Are you considering making a charitable gift as part of your estate plan?
If so, there are a few questions to consider, including what would you like to donate, how much would you like to donate and what charitable organizations are you considering donating to?
This article will focus on some of the tax planning considerations to think about when making charitable giving part of your estate plan.
What to donate?
When considering a donation to charity, the most common method is to simply donate cash. This type of donation is easy for both the donor and the charity; however it is not always the most tax-advantaged, especially for people making large donations.
Donations of certain types of property provide special tax benefits under CRA guidelines. The most notable of these would be the donation of publicly traded securities, which includes stocks, bonds and mutual funds.
Normally any gains realized on the disposition of publicly traded securities would be included in taxable income at 50 per cent; however when the publicly traded security is donated directly to a charity the inclusion rate is reduced to 0%.
In other words, the tax on any capital gain arising from the disposition of publicly traded securities has been eliminated and the fair market value of the assets being donated is eligible for the donation tax credit, thereby increasing the tax savings.
How much and to who?
In the past, it has been important that a donor’s Will was specific as to the amount of donation and recipient charitable organization.
Without clear instructions, Canada Revenue Agency (CRA) may have viewed the executor as having too much discretion and as a result deemed the executor to have made the donation on behalf of the estate.
If this was to occur, the donation could then only be claimed by the estate, not on the deceased final tax return.
The problem with this result is that it is usually the deceased’s final tax return that has the larger tax liability and would generally benefit more from the donation tax credit.
The 2014 Budget has provided greater flexibility for the tax treatment of donations made by Will or beneficiary designation (such as life insurance or RRSP) where a death occurs after 2015.
These changes are good News because under the new rules, any donations made within 36 months after death will be a “qualifying donation” and the executors of the individual’s estate will have the discretion to allocate the available donation amongst the last two taxation years of the individual and estate taxation year in which the donation is made or five years thereafter.
In conclusion, when preparing your Will and considering charitable giving it is important to determine if your income in the year of death and the preceding year are high enough to receive the full value of the donation tax credit.
Also if you own publicly traded securities with accrued gains, you should consider donating these securities directly, while alive or at death to increase your tax savings.
This is just a brief look into some of the issues to consider when including charitable giving in your estate plan.
Make sure to consult with tax and legal advisors when putting a plan in place.
Submitted by Carol Brubacher, CPA, CA, TEP, Collins Barrow Chartered Accountants.
