Cranbrook & District Community Foundation

Creative Giving

So you want to give to the community – but just giving a donation of cash doesn’t work for you. What other options are there?

Stocks and Bonds

Publicly traded securities (stocks and bonds) may, at any given time, have a value different from either the face value or the amount paid for them. If this value is greater, then, when you sell them, you would be taxed on the increase in value as capital gains. Suppose you want to donate $1,000 to a charity. You could simply write them a cheque, and in return you would get charitable receipt to apply against your taxes. But, suppose you also own securities that have a much greater value than when purchased, and you know you will have to pay tax on the capital gain when you sell them. Because your securities have greatly increased in value, this will be a significant amount to add to your taxable income. Currently, you must pay taxes on only 50% of capital gains -- but you can reduce this taxable amount by another 50%. To do this, and donate to the charity, you transfer $1,000 worth of securities to the charity. Now, you receive the same $1,000 tax receipt as before, and the tax department still wants you to pay taxes on the capital gains. BUT, because you gave the securities to a charity, you will only be taxed on 25% of the capital gain rather than the normal 50%. You will have accomplished two things – donated $1,000 to the charity, and reduced the taxable income from the sale of your securities by half.

This option is a way to give while reducing taxes. Below are some options for easing your taxes through charitable receipts, leaving a legacy after you die, and reducing the amount the taxman will grab from your estate.

A Trust

One interesting option is a charitable remainder trust. This is a way of giving property – whether cash, real estates or investments – to a charity to take effect after your death, but retain the income while you can still use it. As an example, suppose you own a rental property. At present, you are maintaining the property, receiving rental income, and, if you sell the property, are subject to capital gains – as will your estate be when you die. If you want to gift a charity with the property, you may transfer the property to a charitable remainder trust with the charity of your choice as beneficiary. You may continue to maintain the property (or designate a trustee) and collect the rental income. When you die, the property becomes the property of the charity. There is no effect on your estate, and it will not be subject to probate fees or claims of creditors. The plus side to this way of giving is that it simplifies the probate of your will and removes any tax effect from the rental property. And you can continue to enjoy the income during your lifetime. One negative is that once the property transfer is made it is irrevocable. The property is permanently in the trust. The other drawback is that you must consider the management of the trust. If you are unable to manage it, then you must have a way to pay the trustee’s fees. In any case, annual financial reports and reports of trust income allocations must be prepared for the beneficiaries of the trust and the federal government.

Life Insurance

A second option is to donate a life issuance policy to the charity of your choice. If you have an existing policy, you may donate it directly to the charity, which then becomes responsible for the premiums. You receive a charitable receipt for the cash value of the policy, plus any accumulated dividends, and minus any loans against the policy. Should you elect to continue paying the premiums, then you would receive an annual receipt for that amount. Alternately, you may simple change the beneficiary of the existing policy to be the charity, while retaining ownership of the policy, along with control, the option of using it to borrow against, and allowing you to change the beneficiary again at a future date. In this case you can get a charitable donation receipt for the value of the premiums paid on the policy. You may also take out a new policy with the charity as beneficiary. If you pay the premiums, then you benefit from a tax receipt annually. In all of these cases, the charity receives the proceeds from the policy upon your death, and in the last two cases, your estate will receive a charitable donation receipt for that amount.

RRSPs and RRIFs

If you are retired and living on income from RRSPs and/or RRIFs, your estate will have to pay taxes on the entire remaining value of these vehicles when you die. For some, this raises the estate into the highest tax bracket and the government may claim about 40% of the estate. By including a donation to a charity of some of that money in your will, you can reduce the rate at which your estate is taxable, plus providing the estate with a charitable receipt. Since the tax department allows you to deduct charitable donations over $200 at the highest tax rate, even if the income is taxed at a lower rate, proper planning can allow you to donate a significant amount to a charity while the amount payable to your heirs is reduced by a much smaller amount. The loser here is the tax department, which will be able to claim a much smaller portion of your estate.

Pensions

While many pensions simply end when you die, or simply transfer to your spouse until he or she dies, other pensions have more options. Fixed term pensions pay for a certain time period, regardless of whether or not the beneficiary is living. In this case, the monthly amounts will be paid to your estate, and you may will them to anyone you please – including your favourite charity. You heirs would benefit from a taxable receipt for the annual amounts paid. Occasionally, the pension is paid out as a lump sum, in which case your estate would receive the receipt for that amount in the first year.

Planning

The key to all these options is proper planning. Not all these options will work for everyone – and it is necessary for a financial planner or estate planner to sit down with you and work out which options will allow you to save taxes, and leave a legacy while meeting your other needs. At the end of the day, you can know that the community will be better because you were there, and that your legacy will live on after you.

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801B Baker Street, Cranbrook,
British Columbia,
Canada V1C 1A3
(250) 426-4195

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