Donated property accumulated upon written approval of the Minister of Finance
· funds are placed into an endowment

Income inclusion rate
Donations of securities on prescribed stock exchanges would be subject to income inclusion rates of one half the normal rate

2000 Federal Budget
Charities may now be named beneficiary under a life insurance policy, and entitle the donor to a donation receipt (effective Jan. 01, 1999).
· avoids probate taxes and creditor claims of the estate
· no annual receipt for premiums
Group insurance may now be donated, and receive donation receipt for the amount of the death benefit
RSP and RIF may name a charity as beneficiary
· donor will receive donation for amount paid out on death
· probate taxes can be avoided and risk of creditor claims minimized
· FULL amount is tax deductable to the estate
Capital gains inclusion rate ~ 25% (2002)
· Listed securities
· Ecological gifts (public foundations)
· Employee stock option shares (listed)

Benefits of insurance programs
· Provide flexibility and control
· Allows for significant gifts without major impact on estate values
· Can be used to meet charities' goals while enhancing client's retirement and estate plans
· Suitable for broad range of clients

A "win-win" situation (Benefits)

Charity
A source of very large capital contributions to:
· Undertake major projects
· Satisfy long-term projects
· Help to conserve current funds

Donor
· Enables ultimate gift to be much larger than otherwise possible
· Provides major tax incentives
· Satisfies the desire to give, without unduly eroding estate capital which would reduce bequests to other beneficiaries

This material is for information purposes only and should not be construed as legal or tax advice. Every effort has been made to ensure its accuracy, but errors and omissions are possible. Individual circumstances may vary and specific legal and tax advice is recommended.

This strategy is based on current tax legislation. Future tax changes and market conditions may affect this program.

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