Legacy means different things to different people. For some clients, it means leaving behind a gift for someone they love. For others, it means making a contribution — a lasting memory that can help make a difference through a charitable donation.

The question is: how do we help clients do this? How do we help clients have enough passive retirement income to cover their needs while meeting their legacy goals?

In my previous article, I discussed the benefits of charitable donations and what you need to know in 2016 – looking at the considerable tax credits available to help structure these gifts. The next step is to look at the opportunities to provide retirement income, a charitable gift, save on taxes and preserve clients’ wealth. Passive retirement income can come from conservative stock and bond portfolios and various retirement income solutions, such as:

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

In 2013, 35% of all charitable donors in Canada were age 55 and older.

This same group accounted for 47% of all donations.

Source: Statistics Canada, Volunteering and charitable giving in Canada, January 2015.

Let’s take a closer look at these 3 popular retirement investment vehicles. Specifically, we’ll discuss how clients can generate income during their lifetime, while providing flexible gifts — both while living or after their death.

1. Series T mutual funds

A series T mutual fund offers 2 primary features to clients: monthly cash flow and tax efficiency.

For example, with a Series T mutual fund from Sun Life Global Investments (Canada) Inc., the funds may offer T5 or T8 options. These options provide monthly cash flows targeting an annualized distribution of 5% or 8%, respectively, based on the price of the fund on December 31st in the previous calendar year. When the client receives the distribution, a portion may include return of capital (ROC). The amount of ROC distributed will depend on the amount of taxable income the fund is generating from its investment activities, as these amounts must be distributed to unitholders.

If the cash flow consists mostly of ROC, investors can maximize the after-tax value and take advantage of the opportunity to avoid clawbacks on government benefits, such as Old Age Security (OAS). Although by returning the capital first, the investor will have a bigger capital gain (or smaller capital loss) at the time they eventually sell their investment. And the client can control when to sell the units and therefore control the timing of the eventual tax liability on the capital gains.

The ROC is not taxable in the year it’s received. It’s subtracted from the adjusted cost base (ACB) of a client’s investment. A lower ACB will mean a larger capital gain (or smaller capital loss) when they eventually sell their investment. If the ROC causes the ACB to fall to zero, further ROC distributions would be taxable as capital gains in the year they’re received.

Using series T mutual funds to establish a charitable donation

Since tax isn’t payable on the unrealized capital gain, a capital loss cannot be realized unless the security is sold by the donor and cash is given to the charity. Government incentives, put in place in the 2006 federal budget, encourage charitable giving by reducing the capital gains inclusion rate on donated securities to zero.

Let’s look at an example of a client* that has a series T mutual fund, with a fair market value of $300,000:

Series T value$300,000
Adjusted cost base
Potential taxable capital gain$150,000
Potential tax liability (assuming marginal rate of 49.6%)$74,000
Tax receipt issued$300,000
Capital gains exemption($300,000)
Federal and Ontario charitable donation tax credit$120,440
TOTAL TAXES SAVED$194,840

* Assumes an Ontario resident with taxable income in 2015 of $400,000.

By donating these units, the investor receives $300,000 in donation receipts and the entire capital gain would be tax exempt. In addition, assuming the investor can use all of the donation credits (i.e. has at least $400,000 of taxable income) they’ll receive $120,440 in total federal and Ontario donation tax credits.

Additional bonus: There’s flexibility in the donation amounts. A donor can donate some or all the units to customize the gift amount. They can also plan for a gift in life or in death (consider a gift of the deceased or gift of the estate).

2. Segregrated fund contracts

With a segregated fund contract that includes an income guarantee, clients get guaranteed income for life, with maturity and death benefit guarantees. Planning a gift with the death benefit is a way to leave money to a charity by naming the charity as a beneficiary.

3. Annuities

A charitable gift is something a client would give to an organization that they believe in and wish to support. An annuity is a fixed sum of money that is paid to the client each year. Put them together and you have a charitable gift annuity — “the gift that pays you back.

The amount of the annual payments will depend on the amount transferred, the ages of the beneficiary(ies), annuity term, and the annuity rate schedule in effect at the time of the gift.

How does it work?

  1. The donor gifts money to the charity and agrees on a fixed income; and the charity arranges for the fixed income to be provided to the donor.
  2. The donor gets a tax receipt for the portion of money the charity holds back as a gift. This is typically about 25-35% of the total amount.
  3. The taxable impact of the annuity payout will depend on the:
    1. arrangement between the donor and the charity, and
    2. donor’s age and gender.

The charity then keeps the difference between the cost of the annuity and what it receives from the donor.

Life insurance options

For clients with a large sum invested in their registered retirement savings plan (RRSP) or registered retirement income fund (RRIF), or for those who don’t have a spouse to take over their registered account on a tax-deferred basis, you may want to consider an income replacement strategy with life insurance. By naming a charity as the beneficiary on the client’s registered account, when they die:

  • the balance in their RRSP/RRIF account would be considered fully withdrawn and included on their final tax return as income; and
  • the donor would receive a charitable tax receipt for the amount in the account, and the tax credits could be used to offset the taxable income.1

The client could then replace the amount they would’ve left for their children/beneficiaries through a life insurance policy, with the death benefit going to their beneficiaries tax-free.

Next steps

Learn more about how to have a legacy needs conversation with clients, and earn continuing education (CE) credits, through the new Money for Life – Legacy needs course on Sun Life Financial’s Education Hub. During this 1-hour self-study course, you’ll learn more about:

  • the importance of discussing and planning for clients’ legacy needs in each life stage,
  • what those conversations include, and
  • how to help clients plan to cover these needs.

To learn more about the solutions available to give clients passive retirement income using charitable donations, speak with a Sun Life Wealth Sales Director.

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1 On the death of the last surviving spouse, amounts in a RRSP, RRIF, LIRA and LIF are included as income on the deceased’s final tax return.