A bequest (also known as a gift by will or a testamentary gift) is a revocable gift made by Will to a charitable beneficiary. There are four basic types of bequests:
- specific bequest (either a specific amount or a specific piece of property which is usually paid out before any residual gifts);
- residual bequest (a share or percentage of the residue of estate);
- contingent bequest (a “disaster clause” bequest that names an alternate beneficiary in case the terms of the original bequest cannot be met); or
- bequest subject to a trust (Will establishes a testamentary trust that is funded at death; typically provides lifetime income to one or more named beneficiaries and a future gift to one or more charities).
Since a bequest is revocable, it can be amended or revoked at any time by the donor. Click here for sample bequest wording for an existing or new BenefAction fund.
At death, there is a “deemed disposition” of all capital property owned. This means that for tax purposes property is treated as if it were disposed immediately before death. There may be capital gains or losses triggered by the deemed disposition. Capital gains taxes owing are payable on the final lifetime income tax return and losses can be used to offset gains. Any capital gains or losses that occur after death are recognized on the estate tax return.
Under the Income Tax Act, an individual who makes a gift by Will to a registered charity or other qualified donee (specific organizations that can also issue tax receipts) is deemed to have made a gift immediately before death. The gift generates a non-refundable tax credit that can be claimed against tax owing. Depending upon how it is structured, a bequest subject to a trust may not generate any tax savings on the final lifetime return.
A gift at death can be claimed against up to 100% of the individual’s net income on the final two lifetime tax returns. If the bequest is too large to claim on the final return, the surplus can be carried back to the previous tax year. The 100% contribution limit can eliminate tax on the final two lifetime returns if the charitable bequest is large enough.
If you have allocated a significant portion of your estate to charity in your will (rule of thumb is 25%), you may have a planning opportunity. If the bequest is too large to be claimed on the final two lifetime returns, a portion of the eligible tax credit will be lost. To utilize the tax credit, it may be prudent to give a gift during life. Splitting a large bequest into a lifetime gift and a bequest can help significantly increase total tax savings. When properly planned, you will have the satisfaction of giving during life without any change in your lifestyle.
Examples of Charitable Bequests
Mr. & Mrs. Griffin name a specific bequest of $50,000 in their Will for their favourite charity. When the second spouse dies, the bequest is paid out at the beginning of the estate administration process.
Residual Bequest for Legacy Fund
Steven and Wendy Jones name the Jones Family Fund at a public foundation as the residual beneficiary of Steven’s Will. The Jones Family Fund is established at the same time as their Wills are executed. The Fund is established to support charities or causes of interest to Mr. & Mrs. Jones as chosen by their two adult children. They have the option of partially funding the Fund during life for philanthropic and tax planning reasons.
Charitable Testamentary Trust
Chen and Betty Tsi have an adult daughter with a severe physical disability. Their Wills create a testamentary trust to provide support to the daughter for the balance of her life. When the daughter dies, the remaining capital in the trust will pay out a charity that provides community based nursing services.
Testamentary Private Foundation
Andrea Wilson establishes a testamentary trust in her Will that will exclusively support charities of her choice. When she dies the trust will be registered with Canada Revenue Agency as a private foundation by her trustees in her memory. The objectives and terms of the private foundation are incorporated into the Will.This article has been adapted by BenefAction with permission from the author, James Dunne, Wealth Advisor at ScotiaMcLeod in Toronto.
Budget 2012: No New Donation Incentives
No new measures to increase incentives for charitable giving.
Budget 2012 focuses largely on measures dealing with the perceived lack of transparency and accountability concerning charities devoting their resources to political activities. This will create new challenges for registered charities conducting political activities, but generally speaking the scope and impact of this budget is not as broad as that of 2011.
It is worth noting that Budget 2011 established a new House of Commons Standing Committee on Finance for the study of how current tax incentives for charitable donations might be improved. Alas we will have to wait until 2013, but the sector remains hopeful as Budget 2012 at least confirmed the Standing Committee will continue to review submissions.
Let’s have a quick look at one of those. The Canadian Association of Gift Planners (CAGP-ACPDP™) proposes encouraging and enabling Canadians to meet their philanthropic goals by supporting the following planned giving incentives:
• Stretch Charitable Tax Credit: This incentive is a broad measure in which increases in giving year on year receive increased tax recognition.
• Gifts of Real Estate: This incentive means that the capital gains realized on gifts of appreciated real estate would be exempt from tax.
• Gifts of Private Company Shares: This incentive extends the exemption from tax on capital gains realized on gifts of public company shares to the capital gains realized on the disposition of certain gifts of private company shares.Source: Carters.ca, Charity Law Bulletin No. 280, March 30th 2012; Miller Thomson, Charities and Not-for-Profit Newsletter, March 2012; CAGP-ACPDP™ Submission to the House of Commons Standing Committee on Finance Study on Tax Incentives for Charitable Donations.
Voluntary Philanthropy Vs. Involuntary PhilanthropyPublished with permission by the author Keith Thomson, Certified Financial Planner and Managing Director with Stonegate Private Counsel, a division of CI Private Counsel LP.
The Webster’s Dictionary definition of a philanthropist is, “a benevolent supporter of human beings and human welfare.” But who is this person? Someone who potentially gives up approximately one quarter of his or her capital gains and/or up to roughly one-half of his or her income to support the general welfare of our country? Of course the answer is … most of us!In other words, as taxpayers we could all be considered “involuntary philanthropists.”
The chart below details how a dollar raised by government through taxation (i.e., $631billion in 2010) is spent.So here’s the question, “Given a choice, is this how you would choose to donate your money?” If the answer is “no,” then perhaps you may wish to investigate how you could redirect your involuntary philanthropy, also known as tax dollars, to voluntary philanthropy.
Please do not misunderstand me, I realize that taxes are absolutely necessary and I fully appreciate the fact that if it were not for the taxes we pay, Canada would most certainly not be the wonderful country it is today. However, it goes without saying that many of us would like the option of redirecting a percentage of our involuntary social capital to those causes that are important to us.
This approach is significantly different between traditional estate planning, with its focus primarily on the money, and what I feel is a more effective approach, which is driven by life’s most important treasures: relationships and values. Fortunately, our government encourages this type of approach. How do we know this to be true? Because Ottawa provides incentives to encourage activity in certain sectors of the economy. As an example, if our government wishes to increase real estate ownership it allows a number of tax breaks for the purchase, ownership and sale of this asset class. In much the same way, since 1996, in order to encourage philanthropy it has introduced into our Income Tax Act over 20 incentives to facilitate giving.
This has now created what many would argue is the most generous tax environment to promote charitable activity in the world today. If this type of voluntary philanthropic planning, with its focus on relationships and values resonates with you, I would encourage your family to seek out a financial advisor with a specialization in charitable planning and investigate the numerous strategies that could also help you to focus on what is important and significant to you.
Gift the cottage and replace the wealth
Replacing a taxable asset with tax-free cashPublished with permission by the author DeWayne Osborne, CGA, CFP, Lawton Partners Financial Planning Limited
The tax-free nature of the death benefit is a powerful incentive to use life insurance as part of their tax planning strategies for clients. A common use of insurance has been to replace taxes paid by the estate (AKA wealth replacement). The estate would still pay the tax, but the death benefit would restore the estate to its pre-tax level.
Given the rule change for claiming tax receipts on the year of death, another use for life insurance has emerged. Taxable property is gifted to charities, and tax-free death benefits are used to replace the gifted assets. The resulting tax savings from the gift are sufficient to purchase a life insurance contract of equal or greater value than the property gifted.
The end result, a taxable asset that no one really wanted is converted into tax-free cash that everyone wants at no cost to the donor!
Here is how it works:
Sylvia age 73 and a non-smoker cannot use her cottage any longer. All of her children have moved out of province and she has been assured that they do not want the family cottage.
Sylvia is a regular contributor to XYZ charity. After discussing the issues with her advisors, she decides to donate the cottage to XYZ charity for a $150,000 tax receipt. The resulting tax saving of $67,500 (assuming a 45% tax rate) was sufficient to purchase a $250,000 insurance policy with her children as equal beneficiaries.
In short, XYZ charity sold the cottage to help fund its activities, and Sylvia left $250,000 tax-free cash to her family.
The power of insurance is best realized when it is used in combination with other estate planning tools to create unique planned gift strategies. Such strategies provide a clear win-win situation for both the donor and the charity.
Retirement plan assets are one of the most heavily taxed estate assets to pass to heirs.
The recipient would normally be taxed at their highest marginal rate. However, since 2000 it has been possible to make a direct designation of an RRSP or RRIF plan to a charity (except in Quebec where a beneficiary must be a person). The charity must be named as beneficiary on the plan. On the date of death of the donor or the second spouse, the plan assets are valued for the tax receipt. This can be a portion of or the whole value of the plan. Like with life insurance proceeds, the executor will transfer proceeds directly to the charity avoiding probate. Then the estate could claim the gift up to 100% of net income in the final two tax years.
|Example – Donating RRSP assets|
|Mrs. C wants to help her favorite charity and wants to minimize her taxes at death. She has a RRIF worth $200,000. She lives in a province with high probate fees and she has concerns that her heirs may try and disrupt her estate plans – especially if proceeds are paid to a charity. Her financial advisor recommends naming her charity as the beneficiary of her RRSP. Here is how it would look assuming the RRIF did not change in value.
By naming the charity as a beneficiary, Mrs. C has reduced her estimated tax bill by $90,000, reduced her probate costs, and ensured that her heirs cannot contest her intentions.
The important things to remember when clients are donating a RRSP/RRIF are:
- It is appropriate for any committed donor with RRSP/RRIF, regardless of age;
- The most recently signed documents normally overrule previous instructions, so it is important that the charity be named beneficiary on plan documents and that this is outlined in the Will too;
- The tax credit on donor’s final income tax return is based on value of gift from the plan ;
- The amount of the gift creditable on final tax return is 100% of income (not 75% like when donor is alive);
- There is a one year carry-back if the gift is in excess of 100% final year income;
- A direct designation gift is good for donor advised fund endowment donations;
- The gift is not subject to probate;
- It is most appropriate on death of 2nd spouse (RSP rollover tax free between spouses).
 A Charitable Guide to Planned Giving, DeWayne Osborne, CGA, CFP, Lawton Partners Financial Planning Services Limited, 2009
Benefaction’s top 10 charitable giving tips for Canadians
Canadians know that giving brings with it a tremendous sense of connection and fulfillment. Check out these tips to see how to get the most out of your charitable gifts.
1. Save tax by taking full advantage of tax planning opportunities.
Structure and time your gifts to limit any tax on the capital gain and obtain full benefit of the tax credits available to you.
2. Make gifts of securities instead of giving cash.
In addition to the tax credit, NO tax on any capital gain applies to gifts of publicly-traded securities given to charities.
3. Limit taxes for your estate by gifting your RRSP or RRIF.
Naming a charity as the beneficiary for your RRSP or RRIF usually eliminates the tax on this investment.
4. Executives should consider donating optioned stock.
Cash proceeds from optioned stock may be donated within 30 days of the exercise date. Like public securities, the donated portion will incur NO tax on the capital gain.
5. Make your gift go farther.
By designating a charity as the beneficiary of a life insurance policy, donors can bequeath many times more to their favorite charity.
6. Know your limits.
Up to 75% of net income (100% in the year of death) can be deducted annually. Any excess can be carried forward for the next five years.
7. Donate flow-through shares.
Despite the 2011 budget eliminating the capital gain component of the tax benefit that existed where a Canadian taxpayer buys a FT and then donates it to charity, taxpayers continue to benefit from the allocated FT resource deduction and the charitable donation tax credit. Subscription agreements prior to March 22nd 2011 are not affected, but charitable owners of FT’s should be aware of the impact this budget may have on their future donation plans and the possible time limit on being able to take advantage of the capital gain exemption of a FT share donation.
8. Save time by dealing with professionals who can manage your donations.
Benefaction can help to administer all your gifts from one place; and we can help make complex gifts easy for you to donate to your favorite charities.
9. Take control of your giving.
Enjoy benefits of having your own private foundation without the administrative costs and complications. Contact us for more information about a Benefaction Donor Advised Fund.
10. Create a legacy.
Many charities offer donors the ability to make gifts (and attach their names to them) so that others will know of their generosity for generations to come.
Case Study: The Philanthropist
Gifts of preference shares from a private companyPublished with permission by the author Kevin Wark, LLB, CLU, TEP, SVP, Business Development, PPI Financial Group
Robert is in his late 40’s and has built a successful business now worth approximately $20 million. He was recently asked to join the Board of a local charitable foundation and would like to demonstrate his leadership and support by making a large gift. Unfortunately most of his wealth is tied up in the value of his shares and he does not want to significantly reduce his current cash flow, which is being used to support his high standard of living.
His insurance advisor suggested that Robert explore converting some of his common shares in his company (say $750,000) on a tax deferred basis into redeemable preference shares with a fixed dividend rate. As part of this transaction Robert would use the capital gains exemption to increase the cost base of those shares to equal their fair market value of $750,000. Robert’s company would then acquire a $750,000 insurance policy on Robert’s life, which would be used to redeem the preference shares on Robert’s death.
As a next step, Robert would donate the preference shares to the charitable foundation and receive a charitable donation receipt for $750,000. This donation receipt can be used to offset taxes in the current year and/or carried forward for up to 5 years to offset his taxable income. Assuming Robert is in a 45% tax bracket, this gift would generate tax savings in the range of $225,000.
While Robert is alive the charitable foundation will receive dividends on the preference shares, which can be used to fund its charitable activities. On Robert’s death the shares will be redeemed with the life insurance proceeds, so the foundation will have $750,000 in cash for charitable endeavours.
There is another benefit of this strategy. The insurance proceeds received by Robert’s corporation on his death will create a credit to the its “capital dividend account”. Tax-free dividends can be paid from the capital dividend account to the surviving shareholders in the company. This will generate an additional tax savings to Robert’s beneficiaries in the range of $150,000- 225,000 (depending on the dividend tax credit available on the dividend)
To summarize the benefits of this strategy:
- Robert can make an immediate gift without impacting his cash flow, and benefit from a significant charitable tax credit.
- The Charity will annually receive income from the shares, and on Robert’s death will realize a large cash infusion from the redemption of the shares.
- The share redemption is funded through corporate owned life insurance, which also creates a credit to the capital dividend account and future tax savings to the beneficiaries of Robert’s estate.
- They are common shares issued by the corporation to you;
- The issuing corporation is an eligible small business corporation;
- That is, 90% or more of the assets are used to generate active business income;
- The total value of the corporation cannot exceed $50,000,000;
- While you hold the shares, the company must be an eligible active business corporation for at least 730 days;
- And the big hurdle, 90% or more of the company’s assets are used to generate active business income and not passive income such as investment income.
Charitable giving, capacity and POAs
As the average lifespan of Canadians increases, so does the probability of acquiring a critical illness requiring long-term care or becoming mentally incapacitated during our lifetime. What if you or your clients aren’t capable of making crucial decisions concerning your health, finances or the care of young children? A recent study by BMO suggests that fewer than six in ten polled have a Power of Attorney for personal care in place and 54% don’t think they need one yet. But as Jonathan Chevereau noted in his recent article ‘Who takes care of your money when you can’t?’; “Yet” is the operative word and time may be shorter than you think.
Wills and power of attorney are the cornerstones of estate planning
To prepare for such a possibility, you need to have a properly executed Power of Attorney (POA) or Mandate in Quebec, both for personal care and for property. You will also need to have an up-to-date Will. While there are several ways to ensure your estate goals are accomplished, these two are considered cornerstones of estate planning. Everyone should have both.
A Will is a legal declaration of a person’s wishes as to the disposition of his or her property or estate after their death. It is the most important document you have to ensure that your wishes are carried out after you are gone. Many people delay writing their Will under the assumption that being young, or in good health or without dependants, justify waiting. However, if your assumption is wrong, your beneficiaries will get what the province mandates. In addition, the absence of a prepared Will invariably causes delays and extra expense for surviving loved ones.
A will is important for planned gifts because by far, the most common way to plan a gift is a simple bequest through a will. The deceased will receive a tax receipt and can claim up to 100% of net income for charitable donations in the year of death and in the year prior. This is appealing for donors who wish to minimize their taxes at death and increasingly, advisors are recommending charitable donations as part of the overall estate plan for clients.
A POA for property is a legal document that gives someone the authority to manage and govern your property and financial affairs while you are still living if you become incapable of doing so. There are different roles a power of attorney can take on, over a limited period of time (i.e. during your absence on vacation) or in more enduring situations and with broader control (i.e. managing all of your financial affairs if you are somehow incapacitated). POA’s are an important tool in planned giving. The POA’s key function is to allow the attorney to keep a planned gift strategy viable. For instance, if the attorney is not permitted to make charitable donations, a comprehensive tax strategy using charitable gifts to reduce estate taxes may collapse.
Careful consideration should be given to the value of your estate and those people and charitable organizations you wish to benefit from it. Questions that should be considered are who should receive what, and under what circumstances. In order to avoid disputes, it is important that life policy and registered plan policy beneficiaries are clearly outlined, both in your will and in supporting beneficiary designation documents with your plan providers.
When considering using a beneficiary designation in charitable giving, care must be exercised to ensure that a tax receipt can be issued for the actual transfer of the property. Upon death, a tax receipt can be issued for property received by virtue of a charity being named the beneficiary of a life insurance policy (including life insurance segregated funds and life insurance annuities), and as a beneficiary of a RRSP or RRIF. However, in other situations such as a charity being named the capital or income beneficiary of a trust, the payment to a beneficiary may be legal obligation of the trust and not a voluntary act. Therefore, such a transfer is not eligible for a tax receipt (yet the property was actually transferred to the charity).
Choosing an executor
Your executor is responsible for administering your estate according to the wishes in your Will. Not only should you choose a primary executor, but also an alternate (a contingent) if you are concerned whether or not an individual you appoint would be up to the task. You can also consider naming a corporate executor, such as a trust company, to undertake this role for you.
The duties of an executor are many and complex, and the emotional strain can be high, so choose this person carefully. Letting them clearly know your wishes will give you peace of mind, and will allow them to act decisively during a potentially unsettling time.
Whatever stage of life you are at, Wills and powers of attorney are two cornerstones of prudent estate and charitable gift planning. They can help ensure that your worldly assets are properly cared for, and that the most important people and causes in your life are properly considered at an important time.This article has been adapted by Benefaction with permission from the author, James Dunne, Wealth Advisor at ScotiaMcLeod in Toronto.
Case Study: Donate to eliminateDonate to eliminate is a gift planning strategy where you use losses and donation credits to offset other transactions that cause income. Advisors play a significant role in this strategy.
One powerful use for outright gifts of capital property is to eliminate capital losses or gains. Allowable capital losses can be carried back three years and forwarded indefinitely to offset capital gains. When a gift is being contemplated, often future and or past capital property transactions should be considered.
For example: John lives in Saskatchewan and is considering making a gift (he normally gifts cash). After a routine portfolio review with his financial advisor, he remembers a significant loss that he had on an investment five years ago. His current portfolio is healthy (no losses expected), and one of his stocks has done very well. Unfortunately, the company is being merged with another company, and John is uncomfortable holding the stock after the merger. To make matters worse, John’s advisor feels a major market correction is on the horizon and wants to lock in some of John’s gains.
John has always donated generously and has more donation credit than he can use – or so he thought!
John was going to sell the security and use the loss to offset some of the capital gain (the loss is not large enough to cover the entire capital gain). However, John’s advisor suggested another strategy.
John will sell off all of his investments that he feels are going to suffer during the market correction. His resulting capital gain is $200,000 of which $100,000 is taxable to him. John is in the highest tax bracket of 44%. John’s advisor suggests that he use all of his loss and donation carry forwards to offset $75,000 of the income from the gain. Now, John donates the highly appreciated security to the charity as well. The resulting donation will create another $44,000 in tax savings, which will wipe out the remaining tax owing from the adjustment to the portfolio, and thanks to the zero inclusion rate from the resulting capital gain on the donation, no more income is produced from the transaction.
If John’s loss resulted from selling listed personal property, THEN the logical asset to gift would be another listed personal property because listed personal property losses can only be applied against listed personal property gains. Such asset selection is particularly important depending on the amount of time that has passed since the loss was incurred because LPP losses can only be carried forward seven years – then they are lost forever!
|FMV of stock sold||$400,000|
|Capital gain from stock sold||$200,000|
|Income from the gain||$100,000|
|Tax from the sale @44%||($44,000)|
|Donation of $100,000 in listed stock||($100,000)|
|Donation tax credit @44%||$44,000|
|Net tax owing from gift and sale of $500,000 in listed stock||0|
|Cash in donor’s jeans for re-investment||$400,000|
The key for advisors to educate their clients as to the possibilities for making planned gifts. Such knowledge will enhance the clients likelihood of leveraging the size of their gifts when they are ready to donate.Used with permission from the author, DeWayne Osborne General Manager, Compliance Officer, and in-house expert on charitable and planned giving at Lawton Partners.