Tag: charitable giving
This week on Hull on Estates, Natalia Angelini and Umair Abdul Qadir discuss life insurance in the context of two articles, namely, “That’s Life Insurance” by Michael Grob, published in the June 2016 edition of Step Journal (http://bit.ly/29Yoc3Z) and “Charitable Donations: A Summary of Tax Considerations” by James M. Parks, published in the Canadian Donors Guide 2016/17 (http://bit.ly/29SAkAF).
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A couple of months ago, I blogged about a letter from the Department of Finance in which it addressed concerns regarding amendments to the Income Tax Act (the “ITA”) that have come into force as of January 1, 2016. The stated purpose of the letter was to confirm the Department of Finance’s understanding of the issues raised and to describe an option for responding to these issues. There was no promise that the option would be pursued or that any action would be taken.
However, on January 15, 2016, the Department of Finance released draft legislative proposals that would modify the income tax treatment of certain trusts and their beneficiaries. The legislative proposals, along with explanatory notes, can be found here.
Currently paragraph 104(13.4)(a) of the ITA provides that upon the death of a beneficiary of a spousal trust, the trust’s taxation year will be deemed to come to an end on the date of the individual’s death. Subsequently, according to paragraph 104(13.4)(b), all of the trust’s income for the year is deemed to have become payable to the lifetime beneficiary during the year, and thus must be included in computing the beneficiary’s income for their final taxation year. This has been raised as an issue due to paragraph 160(1.4) which makes the trust and the beneficiary jointly and severally liable for the portion of the beneficiary’s income tax payable as a result of including the income from the trust. As such, it is possible that the beneficiary could be responsible for the full income tax liability, to the benefit of the trust and the trust’s beneficiaries.
According to the draft legislation, paragraph 104(13.4)(b) is to be amended and 104(13.4)(b.1) is to be added, such that (b) does not apply to a trust unless all the requirements are met and the trust and the beneficiary’s graduated rate estate jointly elect that (b) apply. It would, therefore, be up to the trust and to the estate of the beneficiary to determine whether they wish the trust’s income to be included in the income of the beneficiary for their final taxation year.
There was also an issue raised with respect to the stranding of charitable tax credits. This situation could arise if a trust were to make a charitable donation after the beneficiary’s death. As the trust’s income for the year has to be included in the beneficiary’s income, consequently, the trust would have no income against which to deduct tax credits. Based on the draft legislation, as long as the beneficiary and the trust do not jointly elect for 104(13.4)(b) to apply, the trust’s income will be included in the trust’s tax return, and any charitable donation tax credits should be able to be deducted from that income.
The press release issued with the draft legislation stated that the Department of Finance had released the draft legislative proposals for consultation and welcomed interested parties to provide comments by February 15, 2016.
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I recently tweeted this article from the Financial Post, which discusses different methods of charitable giving and the tax benefits associated with each method.
With respect to inter vivos charitable gifts, the methods include:
- A one-time gift using cash, cheque or credit card;
- Gifting publicly traded securities;
- A one-time gift using flow-through shares; and
- Gifting real estate or private shares.
One-time gifts using cash, cheque or credit card, which are familiar to most individuals, are the most common type of gift and are often gifts of smaller amounts. The other type of one-time gift, which makes more sense for larger gifts, is a gift of “flow-through shares”. These are a particular type of stock involved in materials or energy exploration that qualify for significant government credits. This option is better for individuals comfortable with advanced tax strategies and high taxable incomes. The two remaining inter vivos methods of gifting publicly traded securities, private shares, or real estate, are best for large gifts and result in tax benefits with respect to capital gains.
With respect to testamentary giving, the article discusses leaving money in a will, leaving money through an insurance policy, and donating RRSPs and RRIFs. Gifting money to charities via a bequest in a will is familiar to many individuals. However, there are often more tax-efficient ways to give, since money in your estate has been fully taxed and probated along the way.
The other methods of testamentary giving discussed are less common. Leaving money through an insurance policy involves paying premiums on a policy for which a charity is the beneficiary, and receiving a tax receipt on the payment of that premium. This method is said to often deliver a higher rate of return than investing and leaving money to a charity in your will. It also has the benefit of providing certainty with respect to the amount you will be donating to the charity. Donating your RRSPs or RRIFs has a benefit in that, often, the taxes on an RRSP or RRIF may be the largest tax liability on an estate. By donating the balance of the RRSPs or RRIFs, you can effectively use a charitable gift to cancel out the tax.
If charitable giving is something that you consider important, consider gifting in a tax-efficient way so as to gain a benefit yourself, and to provide even more of a benefit to your chosen charity.
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