Since Charles Dickens, the holiday season has evoked the need to help others who are less fortunate than ourselves. Society’s charitable instincts have evolved from the days of “noblesse oblige” — the private generosity of the privileged classes. Today, charities are well-organized, well-funded institutions employing thousands of people, seeking out and using private resources to best meet the objectives of their organization.
The federal government appears to have encouraged the growth of the charitable sector by providing significant tax relief to charitable donors. It is usually an easy choice between paying your money for taxes or giving it to charity. Studies have shown, however, that tax incentives and financial benefits may influence the nature, size and timing of a charitable gift, but not the basic decision to give. This is ultimately a function of psychological factors and practical considerations.
People make charitable gifts for a number of reasons. First, they usually have enough assets that they can afford to give some of them away. Second, they understand and believe in the objectives and values of their chosen charity. Third, the charity will benefit the community by implementing its charitable objectives. Finally, people derive a great deal of satisfaction and meaning through giving. Charitable gifts are often a response to developments in the lives of donors, manifesting in a deep commitment to the mission of a particular organization.
During our lifetimes, we are generally limited in the gifts that we can make because we have mostly non-cash assets. Usually, we cannot afford to surrender income-producing capital, and we want to maintain control of our assets until we decide that we no longer need them.
Gifts of charity
There are many different types of gifts. Current gifts are usually in the form of cash, publicly traded securities, real estate, artwork and other tangible items. These are meant for immediate use by the charities.More lasting gifts — called planned gifts — are usually sizable contributions given with serious thought to the benefit to the charity as well as the financial implications to the donor. These gifts are generally made from assets rather than income.
The basic building block of the planned gift is the charitable bequest. Virtually everyone has the ability to give more at the time of death than during their lifetime.
The natural fear of surrendering money during your lifetime is of less concern after your departure.
In North America last year, 45 percent of all gifts were made by charitable bequest. The normal way of making such a bequest is through a valid will, naming the charity and defining the amount or terms of the gift. But there are other types of planned gifts, which do not require a will because the gifts pass directly to the charity outside of the estate.
One of the most attractive forms of gift-passing outside of an estate is to name a favourite charity as the beneficiary of a Registered Retirement Savings Plan or a Registered Retirement Income Fund. Potential testators will usually have regard to the needs of a surviving spouse first because of the tax-free roll-over provisions inherent in these plans. If there is no spouse or surviving children to benefit, then the bequest of an RRSP or RRIF becomes quite interesting because the tax credit on the terminal return of the deceased is given by the charity for the full amount of the RRSP or the RRIF, which is donated to the charity on death.
By virtue of this tax credit, the deceased’s estate can use up to 100 percent of the net income in the year of death and a further 100 percent carry-back for the previous year. In this way, the tax credit will completely offset the tax payable as a result of the deemed disposition of the contentsof the plan, which would otherwise bring the whole amount remaining in the RRSP or RRIF into income in the year of death.
A gift of real estate is usually a very significant donation. The transfer of the real estate is a disposition of the property, which will trigger capital gains tax on 50 percent of the increase in the value of property since the date that it was acquired.
When real estate is donated to a charity, a tax credit is given for the full amount of the value of the real estate at the time of the gift. This will negate any tax payable on the transfer to the charity.
A variation on this theme is to commit the property to the charity but retain possession of it and use the real estate during the donor’s lifetime or the lifetime of a member of the donor’s family. Once the need for the property has passed, then the title to the property can pass to the charity and the tax credit will be issued accordingly in an amount equivalent to the fair market value of the property at the time of the gift. This is useful when you want to make a large gift of property, but you need a residence for yourself or members of your family until the property is no longer required.
Annuities are another form of popular gift. In many cases, an annuity will have a guarantee period, leaving it open to the recipient of the annuity income to designate a charity as the beneficiary of any remainder owing on the annuity at the time of death, if the annuity holder dies before the end of the guarantee period.
Many people have small life insurance policies they purchased years ago and have completely forgotten about. Life insurance, where a charity is named as the primary beneficiary, will result in the proceeds of the policy being paid to the charity on the death of the insured. As with RRSPs, a donation of life insurance is creditable against 100 percent of the net income of the deceased in the year of death. Any excess not so used can be applied in the net income of the year before death. This form of gift is popular because most donors understand life insurance. It also has a powerful psychological appeal because individuals can see themselves as major donors without any current disbursement of money.
Not everyone has a paid-up insurance policy in the top drawer of their dresser not required for other purposes. A donor can also buy an insurance policy that names the charity as the owner of the policy. The donor pays the premiums on the insurance policy during his or her lifetime, and as long as the charity remains as the beneficiary of the policy, a tax receipt can issue from the charity for the premiums paid each year on the policy.
In a further attempt to elicit your charitable instincts, the government provides special tax treatment for a gift of publicly traded, listed securities to a charity. Ordinarily, if securities are sold and the cash proceeds are given to the charitable institution, 50 percent of the capital gain is taxable. If the securities are transferred directly to the charity, then only 25 percent of the capital gain in the value of the securities will be taxed. This is a gift you can make during your lifetime as well.
Most large charities have gift-planning officers who can assist in making any of the gifts described above.There are also many variations and combinations of these charitable giving strategies, which could work to even greater advantage, depending on the tax situation. Getting back to Dickens, Ebenezer Scrooge’s gift of a Christmas turkey to poor Bob Cratchit and his family reflected the private charitable instincts typical of the Victorian era. Today, we are witnessing the transfer of millions and millions of dollars annually into the hands of registered Canadian charities, clearly demonstrating the growth in the charitable instincts of our society as a whole.
Once the will to give is established, the opportunities to do so are never-ending — and each and every gift will elevate the human spirit.
NOTE TO READERS: PLEASE CONTACT A PROFESSIONAL ADVISOR TO DISCUSS YOUR PARTICULAR CIRCUMSTANCES PRIOR TO ACTING ON THE INFORMATION ABOVE.
John Johnston is a partner with the law firm of Nelligan O’Brien Payne LLP(www.nelliganlaw.ca) with offices in Ottawa, Kingston, Vankleek Hill and Alexandria.
[This article was originally published in the December 2005 issue of Fifty-Five Plus Magazine.]