Many of us have charities we support during our life and want to continue on after we die. The tax rules support this type of philanthropy, but we have to be sure we follow all the rules.

Normally individuals can only claim charitable gifts up to a certain limit each year. For tax years after 1996, the limit is 75% of net income, with two general exceptions.
• In the year of death, and previous year to the year of death, a taxpayer is able to donate up to 100% of their net income.
• When donating non-registered publicly traded securities the standard 75% donation rate is bumped up by 25% of the taxable gain resulting from the gift. This added mechanism helps ensure that a gift of these securities would not result in a tax burden for the donator.

Life insurance is another way to provide a sizeable gift. There are two main ways to do it: we can give a policy now, or we can make a testamentary gift (after death) of the face value at the point of death.

To give an existing life insurance policy to a church or charity while we’re still alive, the policy needs to be ‘absolutely’ assigned to them, making them the irrevocable owner and beneficiary. When you do this, you are given a tax receipt for the cash value of the policy, and you get an annual receipt for the donation of all premiums that you pay thereafter. Beware, though: if the proceeds of disposition (value when transferred) are higher than the adjusted cost base on the policy, the giftor has to declare this amount as income in the year of the disposition. In effect any dividends that had accumulated in a whole life policy at the time of entitlement are considered proceeds from disposition. This is not treated as a capital gain or dividend where we would enjoy tax benefits; instead, it would be 100% taxable.

You may wish to designate a charity as the beneficiary of your RSP or RRIF. Upon the death of the benefactor the tax rules consider that the value of the investment at that time had been liquidated of their Fair Market value (FMC) at that point in time. Let’s say that the value of the investment at death was $50,000. This amount would then be added to the terminal tax return for the deceased and then offset by the non-refundable tax credits relating to the donation of the $50,000.

Where the charity is named the beneficiary the proceeds from the RRSP/RRIF do not flow through the estate. Probate fees are not applicable and the full value of the donation will be received by the charity. This might not be the case if it went through the estate where there might be claims from other creditors.

July 16, 2008