“CHRISTMAS IS THE SPIRIT OF GIVING WITHOUT A THOUGHT OF GETTING. IT IS HAPPINESS BECAUSE WE SEE JOY IN PEOPLE. IT IS FORGETTING SELF AND FINDING TIME FOR OTHERS. IT IS DISCARDING THE MEANINGLESS AND STRESSING THE TRUE VALUES.”
– THOMAS S. MONSON
Most are aware that a charitable gift on death has a beneficial impact upon an estate. To understand how this benefit arises, we must first look at what tax liability arises at death.
Taxation at Death
Canadian tax laws deem (or treat) an individual as having sold all of their capital property upon death. This deemed disposition occurs at the fair market value of the property on the date of death. Capital property generally includes non-registered investments and real estate. Tax is then payable on any capital gains with respect to the deemed disposition of the property. Also, the full value of any RRSPs/RRIFs that the deceased owned at their death is included in their income. For many, these tax rules result in a significant amount of tax owing on death.
One way to reduce taxes owing is through a tax credit. A tax credit is an amount that can be subtracted from any taxes that are owing. On the other hand, a tax deduction reduces the overall amount of taxable income. In contrast, a tax credit works to actually reduce the amount of tax that is owing. There are specific rules that apply but, generally speaking, it is possible for donation made to a charity by an individual in their Will or by their estate to qualify for a donation tax credit. This also applies where a charity is the named beneficiary of registered assets (RRSPs/RRIFs, TFSAs) and life insurance.
Changes to Use of Donation Tax Credits
Changes regarding how and when donation tax credits may be used were introduced in January of 2016. It was felt by many that all too often donation tax credits were left unused due to a lack of or insufficient planning. The changes hoped to rectify this issue by increasing flexibility in the use of donation tax credits. For example, with respect to donations made by a graduated rate estate, donation tax credits may be applied against taxes owing in the year of death and the preceding year as well as being used by the estate in the year the gift is made and any prior year of the estate.
How to Incorporate a Charitable Gift into Your Estate Plan
There are many ways to incorporate charitable giving into an estate plan:
– specific cash gifts;
– gifts of specific property such as shares, mutual funds, or real property; and,
– a portion of the residue.
It is vitally important that you speak with your estate planning lawyer, accountant and financial planner regarding the best way to incorporate charitable gifting into your unique estate plan. Many factors need to be considered including the context of the gift in the overall estate plan and the possible tax implications of the gift. A charitable gift in an estate plan helps to extend this season of gifting throughout the year ahead and for years to come.