When one considers drawing up a last Will, one of the most important decisions, if not the most important, is who the beneficiaries are. In most instances, it’s their spouse, children, grandchildren and close family and friends. Charities are also considered when testators want to gift to causes close to their heart as a way of giving back to the community by making a financial contribution.
However, some may think that gifting to charity will decrease their estate to the detriment of their family and friends. But it may not. In fact, gifting to charity can have a substantial beneficial effect on the estate and may even eliminate or lessen the tax burden on an estate. Estates can attract hefty tax bills. When a person passes away, there will be income realized in multiple ways- sale of real estate, investments, RRSPs, RIFs and stocks. There will be capital gains taxes and taxes on the realization of investments and RRSPs and RIFs.
But you can make a smart and savvy financial decision to gift to charity in your last Will whereby the estate earns a tax credit which can offset some of the tax liability. This in turn will ensure that your loved ones receive the most money while ensuring a gift to a worthy cause that you believe in and support.
A charitable gift made in your Will can be claimed up to 100% of your net income and can be claimed in your two final tax returns. If the donation is too large to claim on the final return, the surplus can be carried back to the previous tax year.
You can make a charitable donation in many ways on your last Will:
- Specific bequest – a specific amount of money or property can be gifted to charity before residual gifts are paid;
- The gift to charity can be the residue or a part of the residue;
- The charity can be a contingent beneficiary- i.e. if the original residuary beneficiaries fail, the charity can be named the contingent beneficiary; or
- A bequest subject to a trust – if a trust is established for one or more beneficiaries and on their death, the unpaid residue can be gifted to a charity.
Here are some ways to make use of a charitable donation to reduce an estate’s tax liability:
- Life insurance – a life insurance policy can be a great tool to utilize in this regard. There are many ways of doing this:
- You can name the charity the beneficiary on an existing policy which will eliminate probate tax and also ensure that it’s protected from creditors, if any, of the estate;
- You can name the charity as the beneficiary in your last Will; or
- You can purchase a new life insurance policy and name the charity the owner and the beneficiary of the policy. You receive a tax receipt for the premiums you pay towards the policy.
- Publicly traded securities – A charity can be named the beneficiary of publicly traded securities thereby eliminating the capital gains tax while receiving a tax credit to the estate; or
- Name a charity as the beneficiary of any RRSP’s or RIF’s. RRSP’s and RIFs are heavily taxed on death. However, if you name a charity as the beneficiary, most of the tax will be eliminated.
There are other more complex methods to gift to charity, such as through a charitable foundation set up for the purpose or through a donor-advised fund.
Whichever method you use, it’s always good to talk to your lawyer before you decide. You can also refer to the Canada Revenue Agency’s charitable donation tax credit calculator to see the impact your charitable donation will have on your taxes.
This blog post was written by Nuwanthi Dias, a member of the Wills and Estates and Estate Litigation teams. She can be reached at 613-369-0385 or at nuwanthi.dias@mannlawyers.com.
