If you are one of the generous Canadians who regularly donate to charities, you are giving to causes that you care deeply about, and tax incentives are the last thing on your mind. However, by having a strategic approach to your giving you can substantially reduce taxes on your income and minimize the significant taxes that will be paid by your estate after you pass.
Reduce your tax bill: How donation tax credits work
You may be aware that when you make a donation to charity, you receive a donation tax credit to help pay down the taxes you owe. But did you know that for gifts over $200, your donation tax credit can be almost half the size of your donation? This can go a long way towards paying down your taxes, particularly on your estate which will likely receive a hefty tax bill.
Leaving a gift in your Will to your favourite charities is about more than just tax savings. It’s a way to make a tremendous contribution to the causes you care about, to make your mark and inspire your family and friends. But there are some strategic ways of giving through your estate that you may choose to consider:
A gift of securities in your will
Leaving a cash gift to charity is one of the most common ways to make a gift in a Will. However, if you own stocks and bonds and other publicly listed securities with significant accrued capital gains, you should consider gifting them to a charity instead.
If you transfer publicly listed securities or mutual funds to a registered charity, the capital gains on those securities will not be subject to tax. Plus, your estate will also receive a donation tax credit based on the fair market value of the securities at the time they are transferred. A double tax savings!
Gifting your RRSP or RRIF
You may also consider naming a charity as a beneficiary of your RRSP or RRIF. This can be as easy as designating your charity directly on your plan provider’s beneficiary form (in Quebec this can only be done through a Will).
When you pass, the value of your RRSP or RRIF will be included as income in your final income tax return and will be fully subject to tax. By naming a charity as beneficiary of your registered funds, your estate will receive a donation tax credit that will help offset the income taxes that are triggered.*
Gifting your life insurance policy
Using your life insurance policy is another smart strategy for giving through your estate. It can deliver a donation much larger than you ever thought possible.
A life insurance policy can be gifted in several ways: You can simply and easily designate your charity as a beneficiary of your existing policy. You can donate an existing policy to a charity and name the charity as owner and beneficiary. Or, you can purchase a new policy to donate to charity and do the same.
Each of these methods have unique tax implications that should be discussed with your financial advisor. Depending on your desired outcomes, a gift of life insurance can be part of a financial plan that delivers remarkable tax savings.
By exploring different strategies for giving through your estate, and discussing them with your financial advisor, you can ensure that you are getting the maximum tax benefit from your philanthropy while helping the causes that you care for dearly.
*If you have a surviving spouse, it may be best to name him or her as your beneficiary first as the proceeds of your RRSP or RRIF roll over to your spouse tax free.
Tina Tehranchian is a FP Canada™ Fellow and a Senior Wealth Advisor at Assante Capital Management Ltd.