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Planned Giving

Planned Giving Options

The Role of Planned Giving in Tax Planning

There is an old adage that says, “There are only two sure things in life, death, and taxes.” In fact, we pay taxes throughout our life, and for many, due to Canada Revenue guidelines regarding estate income tax, the largest amount of tax may be incurred by their estate after they’ve died. As such, donors, before or after their death, would rather make a donation to their favourite charity than pay the same amount in income tax. This gives them a greater degree of choice and control over where their money goes and how it will be spent. They also take great satisfaction in knowing that they can put a dollar to work in the church, at a cost to them (or their heirs) of about fifty-five cents. To many people, this seems like good stewardship of their accumulated resources.

Methods of Planned Giving

Planned charitable giving techniques can be as simple as donating an asset directly to a charity, or as complex as setting up a trust with the help of an attorney and professional financial advisor. You have a wide variety of choices when planning your donation - from gifts of real estate or tangible property to appreciated stocks or other securities.

Planned giving is about leaving a legacy for the future work of the organizations you support. Once an individual has made the choice to become a donor, they are then faced with options regarding the type of gift that might be given. Family, life style, income level, asset mix, marital status, age, and other factors all contribute to the selection of the best type of gift to use, which may include:

Bequests

A bequest is any gift made in the “Last Will and Testament” of an individual. Bequests are the most common type of planned gift, accounting for about 80% of all planned giving in Canada. Upon your death, your estate is entitled to a donation receipt for the full value of your bequest gift, which could mean a significant tax credit on your final tax return.

Jennifer Allen, a widow, leaves $50,000 to Lutheran Foundation Canada (LFC) and the balance of her estate to her family. Assuming that her combined federal and provincial marginal tax rate in the year of her death is 45%, her bequest to LFC yields a tax credit of $22,500 to the estate. If instead, she had left that same amount of money to her children, $22,500 would have gone to pay taxes, and her children would have been left with only $27,500 in cash. By choosing to make a bequest of $50,000, the effective difference to the children is $5,000 if you consider the difference between the $27,500 remaining for the children after the tax was paid, compared to the $22,500 tax credit that could be applied against other taxable assets.

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Gifts of Life Insurance

Fred Kind, 60, sells his home and donates $100,000 of the proceeds to his congregation’s District office for funding of Lutheran schools. Fred’s current taxable income is $100,000 per year which will decrease over the next 2 years. He has decided to claim $50,000 of the donation in the current tax year and carry forward the balance of the donation over the next 4 years.

He uses the $22,500 tax refund generated by this donation (assuming a 45% tax rate on a $50,000 donation) to purchase a fully paid up, permanent, life insurance policy worth $100,000, that names Lutheran Layman’s League Canada (LLL-C) as the beneficiary. As a result, the District receives a gift of $100,000 now, LLL-C gets $100,000 at his death from the proceeds of the Life Insurance policy, and he ultimately keeps an additional $22,500 spread out over the next 4 years that he otherwise would have paid in taxes.

Additionally, he’s left with two options, either his estate will receive a charitable tax receipt for the $100,000 life insurance policy paid to LLL-C, or if he chooses to transfer ownership of the policy to LLL-C,  he’ll also receive a charitable tax receipt for the $22,500 premium paid for the life insurance policy, generating a further $10,125 tax credit.  Under this later scenario, with LLL-C as the policy owner, there would be no receipt given at the time of the $100,000 payout.   

As you can see, there are several ways a person can use life insurance within their planned giving strategies, including:

  • using tax savings to purchase an insurance policy as above;
  • naming a charity as one of the beneficiaries of a policy;
  • making a charity the “beneficiary” and "owner" of a policy.

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Lifetime Gifts

Too often people think that planned giving is synonymous with deferred giving, that is, leaving a bequest in their Last Will and Testament. This is not true. A gift made during the donor's lifetime can be a planned gift as well. The principal advantage of a lifetime gift is being around to see what the gift accomplishes. Donors can experience great joy and satisfaction from watching their gift bear fruit. Another advantage is the tax benefits that come from charitable gifts, as some people prefer to realize these financial advantages during their lifetime rather than defer them to their estate.

A lifetime gift can be made with virtually any type of property that has monetary value. All too often the tax advantages caused by a bequest within a will are not fully utilized to the benefit of the estate, as the Donation Tax Credit for the bequeathed amount is far greater than the taxable income that may make up the remaining balance of the estate.

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Gifts in Kind

“Gifts in Kind” generally refers to various types of non-cash gifts that may include a variety of things, including public securities, stock options, land, jewellery, artwork, vehicles, etc. Each of these items may have a perceived value by the donor, although the Foundation, being accountable to Canada Revenue, must show evidence of valuation for the amount receipted to the donor. Selling stocks on the open market obviously proves the worth of a given stock, whereas it may be much more difficult to determine the “Fair Market Value” of someone’s diamond ring or a painting. In each of the two latter cases, a professional appraiser must provide a written statement of worth. For other items, such as a car or some other type of vehicle, checking the newspaper for a similar make and model would provide some measure of comparable worth on which to base a charitable receipt.

Charities are more likely to accept a “gift in kind” if it can be readily sold on the open market for cash, unless the donated item is useful within the charitie's work. A tractor given to Wagner Hills Farm would probably be very useful for that ministry, but not so useful for the Mission Boat Ministry. Charities sometimes must refuse certain gifts, as the cost and time used in attempting to sell the item may be as much of the item itself, or worse still, there is simply no market for the item donated. If you are uncertain about donating a particular item, speak with a Gift Coordinator, and upon investigation, they would be able to tell you whether the item should be donated, and perhaps for what amount you may receive a charitable receipt.

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Gift of Listed Securities

Pete Williams had heard from a fellow member of his church that Lutheran Church Canada accepted donations of publicly traded securities. As he owned a significant number of shares, with portfolios managed at two different brokerage firms, he decided to give a donation from each portfolio to Lutheran Church Canada, in support of mission work in Thailand. The shares from the first portfolio had made significant gains while the shares from the second portfolio had unfortunately suffered a loss in value. Before taking any action, Pete decided to speak with a Foundation Gift Coordinator, simply to clarify some issues regarding the gift. Fortunately, while in discussion with the Gift Coordinator it was learned that Pete had heard it was better to directly transfer the stock to Lutheran Foundation Canada, rather than sell the stock and donate the proceeds. The Gift Coordinator outlined to Pete that while this was the proper strategy for the stocks that increased in value, it was the wrong strategy for those stocks that had decreased in value. The Gift Coordinator reviewed the tax implications based on the combined factors of: 1) selling the shares and donating the proceeds as a “Cash Gift”, compared to transferring the shares directly as a “Gift of Shares”; and 2) whether there was a gain or loss in the share value.

Assuming a 45% combined federal and provincial tax rate, the Gift Coordinator used the following tables to illustrate the tax implications. It soon became apparent to Pete, that:

  • For assets showing a Capital Gain – he should donate the asset, by way of transfer, directly to the charity to avoid tax on the capital gain.
  • For assets showing a Capital Loss – he should sell the asset then donate the cash, allowing him to claim the capital loss on his tax return.
Calculation based on a $3000 Capital Gain
Cash Gift
Gift of Shares
Sell the shares and donate the cash
$8,000
Gift of shares instead
$8,000
Less your original cost
-$5,000
-$5,000
Capital Gain/Loss
$3,000
$3,000
Portion of Capital Gain/Loss that is taxable
50%
0%
Taxable amount of Capital Gain/Loss
$1,500
0
Assumed tax rate
45%
45%
Tax on reportable amount of capital gain
$675
0
 
Net cost of gift to you:
Original cost
$5,000
$5,000
plus Tax on Capital Gain
$675
0
minus Tax Credit (8,000 x 45%)
-$3,600
-$3,600
Net cost of your $8,000 gift
$2,075
$1,400

 

Under the above scenario, a “capital gain”, gifting the shares rather than the cash proceeds from selling the shares, saved Pete $675.

One final point regarding this type of gift, when a donor transfers stocks to the Foundation, our broker has been instructed to immediately sell the stocks, converting them to cash, so that the money may then be forwarded to the donor’s designated recipient. As a policy for this type of donation, the Foundation will not consider market conditions at the time the stocks are received, as that places the Foundation in an awkward position, if the stocks fell in value, when everyone anticipated an increase. With this policy set in place, the Foundation can issue a receipt to the donor for the “cash value” remaining after the transaction, and not be liable for negative stock price fluctuations.

 

Calculation based on a $2000 Capital Loss
Cash Gift
Gift of Shares
Sell the shares and donate the cash
$4,000
Gift of shares instead
$4,000
Less your original cost
-$6,000
-$6,000
Capital Gain/Loss
-$2,000
-$2,000
Portion of Capital Gain/Loss that is taxable
50%
0%
Taxable amount of Capital Gain/Loss
$1000
0
Assumed tax rate
45%
45%
Tax saved on capital loss
$450
0
 
Net cost of gift to you:
Share Value
$4,000
$4,000
minus Tax benefit on Capital Loss
-$450
0
minus Tax Credit (4,000 x 45%)
-$1,800
-$1,800
Net cost of your $4,000 gift
$1,750
$2,200

 

Under this second scenario, a “capital loss”, Pete fared better by selling the shares and donating the cash.

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Charitable Gift Annuity

A Charitable Gift Annuity is an arrangement under which a donor makes a lump-sum contribution to a charity, which then purchases an annuity using a portion of the gift, from which the donor receives a guaranteed payment for the remainder of their life. The charity uses the portion of the gift that remains after purchasing the annuity, and also keeps any funds that remain in the annuity once the donor dies. The size of the payments to the donor depends on the donor’s age and the amount of the initial contribution. Usually annuity payments are significantly higher than returns from other investments of equal value, and of course, annuity payments are guaranteed for life, regardless of the economy or future interest rates. If you are married, you may choose a joint-and-survivorship annuity which continues as long as either spouse remains living.

As a donor, your non-registered gift annuity brings a special bonus at tax time, as a sizeable portion of the income received will be tax-free, and for older annuitants, totally tax-free. Donors are immediately entitled to receive a charitable receipt for the portion of the lump-sum gift which remains following the purchase of the annuity.

Features of a Charitable Gift Annuity

  • guaranteed, excellent income for life
  • older donors prefer this type of charitable gift
  • irrevocable gift, as the capital no longer belongs to the donor
  • the income received by the donor from a non-registered annuity is largely/wholly tax exempt, based on the donor’s age
  • the cash used to purchase the annuity is no longer part of the estate, and therefore not subject to probate tax
  • the charity receives an immediate gift, as well as any funds that may remain at time of death - no waiting for the estate to be settled

Charitable gift annuities use numerous calculations to determine the annual annuity payment received by the donor, the value of the gift receipt that is issued by the charity, and the portion of the annuity payment received by the donor which is non-taxable. Rather than attempt to show these calculations, for reference purposes four typical scenarios have been developed, showing actual dollar values to be expected, as follows:

Suppose Anna, a widow aged 75 years, has a $20,000 savings bond maturing. She wants to re-invest the money and needs retirement income, but also wants to support Christian causes. She decides to place $20,000 in a Charitable Gift Annuity, with the remaining balance in the annuity upon her death to be given to her three favourite charities. Based on her age, she receives an annual income of $1,324 of which $1,145 is tax free. She also receives a one-time charitable tax receipt in the amount of $5,864.

William Bennet, age 90, contributes $15,000 in cash for a gift annuity to be purchased by Lutheran Foundation Canada. He receives an annuity of $1,500 (10 percent) per year for life, of which 100% is paid out tax-free. He is also entitled to a donation receipt for $5,457 in the year he makes the gift. Upon his death, Lutheran Hour Ministries and CLWR by prior agreement received a substantial portion of John’s original contribution.

Sharon and Ed Jacobs, ages 70 and 75, donate $50,000 as a gift for the Lutheran Foundation Canada, and receive $3,504 per year (7.0 percent) for as long as either of them lives. The tax-free portion is $2,825 per year and a donation receipt is immediately given for $10,000. Upon their death, by prior agreement the Foundation forwarded the funds remaining in the annuity to the organizations as requested by Sharon and Ed.

Mary Rogers, age 84, contributes $10,000 for a gift to the Seminary, and receives a lifetime annuity of $821.40 per year (8.214%), 100% of which is paid out tax free. She is also entitled to a donation receipt of $4,370. The Seminary will use Mary’s gift, upon her passing, for funding their annual grants for future pastors in training.

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Gift of RRSP or RRIF

You may be like many other Canadians and contribute to a Registered Retirement Savings Plan (RRSP), or due to your age, you may have even converted your RRSP’s to a Registered Retirement Income Fund (RRIF). The income tax break that you get when you invest in a registered savings plan, plus the growth without tax consequences, is an attractive feature.

However, did you know that these tax savings were only deferrals? At some point in the future, every dollar contributed or earned in a registered plan, be it an RRSP or an RRIF, will be taxed, even if it becomes part of your estate.

When one reaches the age of 71, your RRSP’s must be converted to an RRIF, an Annuity, or taken in cash. If converted to an annuity or RRIF, the income received will be added to other income you may be receiving, and taxed at your marginal tax rate. Usually, this tax rate is lower than the rate experienced while you were working full time.

When the first spouse dies, the full remaining value of an RRSP or RRIF can be transferred to the surviving spouse without any tax consequences. However; when the last spouse dies, the tax must be paid. On the death of the last spouse, the total value of the registered account is added to all other income in your year of death, which for many individuals, gives them a total income in the year of death higher than any year during their lifetime, and therefore the largest tax bill ever paid throughout their life. Consequently, this high income places them in the highest marginal tax rate, averaging 45% in Canada, which means that an amount equal to 45% of this registered asset must ultimately be paid to Canada Revenue.

One final note of caution, that may come as a surprise to many people, specifically when children are listed as the direct beneficiaries to an RRSP or RRIF. Upon your death, the full value of the RRSP or RRIF is cashed out, and paid directly to your named beneficiaries, but your estate is still liable for the tax owed on this asset to Revenue Canada. Your executor may be faced with having to sell other assets in order to generate enough cash in order to cover this potentially large tax bill. Based on how the estate was divided, it could be that the beneficiary left with the balance of the estate, in effect will have their portion reduced by the amount of tax paid due to the RRSP/RRIF. On the other hand, if the named beneficiary was “your estate”, the tax payment would simply be taken from the cash generated by redeeming the RRSP or RRIF, with the balance used for bequests to named beneficiaries. Of course, probate tax must then be paid on those funds, as they have become an investment asset owned by the estate.

In pondering all of the above, many people consider leaving all or a portion of their registered funds to their favourite charities, due to the significant tax reduction advantages this provides. If this is a tax reduction strategy that you’re considering, the best option is to name the charitable organization as a direct beneficiary, preferably giving their CRA Registration number. Under this option, your estate will receive a charitable tax receipt for the full amount given, which fully offsets the tax charged to your estate due to this asset.

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If you require additional information about any of the above information, contact your Gift Coordinator today, and they will be pleased to answer any remaining questions. Together, we can make an eternal difference in the lives that follow.

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