Donate life insurance, save tax

If you’ve been giving less to charity recently, you’re part of a trend. Statistics Canada reports Canadian charitable donations fell 1.9% to $8.3 billion in 2012. And the number of Canadians giving in 2012 slipped 1.4% to 5.6 million.

But there are reasons to give. Charitable aspirations can be tax-efficient. And, if you can’t give this year, it’s now easier and more beneficial to donate via your will than previously.

For deaths occurring in 2016 and later, CRA deems charitable donations (including cash, life insurance, and the proceeds of RRSPs, RRIFs and TFSAs) as made by the estate when they’re transferred to charities, rather than automatically before death.

The estate’s trustee is also able to allocate the donation to the taxation year in which it is made, an earlier taxation year of the estate, or the last two taxation years the deceased was alive. The only catch is the entire donation must be declared within 36 months of the taxpayer’s death.

These changes help both philanthropists and charities. They simplify legal requirements and provide greater flexibility. They also ensure tax benefits of large gifts on death are not wasted, including those arising as a result of life insurance proceeds. For instance, if someone dies early in the year and has little reportable income as a result, the donation credits could exceed her tax liability.

Usually, donations cannot exceed 75% of a donor’s net income in the year made. But for the year of death or the preceding year, donations can be 100% of income.

Donating life insurance

A couple aged 60 can leave a $100,000 charitable gift on the death of the last survivor by paying a monthly premium of as little as $150 for whole or universal life policies. These types of policies usually work best, because premiums are based on a joint equivalent age and are therefore lower than for single-life policies. Also, since more capital gains and income tax on RRSPs and RRIFs usually arise on the second death, the charitable donation is more useful when applied against the income of the last survivor.

There are two ways you can set up the charitable gift.

1. Reap tax benefits while alive: If the beneficiary and owner of the policy is the charity, then the donor will receive a tax receipt for the annual donation in the same amount as the premiums paid.

2. Reduce tax on the estate: If the beneficiary is the donor’s estate, the donor will receive a charitable tax credit for the death benefit when the donor dies.

You can include a clause that stipulates if the charity is no longer around when you die, another one with a similar mandate can replace the original charity as beneficiary. You can also name a backup charity.

David Wm. Brown, CFP, CLU, Ch.F.C., RHU, TEP, is a member of the MDRT, and a partner at Al G. Brown and Associates in Toronto.

This post was updated July 14, 2016.