Government funding to the more than 75,000 registered charities in Canada continues to be dramatically reduced. This leaves many charities facing the possibility of being unable to maintain the same level of service. There has never been a better time for private and corporate citizens to support a favorite charity through charitable gifting.
Many people would like to donate more to their favorite charity but are financially unable to do so. CRA has made provision to gift life insurance, capital property such as land, buildings, stocks, bonds, mutual funds, capital equipment, but not inventory, to registered charities. Life insurance can help because it can significantly increase the size of your gift while at the same time give you or your estate a good tax credit.
How does it work? You have choices when it comes to gifting life insurance proceeds to charity. Following are three options, each which pay the proceeds of your insurance policy to the charity when you die. With the first option, you receive the tax benefit during your lifetime. With the last two options, your estate receives the tax benefit on your terminal tax return.
1. You set up the charity as the owner of the policy, and you pay premiums on the charity’s behalf. The charity will issue a receipt each year for the amount you paid.
2. You can purchase the insurance yourself and name the charity as a beneficiary. The charity will issue a receipt to your estate when it receives the funds upon your death.
3. You can own the policy yourself and name your estate as beneficiary and provide direction in your Will to gift the funds. The charity will issue a receipt to your estate when it receives the funds upon your death.
What are the benefits to you? Along with achieving peace of mind knowing that your gift will make a difference, there will be tax benefits for yourself or your estate.
Gifting stocks directly to a charity: In the past, investors sold their stocks and paid the tax on the capital gains. They then gave the net proceeds to the charity and received a charitable contribution receipt. Now they can gift the stock directly to the charity, get a receipt for the market value of the gift, and the charity can then choose what to do with the stock. Gifts of appreciated stock made to charities avoid capital gains taxes as long as they are a qualified charity. The donor’s cost basis, which is the original cost of the shares plus any commissions paid, transfers to the recipient. There is no tax payable when the shares are sold again.
Individuals who make gifts to charities are entitled to a non-refundable tax credit. If the gift is less than $200, the federal tax credit is calculated at the lowest personal rate on the amount of the gift. Gifts over $200 receive a tax credit of 29% of the gift. The provincial tax credit is also added to this.
Jim Yih from the blog Retire Happy has an interesting article as well on giving to charities. It is an older article but all of his points are still valid. Check it out here.
As with all things tax related, check with your tax professional for advice on your individual financial situation to determine the best option for you. As well, CRA has information regarding charitable gifting on their website.
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