Tax Considerations for Charitable Gifting

Transcription

1 Tax Considerations for Charitable Gifting Prepared by: Martin Kretzschmann CPA CA for Georgian Bay General Hospital Fondation October 24, 2014 Ideas to Redce Tax sing Charitable Giving Simple Gift dring life Beqests in Will Gift of Secrities RRSP s Giving throgh Life Insrance Charitable Remainder Trst

2 General Rles -Donations For those in highest income tax bracket: 20% Tax Credit on first $200 of donation 46% Tax Credit on remainder Can claim donation credit on p to 75% of income Any nsed credit carried forward 5 years Can claim against 100% of income in year of death Unsed credit can be carried back to year prior to death Simple Giving Dring Life Charitable giving dring life is a good way to redirect cash otherwise sent to the CRA in the form of tax. Gifting to charities - yor money can be sed in ways that yo approve of and for cases close to yor heart. Make a plan on setting aside a certain amont each year and who to donate it to. Will redce tax payable at the end of the year. For most people, giving $1,000 will save $400 in income tax.

3 Example Simple Cash Donation Cont Dracla- Income in highest tax bracket de to sccessfl film career and foreign real estate holdings Wants to donate $10,000 to his favorite charity Donation $10,000 Tax Credit $ 4,600 Net Cost of Donation $ 5,400 Charity receives $10,000 while cost to the Cont to donate is only $5,400 Giving thogh Beqests An Unfortnate Fact Everyone is Mortal (exclding Vampires) In this world nothing can be said to be certain, except death and taxes Benjamin Franklin

4 Tax Conseqences on Death Deemed Disposition of all of yor assets at their fair market vale on death Incr capital gains on appreciated investments Stocks, Mtal Fnds etc. Capital gains on other appreciated property Cottage, Vacation Property Fll vale of RRSP s and RRIF s are taxed on final retrn (Exception if srviving spose then assets can be transferred to spose at cost) Example Taxes on Death Ichabod Crane (Widower): Income for part of the year p to death $ 60,000 Gain on deemed disposition of Investments $ 100,000 Gain on Sleepy Hollow Cottage property $ 400,000 Vale of RRIF s on Death $ 440,000 Total Income on Final Retrn $1,000,000 Income Tax payable $460,000 Major Beneficiary of Estate = Canada Revene Agency!

5 Use of Beqests Naming a registered charity as a beneficiary in yor will allows yor Estate to redce income tax on yor final tax retrn with a donation credit. Can se donation credit of p to 100% of income on final retrn. Any nsed portion can be carried back to apply to 100% of income in previos year. Previos Example of Ichabod Crane If fll estate was worth $3 million (incl. condo, life ins. etc) 1/3 rd of his estate left to charity in his will = zero income tax payable for estate Gift of Secrities Normally 50% of gain on sale of secrities is taxable when sold/disposed Effective 2006 CRA Eliminated capital gains on pblicly traded secrities donated to a charity Shares mst be transferred directly to charity, who can then isse donation receipt for fair market vale of shares Donor transfers secrities from his/her brokerage accont to the charity s brokerage accont Donor pays no tax on sale, and gets charity receipt for fll vale Charity pays no tax on cashing in of secrities Gifts can be given dring lifetime or as beqest in will Eventally secrities need to be disposed Deemed disposition on Death

6 Example Gift of Secrities Dr. Frankenstein owns shares in a sccessfl pblicly traded bio-genetics technology company. Cost of shares $25,000 Market vale of shares - $125,000 Gain of $100,000 Taxable Capital Gain of $50,000 (50% of gain) Donation of Cash Proceeds on Sale of Stock $ 125,000 Add Tax Payable on Gain 23,000 Less Donation Credit (58,000) After Tax Cost of $125K Donation $90,000 Donation of Secrities Vale of Stock Donated $ 125,000 Tax Payable on Gain - Less Donation Credit (58,000) After Tax Cost of $125K Donation $67,000 Charity receives $125,000 which only costs Dr. F. $67,000

7 RRSPs and RRIFs On Death fll vale of RRSP/RRIF added to income and flly taxable. Exception if transferred to srviving spose. Person with $100,000 in RRSP - Estate may be left with only $54,000 to distribte after tax. Registered Charity can be named as beneficiary of RRSP/RRIF. Reslting donation tax credit will offset all tax generated by inclsion of RRSP/RRIF in income. Naming charity as direct beneficiary means RRSP/RRIF fnds flow otside of will and not sbject to probate. Life Insrance Several ways to strctre gifting with life insrance. 1. Assign ownership of a new or existing life insrance policy to a charity with the charity as the beneficiary Donor contines to pay premims Donor will be able to get donation credit for premims paid dring each year Can also get donation credit for cash srrender vale if transferring an existing policy Charity will get the fll insrance proceeds on yor death. Advantages Wold be good for those who want an immediate tax benefit to apply against their income each year and who may not have a significant tax liability on their estate. Disadvantage Estate wold not get donation receipt for vale of life insrance on death as ownership was transferred dring life

8 Life Insrance 2. Name the Charity as the beneficiary of an existing policy: Donor contines to pay premims On death, insrance proceeds paid to charity Donation receipt issed to estate for fll vale of proceeds which can be applied to deceased final retrn. Charity will get the fll insrance proceeds on yor death. Advantages Owner retains flexibility to change beneficiary to another charity or other beneficiary dring their life. Option to access cash srrender vale is still there if needed dring life. Attractive option for those individals who may realize significant tax on their death. Life Insrance 3. Name the Estate as Beneficiary with a Testamentary Beqest of all or a portion of the Insrance proceeds to Charity: Life insrance proceeds are not taxable on death Estate wold get tax receipt for the fll amont of donation Will redce or eliminate tax generated from other income sorces on the final retrn (e.g. Deemed capital gains, RRSP s etc) Retains flexibility for the donor to se life insrance as a general tool to go to donate to mltiple charities on death

9 Charitable Remainder Trst Donor transfers property to a trst Names a charity as the capital beneficiary Donor (or heirs of donor) entitled income from the property dring their life On death, residal capital paid to the charity Donor receives tax receipt on the transfer of property to the trst (based on actarial valation of residal interest of trst) Trst can be set p dring life (inter-vivos) or throgh the will (testamentary) Charitable Remainder Trst Advantages Very flexible donation receipt dring life or on death depending on terms and type of trst Donor retains income generated from trst Usally set p throgh trst company so donor not brdened with administration of trst Avoids probate fees Attractive to donors with significant assets bt still reqire income from the asset or the income for an heir dring their lifetime Disadvantages Expensive to administer. Donor incrs ongoing costs. Irrevocable (can t change yor mind after a cople of years) May be limited amont of charities agreeable given complexity of arrangement and time delay of actal proceeds to charity.

10 First Time Donor s Sper Credit Additional credit for first time donors of 25% of new donations p to $1,000 First time donor defined as taxpayer who has not (or spose has not) claimed a donation credit since 2007 (5 years from 2013). Temporary credit can be claimed only once starting in 2013 ntil First time Ontario donor gifting $1,000 wold receive a tax credit of $611. Net cost of $1,000 donation to first time donor only $390. Prepared by Martin Kretzschmann, CPA CA Brabant & Kretzschmann, Chartered Professional Accontants October 2014 Information contained is presented for general information prposes only. Donors shold seek professional advice regarding charitable giving that takes into accont their specific sitation.