Multiple donation options exist for those interested in charitable giving namely donating money, securities or life insurance.
For life insurance policy donations, two options are available to donors, depending on the personal situation of the donor and their current and future tax considerations.
The FIRST OPTION creates an immediate opportunity for tax relief during the donor’s lifetime. By assigning irrevocable permanent ownership of a whole life policy to a charitable organization, such as BCS, which also becomes the irrevocable beneficiary of the policy, an immediate tax receipt can be issued for the Face Value (FV) or the Fair Market Value (FMV) of the policy. The FMV can be determined by the insurer or by an actuary. The FV is usually on the policy statement or can be obtained from the insurer. The tax receipt would be for the higher of the FV or the FMV. Additional tax receipts are also issued for any subsequent premium payments by the donor. At the death of the donor, the full death benefit is paid to the charitable organization with no additional tax benefits to the estate of the donor.
The SECOND OPTION defers the donor’s tax relief, benefiting his or her estate at death.
The donor names the charitable organization as beneficiary of the policy, but does not assign ownership. This option is flexible as the donor can change the beneficiary at any time. No tax receipts are issued for the FV or FMV of the policy. Likewise, no tax receipts are issued for any future premium payments made by the donor. At death, the donor’s estate will receive a tax receipt for the full death benefit of the policy to be used on the donor’s terminal tax return.
In both options, the donor can assign an existing policy or buy a new insurance policy. The advantage of assigning an existing policy is the tax receipt issued for the increased FMV or FV.
In some cases, the donor will assign ownership of the policy to the charitable organization, but will no longer pay future premiums. The charitable organization will be responsible for the future premiums. In this case the donor would receive a tax receipt for the FV or FMV, but not for any future premium payments. Usually, only charitable organizations that are financially able to continue paying future premiums will consider this type of arrangement.
Donating Cash or Securities?
Donating cash is straightforward: a tax receipt is issued for the amount of the donation.
Donating securities allows for enhanced capital gains treatment. Donated securities are deemed to have been disposed of (presumed sale) by the donor immediately before donation to trigger a capital gain (or loss) for the donor/investor. The Income Tax Act provides for a capital gain inclusion rate of 0% for gains on publicly traded stocks, bonds, mutual funds and other marketable securities donated IN KIND to a charitable organization. What this means is the amount of tax payable on any gain realized on these securities donated to the charitable organization is $0.
Example: A donor purchased 1,000 Bank of Nova Scotia shares in January 2012 at
$32 per share for a total cost of $32,000. On April 22nd, 2015, the donor donates the 1,000 Bank of Nova Scotia shares to BCS. The shares will be transferred IN KIND (in share form) from the donor’s investment account to BCS’ investment account on that date. The value of the donation will be 1,000 shares multiplied by the Bank of Nova Scotia’s closing price on April 22nd, 2015, which was $66.02 per share for a total donation value of $66,020 which is the deemed disposition value.
Since the capital gain inclusion rate is 0%, the donor gets a receipt for $66,020 even though his or her original cost was only $32,000. Whether BCS sells or keeps the shares has no bearing on the tax receipt issued to the donor.
The net cost to the donor of Securities vs Cash :
Securities donation: $32,000 1,000 shares at $32 per share.
Tax credits: $34,954 (Quebec) From a $66,020 donation receipt.
(Federal & Provincial) $26,473 (Ontario)
Cash donation: $32,000
Tax credits: $16,924 (Quebec)
(Federal & provincial) $12,811 (Ontario)
To determine the exact tax benefit of donating, consult the Canada Revenue Agency (CRA). You can select the heading Charities and giving and activate the Charitable donation tax calculator. This will allow you to determine the exact tax credits based on the amount donated and the province where you reside.
There is a considerable tax advantage for a securities donation as opposed to a cash on in the example above.
Donations to a charitable organization qualify for an individual tax credit or a corporate tax deduction in the tax year in which the donation was made. It is important to note that, the maximum amount of charitable donations that may be claimed for credit in any one year is 75% of net income and 100% in the year of death and the year immediately before death. Unused donations can be carried forward (but not backwards) for up to five years beyond the year of the donation and it’s subject to the 75% limit in each year claimed.
It’s therefore important to balance the tax credits received from a donation at death against the maximum amounts that may be claimed so that 100% of all available credits can be used.
Other sources: Canadian Association of Gift Planners (CAGP), Scotia Private Banking Group, Philanthropic Advisory Services.
Article by Peter Provencher, BCS’77, Advisor with Hollis Wealth, a division of Scotia Capital Inc. He is also a member of the Canadian Association of Gift Planners (CAGP).