After Retirement 2: Making the Most of Your Charitable Impact
Markus Muhs - Dec 08, 2020
This is the second in a series of estate planning blog posts, from a subject matter expert.
This week's blog post again comes courtesy my friend and fellow Rotarian Kathy Hawkesworth of the Edmonton Community Foundation. Kathy is a legal professional, former tax advisor, and a past chair of the Edmonton branch of the Society of Trust and Estate Practitioners. She acts as Counsel/Philanthropy Advisor for ECF and presented on her area of expertise at the Rotary District 5370 virtual conference a few months ago in which she called out advisors for not talking enough about this stuff. I agree, we need to have deeper conversations on this, which is why I invited her to contribute this piece.
If you haven't read it yet, here's the link to Part 1. Watch out for Part 3 this upcoming Friday. Be sure to check out the ECF, at the link above, for some excellent resources on this topic.
In our last blog, we considered how to define what you might like to accomplish as a legacy of caring for organizations and causes important to you.
Once you have identified what you wish to accomplish, the next question is: How can you leverage your contributions for more impact?
The most universal “gift matching program” in Canada is the charitable donation tax credit you can access for your gifts. Having our governments help you support your favorite causes is brilliant.
There are more than 86,000 registered charities in Canada. In Alberta, your gifts to any of these registered charities can cost you only half of what you think they will, after you factor in the tax savings. It is like a big 50% off sale!
29% of that is a federal credit and 21% is a provincial credit. Together they add up to 50%. Of course, some generous limits and restrictions apply. For some people the news just gets better and better. For example: People who have income above $200,000 in a year may, under the right circumstances, enjoy a tax credit of up to 54%.
The first $200 donated in any given year only qualify for a smaller tax credit; the above rates kick in for the excess donated. Spouses may wish to combine their donations under one spouse's tax return, so that a greater portion of the total donated qualifies for the larger credit. Charitable donations can also be deferred to later years, so that instead of claiming $200 three years in a row, you could claim all $600 in one year and get the larger tax credit on $400 of that money. More info here.
The important small print is that those gifts have to be made to a “Qualified Donee” as defined in the Income Tax Act. This is most commonly a Canadian registered charity.
The credit applies to gifts you make during lifetime AND to gifts made in estate documents including wills, life insurance and registered plans.
Those of you who have contributed to RRSPs may remember that you saved taxes when you made your contribution. When we withdraw from an RRSP/RRIF or at the end of our lives, the value of RRSPs and RRIFs become 100% taxable with some very limited exceptions (such as when they roll over to a spouse upon your death).
Let us imagine that the only asset I owned was my RRSP. I might think my children will share my $200,000 RRSP, but really they won’t – they will share the after-tax value and based on tax rates, CRA may receive far more of this RRSP than each of my children will. Alternatively, I could choose to support a charity and lower my taxes while still providing generously for my children.
For example: If you have three children, does it matter if they each receive 1/3 of your after-tax estate (33.3%) or 30%? If that 3.3% of your estate does not make a huge difference in their lives, you could give 10% of your estate to support a cause that excites you or addresses something that troubles you. That 10% gift to a registered charity might actually cost only 5% after taxes!
The tax news can be even more delightful – and how often can you say that?!
You may have heard of the special tax incentive to encourage people to give publicly traded stock and mutual funds (I’ll call these “PTS gifts”) to charities. When PTS gifts are given “in kind” rather than sold, there is no tax on the capital gain, plus you get a donation receipt for the value of the security on the day the charity receives your gift.
One of my favorite examples involved a donor who made a PTS Gift that ended up costing the donor only about 1/3 of the value of the gift received by the charity — all because of tax savings. The gift was a share owned by the donor for a very long time that had grown extensively in value.
As one person said to me: “If I knew how little this would really cost, I would have done this years ago.”
Another overlooked opportunity is that old insurance policy that you purchased when your family was growing, and you needed a life insurance policy to cover your family's financial shortfall due to your untimely death. If this is a whole life or permanent insurance policy there are a couple of ways to turn that into an amazing charitable gift that can also have an important added benefit of being very private, because of the ability to name the charity directly as owner or beneficiary of the policy, as opposed to having the money flow through your Estate.
There are many tax-effective ways to give that are worthy of multiple blog posts. Hopefully the examples above will provide you with ways to think about your legacy as a feasible reality.
Kathy Hawkesworth (LLB, TEP)
Edmonton Community Foundation
Some additional estate planning resources: