Advanced solutions for charitable giving: Trusts, annuities and beyond

(December 2005) The holiday season is a time when many of your clients will be considering how they can give back to their communities, and will look to you for advice on how they can make contributions to the causes closest to their hearts, without breaking the bank.

In the first two installments of this series we considered different approaches to charitable giving based on an array of client profiles, from the Bay Street Baron to the Art Aficionado, looking at creative ways to help each client realize their charitable giving objectives in a way that is meaningful to them. The second installment of the series offered several approaches you can use to work with your clients to structure life insurance products in order to benefit their favorite charities.

In this third and final installment of the charitable giving series we look at several advanced charitable giving strategies, including charitable remainder trusts, charitable gift annuities and gifting registered accounts.

Charitable Remainder Trusts

An individual can make an irrevocable gift to an inter vivos trust under which a charity is the capital beneficiary. This arrangement is commonly referred to as a Charitable Remainder Trust. The income earned on the investments held in the trust is paid to the donor during his or her lifetime. When the donor dies, the trust is dissolved and the assets in the trust are paid to the designated charity. (While the donor is alive, the charity does not have access to the trust assets).

The donor will receive a tax receipt from the charity when the gift is placed in the trust, but the amounts shown on the receipt will be less than the amount of the gift. This is because the donor has retained the right to receive the trust’s income. The amount shown on the receipt will be equal to the “remainder interest” of the gift, that is, the present value of the amount that the charity will eventually receive from the trust.

Charitable Gift Annuities

The Charitable Gift Annuity allows the donor to make a gift to a charity while continuing to receive a guaranteed lifetime income from the donated amounts. In order to benefit the charity, the amount that the donor is willing to give to the charity must exceed the premium amount that would be required by an insurance company to provide the desired level of annuity payments to the donor. The charity will issue a donation receipt to the donor equal to the difference between the amount of the gift and the premium required to provide the desired level of annuity payments.

The “income” portion of the annuity payments will be taxable income to the donor, but the “capital” portion of the payments will be tax-free.

Gifting of Registered Accounts

Where the owner of an RRSP or RRIF dies and does not have a surviving spouse, the value of the RRSP/RRIF is taxable to the deceased in the year of death. It is possible for this tax liability to be substantially reduced or eliminated by naming a charity as the beneficiary of the RRSP/RRIF assets. This can be done directly or through the donor’s will. The charity will issue a donation receipt to the estate in the name of the deceased for the value of the RRSP/RRIF assets at death.

As discussed in the first article of this series, Beyond cash…Considering alternative avenues for charitable contributions, individuals may also want to consider donations of publicly traded securities or artwork:

Gifts of Publicly-traded Securities

A prospective donor may wish to make a gift to a charity, but would need to sell certain non-registered investments in order to make a cash donation. Where this is done, any capital gains on the investment will be triggered, and 50% of such gains are taxable income to the donor.

However, where the investments are publicly-traded securities (shares, bonds, mutual funds, or segregated funds), and these investments are donated “in-kind” to the charity, only 25% of the capital gains are taxable income to the donor. Thus, while the donor receives the same amount of tax credits by making the donation on an “in-kind” basis, the tax liability applicable to the capital gains is half of what it would have been if the donation had been made in cash.

Gifts of Art Work

An individual who has an art collection that includes paintings, drawings, sculptures and other works of art can make gifts of such items to a charity, and will receive a donation receipt that represents the appraised value of the item. Depending upon the appraised value of the art work and what the donor paid for it, there could be a taxable capital gain. It is important that the donor or the charity obtain an independent appraisal of the art work’s value from an expert in the field who is a member of the Professional Art Dealers Association of Canada, in order to reduce the chances of the validity of the donation receipt being challenged by the Canada Revenue Agency.

Dave Ablett is manager, advanced financial planning support for Investors Group and he is an expert in charitable giving, taxation and retirement planning.

(12/16/05)