By Jeremy Wong, Estate Planning Lawyer, West Coast Wills & Estates
Many people will give to charitable organizations during their lifetime and benefit from the various tax advantages of doing so. The most common example is giving to your favorite charity and receiving a tax receipt that can then be used when you file your tax return. What is often forgotten however, is that these tax advantages are also available to benefit your estate (and ultimately your beneficiaries by leaving them with a “bigger piece of the pie”) if gifts are made to charities within your estate plan and they are properly structured.
As discussed above, the most common form of tax advantage that can arise from charitable giving is through donation tax credits. A donation tax credit is calculated at 15% on donations below $200 and at 29% on donations above $200. The amount of tax credits you receive can then be applied against the amount of income taxes payable. Importantly, if your estate is classified as a graduated rate estate (which is a relatively new classification that allows your estate to take advantage of the same tiered marginal tax rates that individuals use, otherwise estates are taxed at the highest marginal rate), then the executor of your estate can apply these credits to various time points of the administration of the estate depending on when their usefulness can be maximized.
Another method in which charitable giving can generate tax benefits are through the type of asset that are given to a charity. At the time of your death, Canada Revenue Agency assumes that you have sold all the assets that you own. Accordingly, any capital gains (i.e. if the fair market value of an asset is greater than the amount it was purchased for) will be triggered at this time. If sufficient powers are given to your executors within your will, assets such as stocks and mutual funds can be donated directly to charities to take advantage of the “zero percent inclusion rate” which can reduce the usual taxable amount of a capital gain, which is 50%, to 0%.
However, to take advantage of the tax benefits of charitable giving, the estate plan must be properly structured. Some pitfalls include:
- Naming a non-profit organization that is not recognized by the Canada Revenue Agency as a registered charity. Care must be taken to check the charities registry to ensure that gifts are being made to a registered charity and that they are properly identified in the Will (i.e. registered name, address, charitable registration number) to receive tax credits;
- Failing to provide your executors with sufficient powers to gift assets “in kind” (i.e. in the form that they are in). Without these powers, executors may be compelled to liquidate stocks and mutual funds to fulfill a gift to a charity within a will, thereby losing the ability to take advantage of the zero percent inclusion rate associated with gifting capital assets directly; and
- Overestimating the value of an estate and failing to account for provincial probate fees, income taxes and gifts to other beneficiaries that can cause a gift to fail for lack of money in an estate. This can lead to litigation in the future with disappointed beneficiaries.
As seen from the above, gifting to charities can be financially beneficial to both charities and to your ultimate beneficiaries but it must be done properly. Speak with an experienced estate planner today about your options and maximize the benefit of your money.
Jeremy Wong is an estate planning lawyer at Westcoast Wills & Estates. He routinely prepares wills, Powers of Attorney and Representation Agreements. He also advises executors on probate and estate administration.