Tax Benefits of Planned Giving Presented By: DeWayne Osborn CGA, CFP Lawton Partners Financial Planning Services Limited Dosborn@lawton.mb.ca

Tax Benefits of Planned Giving What is a Gift: All CCRA Gift Brochures and Documents; ITA 248(30-31) According to Finance: FMV exceeds the Advantage received by donor; Advantage is: any consideration received by the taxpayer Or any person related to the taxpayer; Must satisfy four conditions: Transfer of property (not services) to charity; and Transfer must be voluntary; and No benefit to donor, or someone selected by the donor. Must be accepted by the charity.

Tax Benefits of Planned Giving Why Planned Giving? Want to help Charity – a must be there!!! Population is aging, baby boomer’s parents are dying Can not take it with you Hate Taxes is about #7 out of a list of 10 An estimated $4,000,000,000,000 (trillion)_dollars will pass to the next generation within 20 years >$6 Billion in 2003! In the USA, the estimates are $41 trillion to $90 trillion

Tax Benefits of Planned Giving Your Estate Real Estate Kids Pension Investments Charity CRA

Tax Benefits of Planned Giving The Charitable Sector in Canada:

Tax Benefits of Planned Giving Source: CCRA

Tax Benefits of Planned Giving Why Make a Planned Gift? Wants to Help a Charity!!!!!!! Individual gets a tax credit to reduce tax owing! Corp gets a deduction equal to tax rate; Both can claim up to 75% of net income in any year. Indv. claim 100% in year of death and previous year (contribution room); Bob has a net income of $50,000, thus he can claim donations up to a maximum of $37,500 in any year Hate Taxes is about #7 out of a list of 10

Tax Benefits of Planned Giving What is a Tax Receipt A Good Thing!! Reduces the tax owed by individuals; Reduces tax by a rate of 46%; For example: a gift of $10,000 cash actually costs you approximately $5,400; Can carry forward up to five years from year of gift.

Tax Benefits of Planned Giving How to calculate the donation tax credit Donation $ Prov. Rate % Fed Rate Combined (%) < 200 10.9 16 26.9 >200 17.4 29 46.4 Many donors understand the federal credit, but forget the combined!! Actual tax rate is irrelevant. The best results comes from low income earners making large donations.

Tax Benefits of Planned Giving

Tax Benefits of Planned Giving

Tax Benefits of Planned Giving Common Planned Gifts Gifts by Will (85 – 95% ) of all gifts Gifts of Cash Gifts of Public Securities Gifts using Insurance including Annuities Gifts of Personal Property (art, cars, jewelry) Others

Tax Benefits of Planned Giving Special Rules and Considerations: Gifts by Will: Deceased gets a tax receipt for gifts made to the MTC through their will; Can be specific: I give my jewelry to MTC; OR Can be a general clause: I give $15% of my estate to the MTC; OR Can be contingent: IF my wife predeceases me, I give our cottage at 123 8th Avenue Victoria Beach to the MTC; OR A variety: I give 15% of the residue my estate to a maximum of $45,000 to support the MTC endowment program.

Tax Benefits of Planned Giving Gifts by Will: Example Bill and Mary want to help MTC. They own everything jointly (together) The make provisions in their will for their kids, friends and family. These provisions are mirrored in each will. They leave the balance of their estate to three charities equally – one of which is the MTC. This residue = $20,000 per charity (total = $60,000 cash). Each charity issues a tax receipt for $20,000. The last survivor of Bill or Mary saves $27,600 in taxes.

Tax Benefits of Planned Giving Special Rules and Considerations: Gifts of Personal Property: Examples: artworks, jewelry, cars, pianos, boats, etc. Deemed minimum cost and market value of $1,000; Gifts of property over $1,000 must be valued by independent expert; < $1,000, or too expensive to use professional, then may be valued by knowledgeable person from the charity; Donate a $8,000 Chrysler Van, you get a tax receipt for $8,000. No gain or loss. You save $3,680 in taxes.

Tax Benefits of Planned Giving More Rules and Considerations – Cont’d: Life Insurance, RRSP, RRIF: Now beneficiary designation qualifies as gift made by individual; Transfer must occur within 36 months of death; Alternatively, you can purchase a new policy, name the MTC owner, and get a tax receipt for every premium paid, OR You can assign an existing policy and get a tax receipt for the cash value of the policy (if any).

Tax Benefits of Planned Giving Life Insurance and Registered Plans – Example: Bob and Mary owned a joint LTD policy with death benefit of $250,000 payable to their estate. Upon Bob’s passing in 2001, Mary changes the beneficiary to the MTC in honour of Bob. If un-changed, upon her death, the MTC will get the $250,000, she will get the tax receipt for her terminal return. Save $115,000 in taxes! Alternatively, Mary could give the ownership of the policy to the hospital today for a tax receipt = CSV and any other premiums she pays.

Tax Benefits of Planned Giving Life Insurance and Registered Plans – Example: Bob and Sue purchase a $100,000 term to 100 life insurance policy with the MTC as owner and beneficiary. The annual premiums of $1,000 are eligible for a tax receipt for as long as the donors pay them. Upon death of both donors, $100,000 passes to the MTC (no tax receipt is issued).

Tax Benefits of Planned Giving Special Rules and Considerations: Gifts of Capital Property Gifts of property over $1,000 must be valued by independent expert; When gifted may cause a capital gain or capital loss; Examples: land, stock, mutual funds, cottages; You get a tax receipt for the fair market value which eliminates the tax on the gain.

Tax Benefits of Planned Giving Gift of Capital Property - Example: Bill has inherited another cottage. He decides to give one of them to MTC for their endowment program. He bought it for $50,000 some time ago. He is taxed at a 35% marginal tax rate. The FMV is determined to be $100,000. When he makes the gift, he has a $50,000 capital gain of which $25,000 is taxable. Bill gets a tax receipt for $100,000 saving him a net $37,250 in taxes! MTC sells the cottage and invests the $100,000 in the endowment fund in Bill’s name

Tax Benefits of Planned Giving More Rules and Considerations: Taxable Portion of Capital Gains cut in half for Gifts by Taxpayers of: Publicly traded stock, bonds, debt obligation, rights on Cdn and 27 foreign exchanges; Mutual funds and segregated funds; Prescribed debt obligations; Can be applied after death (118.5). The Executor can decide what to give.

Tax Benefits of Planned Giving Cash is King!! Cottage Stock Cash FMV of Gift $100,000 Capital Gain $50,000 $0 Taxable Portion $25,000 $12,500 Net Tax Savings (@30%) $38,500 $42,250 $46,000 Enhancement $3,750 $7,500

Tax Benefits of Planned Giving Wealth Replacement Insurance: Bob and Mary want to help MTC; They have some property to give to the MTC. The cost is $100,000, Fair Value $250,000; Their son lives elsewhere and does not plan to use the property now or after Bob and Mary are gone; Bob and Mary take out $250,000 joint-last-to-die policy naming their son as beneficiary. They gift the property to the MTC today for a $100,000 tax receipt which saves them sufficient tax to payoff the policy. The kids receive the $250,000 Tax Free Death Benefit

Tax Benefits of Planned Giving Charitable Gift Annuities Guaranteed, non-reducing payments for life or term of years; Guarantee periods are available (other than term or life); Can be single life or joint (spouse, sisters, brothers, etc.); Tax preferred in that payments are principle and interest; The benefit (Advantage) to the donor can not exceed 80% of amount contributed Benefit = FMV of the annuity payments

Tax Benefits of Planned Giving More Rules and Considerations – Cont’d: Gift Annuity: Example: MTC $100,000 Tax Receipt = $25,000 Keeps $25,000 for its activities or the endowment fund Bob & Mary $7,300/yr $420 CRA $75,000 Insurance Company

Tax Benefits of Planned Giving Back to Back Annuity Assumptions: Male Age 78 Non-smoker $100,000 Invested & $100,000 Insurance Annual Annuity Payment Taxable Amount Tax Deductible Donation of Ins. Premium Net Tax Savings at 46% Net Spendable Income After Tax Yield Pre-Tax Gross Yield $12,597 $759 $7,125 $2,928 $8,400 $8.4% $15.55%

Tax Benefits of Planned Giving Coming Soon…We Hope!! Charitable Remainder Trusts; Major Thrust of CAGP Gov Relations Efforts. Donors place property into a trust Tax receipt issued for discounted fair value Donor enjoys income from property for life Upon death, the property is transferred to MTC

Tax Benefits of Planned Giving Charitable Remainder Trusts – Example: Sue is 75 years old She places or settles $100,000 AGF mutual funds (cost $50,000) into a trust Tax receipt issued today for $50,000 (discounted fair value) Donor enjoys income from property for life Upon death, the property is transferred to MTC NO more taxable issues or concerns!!

Tax Benefits of Planned Giving Gifting Arrangement: December 5, 2003 forward ITA 237.1, 248 (35), Fact Sheet November 2004 Any arrangement where it may be reasonably considered that a person would enter the arrangement to: make a gift, or incur limited recourse debt. If property was acquired at any time through a gifting arrangement, OR Gift is made less than 3 years from acquiring the property OR Reasonably conclude that the property was acquired for the purposes of making a gift. Tax Receipt = Lesser of Cost or FMV!!!!!.

Thank You Dosborn@lawton.mb.ca 944-3538