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Canadians are in general a charitable and philanthropic people. According to a 2012 University of Calgary School of Public Policy Research paper, charitable giving in Canada has reached an all-time high with contributions more than doubling from $4 billion to $9 billion between 1992 and 2008. Over the same period donations to foundations, according to the paper, increased in excess of 250%.
These seemingly positive statistics do however mask a troubling trend. While donations in the aggregate have increased, the number of people giving has decreased. Gifts are being made in larger amounts by wealthier individuals, but the amount of giving by middle income and lower income Canadians has remained flat. According to the Canada Revenue Agency, there are actually fewer people claiming tax credits at each income level. It seems that the adage “80% of the campaign is being supported by 20% of the donors” is becoming more true. This situation could result in a significant problem for charities and foundations in the future.
Over the past several years, submissions have been made to the House of Commons Standing Committee on Finance by various charitable institutions and other interested parties as to how to reverse this disturbing movement. Several tax incentives, such as increasing the tax credits and making it easier for charities to solicit donations, are now under review.
The Government, through tax benefits, continues its policy of helping charities in Canada raise much needed funds. Aside from the existing Federal Tax Credits, several special incentives were introduced in the Federal Budgets of 1996, 1997, 2000, 2006, and 2007, and most recently in the budget of February 11, 2014. These recent incentives could specifically affect the methodology of structuring gifts of RRSPs, RRIFs, TFSAs and life insurance made by will or direct designations. The proposals are being accepted positively by charities and advisors who incorporate charitable giving into estate planning for their donors and clients.
For years, life insurance has been a vehicle used by both wealthy philanthropists and donors of modest means to fund their charitable goals. For a relatively small amount of annual premium a large gift can be left on death. If the policy is issued as a joint life last survivor contract, the benefit is further multiplied (click here for a visual).
A donor can make a gift of life insurance by utilizing one of three methods. Firstly, he or she can purchase the policy, have it payable to his or her estate, and on death make a bequest of the proceeds. Secondly, a donor can purchase a new policy and transfer ownership to a charity, or donate an existing policy to the charity. Lastly, a donor can name a charity as a direct beneficiary on a policy owned by the donor.
In each of these cases?, the charity will receive, either directly or through the will, the insurance proceeds on the death of the insured(s). The tax results will vary during the donor’s lifetime and at the time of death. The most appropriate approach should be implemented taking into consideration the donor’s personal and the estate planning goals.
In the first scenario - where the donor bequests the policy proceeds - the donor will not receive any tax credit for the premiums paid during his or her lifetime. Previous to the proposals in the February 2014 Budget a donation tax credit based on the policy proceeds would be available in the year of death with a one-year carry back. While the donation credit is available up to 100% of the deceased’s income in the year of death, there could still be a problem if there was insufficient income in that year or the previous year, to use the large charitable gift credit. The recent proposals deal with this issue and thereby enhance the use of this strategy. Effective in 2016 and thereafter, donations to registered charities made by will and/or designations under RRSPs, RRIFs, TFSAs or life insurance policies will be deemed to be made by the estate at the time that the donation or transfer of funds to the charity is actually made, and not immediately before death as is currently the case.
The trustee of an estate can now elect to allocate donations either in the taxation year of the estate in which the donation is made, an earlier taxation year of the estate, or the last two years of the deceased’s life. One stipulation is that the transfer to a registered charity must occur within 36 months of death. The welcomed provision gives additional flexibility to the trustee and opens the avenue for additional post-mortem planning.
Before the proposals contained in the February 2014 budget were released, many clients decided to opt for the method of transferring the policy directly to their favourite charity during their lifetime. As long as there was an absolute assignment of the insurance contract to the charity, and the charity was made the beneficiary, a donation tax credit was available for the total amount of the premium being paid on a continuous basis. Although this provides immediate tax relief in the year of the donation, it does not allow for the potentially larger tax benefit on death generated through the payment of the proceeds of the insurance to the charity.
In reviewing with a client the various options of establishing a life insurance gift, an advisor will have to take into account the benefits of each scenario. In any of the methodologies discussed herein it is likely that the life insurance gift will generate a larger gift to the charity than the donor would otherwise be able to make through their own assets. As a result, clients of all means will have the ability to become true philanthropists and to carry on their charitable gifts in perpetuity.
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