It’s a wonderful situation to be in — being able to give back, donating to a favourite charity, making an impactful contribution in your community. And whether those donations range from $20 to $2,000,000, these gifts can help those in need, support the arts and provide funding for new life-saving research.

You may have clients looking to make a donation. They may have a favourite charity and want to include them in their plans, or they’re looking for a way to leave a lasting legacy. Or maybe you have clients who have never donated before and need ways to minimize taxes on their estate. Either way, with the changes to the personal donation tax credits, including the increase to the tax credit rate for clients in the highest tax bracket, there are lots of ways clients can fulfill their wishes and take advantage of these credits — both in 2016 and in the future.

Clients have a 5-year carry forward for gifts made during their lifetime, which can be used against 75% of their net income.

Donate before it’s too late

For clients looking to donate for the first time, there are some considerable tax credits to discuss with them. Announced in the 2013 federal budget, changes to personal donation tax credits included a temporary first-time donor super credit (FDSC), which provides first-time donors with an additional 25% rate on cash donations of up to $1,000. The kicker is that the FDSC only applies until 2017, so it’s key for clients who haven’t claimed charitable donations before to use the credit this year.

Clients will be considered a “first-time donor” if they or their spouse/common-law partner (if they have one) haven’t claimed or been allowed a charitable donation tax credit for any tax year after 2007.

The tax credits provide a great incentive for clients to make a donation. Here’s how the numbers break down:

Federal credit Provincial credit
(Ontario example)		 FDSC on first $1,000
Donations under $200 15% 5.05% >25%
Donations between $200-$1,000 29% or 33%1 11.16% 25%
Donations over $1,000 29% or 33%1 11.16% 25% only on first $1,000

1 The 33% credit applies only to donations made after 2015 and the taxpayer has taxable income over $200,000. Otherwise, donations will still receive the 29% credit.

Let’s take a closer look by using an example. If an Ontario tax payer receives a donation receipt for $36,000, and has a taxable income of $220,000, the following tax credits apply:

Federal credit Provincial credit
(Ontario example)		 FDSC
First $200 $200 x 15% = $30 $200 x 5.05% = $10.10
Amounts over $200 and relating to taxable income over $200,0002 $20,000 x 33%* = $6,600 $20,000 x 11.16% = $2,232
Remaining donation amount over $200 $15,800 x 29% = $4,582 $15,800 x 11.16% = $1,763
Sub-total $11,212 $4,005
FDSC on first $1,000 $1,000 x 25% = $250
Total $15,467

2 The 33% credit applies only to donations made after 2015 and the taxpayer has taxable income over $200,000. Otherwise, donations will still receive the 29% credit.
*The new federal top rate for donation credits provide an additional tax credit of $830 for the tax payer, since they have over $200,000 of taxable income.

Charitable receipts, made in the same year, can be pooled together between spouses and applied against one spouse’s taxes — it doesn’t matter which spouse gets the tax credit (unless one spouse is a first-time donor). If one spouse is a first-time donor, have them claim the credit.

What are the changes to legacy gifts?

For retired clients, another option would be to look at the personal tax credits for legacy gifts. Clients in retirement might be nervous of outliving their money, and may not want to commit to a specific dollar amount. In this case, they might prefer to leave a percentage or the remainder of their estate to a charity.

Graduated rate estate (GRE) is defined by Income Tax Act 248(1). These are the key features:

  • A GRE only results from an individual’s death.
  • It can only exist for 36 months following the date the individual died.
  • It’s a testamentary trust for tax purposes, and will lose its status if the trust is tainted.
  • There can only be one GRE for the same individual.

Proposed in 2014, but coming into effect January 1, 2016, testamentary trusts that qualify as graduated rate estates (GREs) have the flexibility to allocate donations to:

  • the tax on estate from the year the donation was made,
  • a previous tax year for the estate, or
  • the last or next-to-last tax year of the individual.

Additionally, on January 15, 2016, the Department of Finance released a draft tax proposal to extend these rules to donations made by a former GRE, and could extend the GRE status from 36 months up to 60 months after an individual’s death. For details, see the release Backgrounder: Legislative Proposals Relating to Income Taxation of Certain Trusts and Estates.

This creates new planning considerations and opportunities for clients to leave a legacy gift.

My colleague at Sun Life, Stuart Dollar, Director, Tax & Insurance Planning, has written an article that goes into detail on the changes to testamentary trusts — the key change starting in 2016 is that testamentary trusts will be taxed in the highest tax bracket, unless it qualifies as a GRE or a qualified disability testamentary trust.

Bequests under a will

The advantages:

  • Clients will have flexibility on how donation credits are used if the donor’s estate qualifies as a GRE (effective January 1, 2016).
  • If specified in the deceased person’s will, donations or gifts will be considered acceptable claims of the surviving spouse.
  • Clients can leave a percentage of the estate to ensure the gift remains in line with their assets.
  • A client can designate a charitable organization as the beneficiary on their registered fund, tax-free savings account, etc.

The disadvantages:

  • Estate expenses may substantially reduce the gift that clients are hoping to leave, and gifts that go through a will do not avoid probate — the probate calculation uses the pre-distribution amount.
  • Also, probated wills are public record, so if clients want the gift to be private or anonymous, then they shouldn’t do this through their will. Clients may want to explore other gifting strategies as a result, particularly if they can leverage their existing wealth and estate plans.

The opportunity — passive retirement income & charitable donation strategies

From our experience, many clients are happy to structure gifts to their families, charity or favourite not-for-profit cause, as long as they don’t need this money for income in retirement.

There may be opportunities in your clients’ existing portfolios to provide retirement income, a charitable gift, save on taxes and ultimately preserve their wealth. Passive retirement income can come from a conservative stock and bond portfolio and various retirement income products. For example, clients can look to:

  • T-series mutual funds,
  • guaranteed investment funds, also known as segregated fund contracts with guaranteed income, and
  • annuities, as a way to provide sustainable cash flow with guaranteed income for life.

For clients that want to leave a legacy, they have options to combine their retirement income with a donation. Either way, it’s a win-win strategy.

If lifetime income isn’t a primary concern, and clients can comfortably set aside funds for a gift, then gift insurance strategies can be very beneficial to their estate plan. Please see Sun Life Financial’s Planned Giving guide for more information on gift insurance strategies.

Key planning considerations

Finally, when helping your clients plan for their charitable gift(s), it’s important to keep in mind the following:

  1. Timing donations

    The donor should consider whether they would like to use the donation credits during their lifetime or afterwards. Tax and estate practitioners look at whether clients have any taxable income, and keep in mind that donation credits are limited to 75% of clients’ net income during their lifetime and 100% of their net income at death. They will also plan to carry back (or forward) donation credits to match the taxable income. A key consideration is to plan for flexibility as clients’ situations may change from year-to-year, and each individual situation is unique. Planning big donation credits for clients’ estates isn’t beneficial for everyone; this is especially relevant with the new changes and continuing discussions relating to charitable remainder trusts, alter-ego trusts, spousal and joint partner trusts, as well as the new GRE rules.

  2. What to give

    The first question to ask clients is whether they want to make a cash donation or leave assets. A cash donation provides the charity with flexibility to use the funds as needed, and it’s the easiest type of donation for tax reporting. However, not all clients have the cash flow to do this. For some clients, it may be worth considering donations through marketable securities, artwork, land and/or real estate. One advantage to making a donation of marketable securities is that the capital gain is exempt (zero rated). This may be beneficial when combined with a tax-efficient retirement income vehicle like T-series mutual funds. As mentioned above, clients may look in their existing wealth plan to explore combined strategies such as charitable insurance, segregated fund contracts and gift annuities.

  3. Who should give

    Many high net worth families may have a family business, holding companies, family trusts or a family foundation. For these clients, the considerations include who or what entity will make the donation. Tax credits are available for personal donations, while a corporate donation receives a tax deduction. To determine whether this is a personal or corporate gift, consider where the money is, the tax benefit of personal credits versus a deduction, and personal income compared to corporate business income. Estate and tax planners consider the net-tax cost of the donation and place it where it’s most advantageous. After death, would the credits be more beneficial to the deceased’s final return or for the estate? Again, planning big donation credits for a client’s estate isn’t beneficial to everyone. For significant gifts, clients are encouraged to work with their tax advisors to structure the donation.

Philanthropy can greatly benefit both charitable causes and donors. In the 3 recent federal budgets, there have been significant changes around tax rules for charitable donations.

To learn more about some of the opportunities to provide passive retirement income to clients and a charitable donation strategy, speak with a Sun Life Wealth Sales Director, and read my next article focusing on the 3 strategies to provide retirement income and a donation.

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