When clients consider giving to charity, it’s unlikely they’re motivated solely—or at all—by saving tax. So it’s up to you to harness their charitable impulses to benefit them as well as their recipients.
“I don’t think I’ve ever had anybody come to me and say, ‘I want to do this because of the tax,’” says Amanda Stacey, a lawyer at Miller Thomson in Toronto.
So what’s spurring your client to donate? Does she want to leave a legacy or pare down her art collection? Help a timely charitable initiative? Mark the sale of her business? Considerations like these will guide whether a donation is made while she’s alive or be provided for in her will.
Timing won’t change the amount of a tax benefit, but it can affect a credit’s usefulness, says Frank Di Pietro, assistant vice-president of tax and estate planning at Mackenzie Investments in Toronto.
If your client plans to make a large donation upon her death, ensure the credit will help cover any tax she’ll owe. “If a lot of the credit ends up being wasted—for example, [she] may not have a significant amount owing on death—then [she] might be better suited to make annual donations,” Di Pietro says. But if your client is a retiree who has little income but sizable assets, a testamentary donation may be more effective.
When donating via estate, ensure it’s designated a graduated rate estate (GRE). Otherwise, CRA will tax the estate at the highest marginal rate, says Alexandra Tzannidakis, a lawyer with Drache Aptowitzer in Ottawa.
Among other benefits, GREs also give donors flexibility when claiming donation credits, says Sam Marinucci, an accountant and partner at Hogg, Shain & Scheck in Toronto. A donation can be carried forward five years, carried back to prior years of the estate, assigned to a client’s terminal return or assigned to the year before. If your client’s estate is not designated a GRE, the donation credit can be applied only in the year the donation is made or in any of the five years forward, explains Tzannidakis. The benefits of a GRE designation expire after 36 months, so structure donations to happen before then.
If your client wants to donate while she’s alive, there’s no time like the present, Marinucci says. The federal first-time donor’s super credit expires at the end of 2017. If your client donates before the end of the year, she’ll receive up to $250 in extra credit from CRA.
Who it works for: People donating to CRA-approved charities in Canada or internationally.
How it works: The federal credit is worth 15% of the donation up to the first $200, 33% for the amounts corresponding to the amount of taxable income above the highest tax bracket ($202,800 for 2017), and 29% for the remainder.
Lifetime vs. estate: If donating upon death, a credit can offset 100% of net income on the terminal return and the year prior. If donating during a client’s lifetime, the credit offsets a maximum 75% of income. A lifetime donation can offset income in the year it’s made, or it can be carried forward five years and back one year.
Pitfalls: Donations are eligible for a credit only once they’re made; CRA doesn’t accept pledges.
Tax savings example: Nakita’s taxable income in 2017 is $215,000. She is donating $20,000 to a children’s hospital this year. Federally, the 33% credit rate applies to $12,200 of her donation, corresponding to the portion of her income that’s in the highest tax bracket. Of the remaining $7,800 of the donation, $200 will be credited at the 15% rate, and $7,600 will be credited at the second-highest tax rate, 29%. Provincially, Ontario’s credit is 5.05% for the first $200 donation, and 11.16% for amounts above that.
($200 x 15%) + ($7,600 x 29%) + ($12,200 x 33%) = $6,260
($200 x 5.05%) + ($19,800 x 11.16%) = $2,219.78
RRSPs, RRIFs and life insurance
Who it works for: Clients with registered investments or life insurance they no longer need. “People tend to do this when they get a little bit older,” says Stacey. “A life insurance policy for someone who is relatively young and healthy [is] not worth very much. From a tax credit perspective, there’s not a whole lot of benefit to the donor.”
How it works: There are two basic options, depending on what your client is donating, and when. For registered plans or insurance, your client can name the charity as beneficiary directly on the account or policy. Alternately, an estate planner can prepare an addendum (codicil) to you client’s will, Stacey explains, though this is unusual.
Your client can also transfer ownership of a life insurance policy to a charity while she’s still alive. This is typically done with permanent or universal life policies, says Stacey. Determining a policy’s FMV is complex, so it must be professionally appraised. “These are sophisticated gifts that are usually done by folks who have some wealth,” she says. For younger or less wealthy clients, it’s best to donate on death, as the process is simpler and allows the donor greater flexibility in case she later realizes she needs the policy.
Lifetime vs. estate: If your client names a charity as beneficiary, the organization will be paid when she dies and her estate will receive a tax credit. If she donates in her lifetime, she’ll receive a credit for the FMV of the policy at the time of donation.
Pitfalls: “Most charities don’t want to be responsible for paying life insurance premiums,” notes Di Pietro. Ensure your client can continue paying premiums, if she hasn’t paid them fully already. As she pays, she’ll get additional tax credits. Otherwise, premiums can either be deducted from the policy’s tax value, or the charity can use other donations to pay. If your client prefers to have the charity pay, she’ll likely have to donate to a larger organization, notes Stacey, because a smaller charity may struggle to keep up with the cost. Some donors give cash along with their policy to cover future premiums. The cash would also be eligible for a donation credit.
Tax savings example: Marko is a healthy 72-year-old widower. His two daughters are successful, and he has no mortgage or other liabilities. He has a large portfolio of registered investments and he lives off that income. Marko has a life insurance policy he’d like to donate to Right to Play. He consults an actuary and an underwriter, who value his policy at $225,000. Marko names Right to Play the policy’s beneficiary. He’ll keep paying the premiums and getting an annual tax credit for those amounts. When he dies, his estate will receive a credit for the value of the policy. His executor can use the credit to offset the tax that will arise from the deemed disposition of his registered accounts when he dies. As a GRE, any remaining credit can be carried forward five years, or back to Marko’s last and second-last returns.
Who it works for: Clients who own property, especially land that hosts sensitive species or ecosystems. If the land has been altered but could be restored, it’s still a viable gift.
How it works: The donation can be to a Canadian government or to one of more than 150 charities approved by the Department of Environment and Climate Change. Clients should work with the charity to have the land certified under the federal Ecological Gifts Program. The department will determine the land’s fair market value (FMV) and issue a certificate valid for 24 months. If the donation isn’t made within that time, the land must be reappraised. The tax credit is worth 100% of the ecologically sensitive land’s FMV.
The amount of credit your client can claim isn’t limited to a percentage of her annual income. The credit can be carried forward for 10 years or back one year from the year of death. CRA exempts donations of such land from capital gains tax.
Non-ecologically significant land can also be donated for credit. However, your client will realize deemed capital gains on the donation; further, the credit can only be carried forward for five years, and it can only offset 75% of your client’s income.
Lifetime vs. estate: If your client wants to retain use of the land in her lifetime, she can donate through a charitable remainder trust. She could also work with the charity to retain use while she is alive, donating full ownership upon death, says Tzannidakis. The client would reap some of the tax benefit in her lifetime, and the rest in her estate. When preparing to donate ecological land via estate, ensure it’s a GRE so capital gains are not taxed, Tzannidakis warns.
Pitfalls: As of Budget 2017, private foundations are no longer permitted to receive gifts of ecologically sensitive land. CRA has additional rules if the land was acquired under a tax shelter gifting arrangement.
Tax savings example: Phil donates 50 acres of land in Embro, Ont. to the Nature Conservancy of Canada. The land is certified under the Ecological Gifts Program. The FMV is $950,000, resulting in a credit of equal value. Though Phil paid $150,000 for the land 13 years ago, the $800,000 gain isn’t taxed. Phil’s 2017 income is $207,000. He claims $207,000 of the credit in 2017, making his taxable income zero. The remaining $743,000 credit can be carried forward until 2027.
Art and valuables
Who it works for: Artists, dealers, collectors and people with listed personal property such as jewelry, rare books and antiques.
How it works: CRA treats artists, dealers and collectors differently, even if they’re donating identical items. If a collector donates a sculpture, it’s treated as capital property. If a dealer donates, the sculpture will likely be treated as inventory. An artist’s donation may be treated either way, depending on the particular circumstances of a donation. The capital gains treatment is best, says Marinucci. Under these rules only half of the donation’s FMV is taxable. Since the donation credit is worth the object’s full value, this means the credit can be used to offset more of your client’s income.
If the item is worth more than $1,000, it must be appraised. The charity is responsible for the appraisal, but your client can donate cash to cover the cost, says Stacey. Donating capital property is a taxable disposition, so any change in an item’s value since your client acquired it is a taxable capital gain. The donation credit can offset 75% or more of your client’s annual income.
If an item has “outstanding significance and national importance” to Canada, CRA says it’s then eligible for preferential tax treatment. Your client must work with an eligible cultural institution to have it certified by the Canadian Cultural Property Export Review Board (CCPERB). The board will issue a certificate stating the item’s FMV, which is valid for 24 months. Your client won’t have a taxable capital gain when the item is donated. The amount of credit your client uses in a year is not limited to a percentage of her income, and any unused credit can be carried forward for five years. The cultural review board process and ownership transfer must occur before your client can claim a donation.
Lifetime vs. estate: If your client plans to donate listed personal property via her estate, the item will be valued twice, notes Marinucci. Its FMV would have to be appraised for inclusion on your client’s terminal return as a deemed disposition, and then again upon donation. Once the item has been donated, the resulting credit could be carried back to your client’s terminal return to offset the deemed disposition.
Whether a donation is culturally certified or not, if it’s made in the year of death, the credit can offset 100% of a client’s net income. Any unused credit can be carried back one year to the client’s terminal return and used to offset up to 100% of the client’s net income in that year.
Pitfalls: “The vast majority of charities want cash or near-cash,” says Stacey. “They are not in the business of dealing with someone’s stuff.” If a charity won’t accept your client’s valuables, she could sell the items herself and donate the proceeds. It won’t affect her tax obligations or credit.
Tax savings example: Nina is an art collector. Recently, her collection has outgrown her Montreal townhouse, so she’s decided to donate 10 large illustrations by Canadian artist Gary Taxali to the Musée d’art contemporain de Montréal. The museum agrees to accept the collection, which an independent appraiser values at $250,000. Nina paid $150,000 for the collection four years ago. CCPERB has certified the art as cultural property, so Nina won’t have taxable capital gains when she donates. She can offset up to 100% of her net income of $202,000 with the FMV of her donation. The remaining donation credit ($48,000) can be carried forward for five years.
Who it works for: Investors, business owners and employees with company stock plans or options.
How it works: CRA allows people or estates to donate publicly listed shares, bonds and mutual funds directly to a charity without triggering capital gains tax. “That reduces the overall cost to the taxpayer of having made a donation,” says Marinucci. However, if your client receives an advantage in exchange for the donation (e.g., concert tickets—see example below), then the value of that advantage will be taxed.
Lifetime vs. estate: Consider if your client might need these assets later in life, and how much she values having them at her disposal (the younger the client, the less likely she’ll have her retirement needs covered, says Stacey). If donating via will, the estate must be a GRE to get the capital gains zeroing benefit, she adds.
Pitfalls: Your client must donate the securities directly to the charity, rather than selling and donating the proceeds, in order to qualify for the capital gains exemption. It’s possible to donate stock options, private shares and flow-through shares, but your client will have taxable capital gains on these transactions. These donations are also subject to further CRA rules.
Tax savings example: Will donates 200 Starbucks shares with a fair market value of $11,000 to MusiCounts. The shares cost $7,000 three years ago, so he has a $4,000 capital gain. Will receives box tickets to the symphony as a thank you, worth $250. The portion of the gift eligible for the zero capital gains tax treatment is:
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|proceeds of disposition|
Jessica Bruno is a Toronto-based financial writer.