In 2013, Statistics Canada reported that 82 per cent of Canadians made financial donations to a charitable or non-profit organization, with the average Canadian contributing $531 annually.
However, Canadians aged 55 and older accounted for 47 per cent of the $12.8 billon given that year. Furthermore, the average annual contribution for donors aged 75 and over was $726 – nearly $200 more than the national average. As Statistics Canada noted, “Mirroring … the typical Canadian, the average donor is getting older.” From an estates’ perspective, the average donor is approaching ages at which incapacity or death become more common.
Much attention has been devoted to the unprecedented wealth transfer that is underway. A study this June suggested that $750 billion will be inherited over the next decade, making it the greatest intergenerational wealth transfer that our country has ever seen. Only time will tell how much of that wealth will be donated to charitable and non-profit organizations.
While people may leave gifts in their wills to charitable and non-profit organizations for a multitude of reasons, one compelling reason is to reduce tax liabilities, particularly with regard to investments that may create serious and unexpected tax burdens.
For example, Registered Retirement Savings Plans and Registered Retirement Income Funds are common investment tools whereby the policy holder or account owner has the opportunity to name a beneficiary to ultimately receive the proceeds of the plan upon the death of the owner. Such proceeds often pass outside of an estate.
However, if not properly arranged, it is possible that, even with proceeds passing directly to a beneficiary, the tax burden may nevertheless be payable by the estate. Tax consequences relating to assets passing outside of an estate can lead to conflicts between the designated beneficiary of a plan and the beneficiaries of the estate.
One possible way to avoid conflict between the two parties and to avoid an added tax burden on the estate is to name a registered charitable organization as the designated beneficiary of one or more plans, or another asset that passes outside of an estate, such as a life insurance policy or a Tax-Free Savings Account.
Amendments to the Income Tax Act have been made that incentivize planned charitable giving. Prior to 2016, gifts to registered charitable organizations made by will received tax credits that could only be used in the year of the testator’s death or carried back to the preceding year.
The Income Tax Act now allows an estate to carry forward any unused tax credits with respect to charitable gifts made by will, designated gifts (being those made by way of beneficiary designation), and gifts made by an estate, for five years. Given certain limits on the amount of tax credits that a person or an estate can claim each year, planned charitable giving can be a valuable tool in creating preferential tax treatment.
Charitable giving can often be its own reward. However, in light of pre-existing tax benefits related to donations and the more recent amendments that have further incentivized charitable giving, there has never been a better time to support a meaningful cause. Interested persons should consult with a tax professional and experienced drafting solicitor for assistance in creating an estate plan that minimizes unexpected tax liabilities, while also benefiting charitable and non-profit organizations.
Ian Hull and Suzana Popovic-Montag are partners at Hull & Hull LLP, an innovative law firm that practices exclusively in estate, trust and capacity litigation. To watch more Hull & Hull TV episodes, please visit our Hull & Hull TV page.
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