Reposted from The Globe & Mail, published June 28, 2018
It is better to give than receive, especially when that giving results in tax savings. One of the most common ways to donate money to a charity is through a will. But this approach has drawbacks. For one thing, the tax savings is limited. In the year of one’s death you can claim only up to 100 per cent of your “final” year’s income in donations. That may not add up to much. Plus, by going through your estate, probate fees of as much as 1.7 per cent apply. In addition, estates with high levels of charitable giving are sometimes challenged by family members who want a bigger share of the pie.
High-net-worth individuals should consider other methods to boost their tax savings and ensure family harmony.
SET UP A FOUNDATION
This option may appeal to those who plan to donate more than $1-million, as it allows the donor to have greater control over how dollars are given.
The foundation manages the money for you; it can earn income by investing the capital while donating to causes of your choice, even after you’re gone. It can also allow your name or your family’s name to be associated in the long term with what’s important to you.
“The intention of a foundation is to create a lasting legacy that earns a return and allocates funds to charities annually,” says Jennifer Reid, vice-president of tax and estate planning at Richardson GMP in Calgary.
USE LIFE INSURANCE
Donors can designate a charity as the beneficiary of a life-insurance policy. Funds are paid directly to the charitable organization, avoiding any potential estate battles. Since the funds don’t form part of the estate, they avoid probate, too; probate fees vary by province but can be as high as 1.7 per cent, which can add up on a significant charitable gift.
Insurance has other advantages. If it’s structured properly, the annual premiums can be considered charitable giving, meaning donors receive a tax credit each year.
“Donating life insurance is often beneficial, as an individual can determine the amount of donation credits that will be needed to offset the tax bill at death,” Ms. Reid says. “They can then fund a policy that generates the required death benefit. As the charitable donation offsets the tax, the remainder of the estate is kept whole for the family beneficiaries.”
Life insurance, depending on the policy-holder’s health and other factors, may cost less to purchase than the actual death benefit, Ms. Reid says. “You may be able to purchase the appropriate death benefit, and therefore donation, for much less than a straight cash donation from the estate.”
Donating stocks that have accumulated capital gains can be advantageous, as you’re donating “pre-tax” dollars.
Ms. Reid shares an example: Say you want to donate $1,000. You decide to liquidate stock from your portfolio to generate the cash. If you sell stock worth $1,000, but you originally paid $500 for it, you have a capital gain of $500 (50 per cent of which is subject to tax).
In this example, you pay tax and the charity receives less than $1,000.
Rather than liquidating the stock yourself and paying the tax, you donate the stock. The charity receives the shares, worth $1,000, and issues a donation receipt for $1,000. It can then turn around and sell the stock.
“The charity gets more, the individual gets a higher donation receipt and is exempt from paying tax on the capital gain that would otherwise result from selling or disposing of the shares,” Ms. Reid explains.
SET UP A TRUST
Whereas a foundation is set up for a particular charitable, non-profit or other social or religious purpose, donations can be made through a trust as well. A trust can be set up in one’s lifetime (inter-vivos trust) or upon death (testamentary trust).
Designated trustees then distribute capital or income up to the maximum federal or provincial tax credits available, the advantage being they can control the timing of the donations and whether they are lump sums or part of an income stream.
The benefits of using a trust can change with the times, however. “Sometimes the government is generous with a lot of tax credits for charitable giving; some years, depending on who’s in power, they restrict or limit the amount of tax credits,” says Henry Villanueva, legal counsel at Calgary’s MacMillan Estate Planning Corp. He recommends consulting an accountant and lawyer.
DONATE RRSPS AND RRIFS
You can designate a charity as a full or partial beneficiary of your registered retirement savings plan (RRSP) or registered retirement income fund (RRIF).
Generally, the largest tax hit on an estate is for the remaining balance of an RRSP or RRIF on the death of a second spouse, because the Canada Revenue Agency treats this as income in the year of death. This money can be taxed at more than 50 per cent, including probate fees. A donation would cancel out this tax.
USE DONOR-ADVISED FUNDS
This method is similar to a foundation – you can leave a legacy, earn income and donate to worthwhile organizations over time – but without the operating expenses and administrative work, such as establishing and maintaining a board of directors, Ms. Reid says.
With donor-advised funds, people typically make a lump-sum contribution and receive a tax-credit receipt; the money is then managed inside the fund and given to causes according to your wishes.
The administration of the fund is completed for a fee by a partner organization, says Ms. Reid. Her firm uses Benefaction Foundation, which specializes in managing charitable giving for high-net-worth Canadians.
“A private foundation is more public – the Smith Family Foundation, for example – whereas a donor-advised fund is private,” Ms. Reid says.
Donor-advised funds are also a great way to involve children and grandchildren in the effort. “It can help to teach not-so-financially-savvy individuals the value of a dollar and the value of supporting valid charitable causes.”
Reposted from The Globe & Mail, published June 28, 2018 @ https://www.theglobeandmail.com/investing/globe-wealth/article-giving-to-charity-choose-a-tax-savvy-method
Also called RRIFs, these products are popular choices for clients with maturing Registered Retirement Savings Plans (RRSPs). RRIFs can start at any age but must do so no later than the end of the year in which the taxpayer reaches age 71. So much for the basics. Blake is now 68 and married.
He has decided he needs more income to maintain his chosen lifestyle and so is looking to withdraw money from some un-matured RRSPs. He has three choices – take lump sum withdrawals (which of course are taxable), buy an Annuity (fixed, taxable monthly payments for the rest of his life) or purchase a RRIF (flexible, taxable payments for as long as the funds last). Lump sums are a possibility but they don’t qualify for any pension tax credits and can only be made up to Blake’s age 71 when he has to make a final choice regarding the RRSPs. The annuity option probably isn’t the best choice at this time for Blake as there is no flexibility in the payments – they are fixed, arrive on a monthly basis and last for life.
A RRIF seems to offer Blake the best of all worlds – flexible payments that are still taxable but the payments are eligible for all of the pension tax credits and pension income sharing when he does his tax return each year. RRIF holders must take a minimum amount of money each year and it is based on a formula of percentages that are published regularly by the Ministry of Finance through the Canada Revenue Agency (CRA). The minimums are determined on January 1st of each year however the taxpayer can take out more than the minimum at any time.
From Blake’s perspective, the RRIF option makes more sense since he wants income (so the minimum requirements are not an issue) and wants to take more money to spend on a random basis for his chosen lifestyle. Another taxpayer, Rose is married – she is 71 while her husband is only 62. RRIF minimums are based on the age of the taxpayer however there is a choice of whose age to use. In most instances, the age of the younger spouse is used because the minimums are smaller. While her husband Ron is going to be considered as the “measuring life”, the income is still Rose’s and is taxable in her hands.
Some important Income Tax information. All payments from RRIFs are taxable. Minimum payments are not subject to mandatory withholding of tax however it is a good idea to have tax remittances set up with the issuing institution so you don’t get a big surprise come April 30th of each year. As the lowest combined Federal and Provincial/Territorial tax rate is 20%, this is a good starting place for your calculations. Additional payments above the minimum amount will be subject to a withholding tax that ranges from 10 to 30% (outside Quebec) depending on the amounts withdrawn.
Would you benefit from assistance in planning your retirement income?
Mei has heard about Tax Free Savings accounts but is still not sure they are the best alternative for her investments. TFSAs are the newest incentive from the Federal Government (with follow-on support from all Provinces and Territories) to taxpayers to save for their futures.
Born out of the financial crisis of 2008, the TFSA was introduced in 2009 as a means to encourage average Canadians to get money out of savings accounts and back into the stock market while accumulating funds for whatever purpose the taxpayer desired, unlike Registered Retirement Savings Plans (RRSPs) which are directly focused on accumulating funds for retirement. Mei understands RRSPs but is wondering if the TFSA is a better alternative. The short answer is that neither is better than the other – they are different but have some similarities. Unlike RRSPs, the TFSA maximum contribution limits are the same for every eligible taxpayer. The annual limit for 2017 is $5,500 for contributions to a TFSA while the cumulative limit exceeds $50,000.
The TFSA is designed to accept pre-tax contributions – in other words, Mei cannot deduct her TFSA contribution from her income when doing her tax return, unlike her RRSP contributions which are tax deductible. To better illustrate this, if Mei is in a 28.2% Tax Bracket ($52,500 of taxable income for 2016) she has to earn $1,393, pay tax of $393 and have $1,000 left to contribute – pre-tax dollars. Where the 2 plans are similar is that the growth (investment returns) on the funds inside the plan are sheltered from tax – no T-5 slips or T-3 slips are issued for gains.
For example, if Mei was earning 6.00% rate of return on her TFSA investments, she earns the full 6.00% however if she held those same investments in a non-RRSP, non-TFSA account, she would only keep 4.31% after taxes of 28.2% are subtracted. Withdrawals are different for each plan. If Mei takes any money out of her RRSP, Canada Revenue Agency (CRA) will tax every dollar. However, money withdrawn from a TFSA is not taxed – not the original capital nor the growth or increase in value.
|Tax Sheltered Growth
For investment choices, Mei can select from any of the following for her TFSA:
- Guaranteed Investment Certificates (GICs);
- Index or Market Linked GICs;
- Guaranteed Investment Accounts;
- Segregated Funds;
- Mutual Funds;
- Exchange Traded Funds (ETFs).
Would you benefit from a discussion about TFSAs?
Afshin has finished his education and has been working full-time for 3 years. His parents are encouraging him to start an RRSP – but why – what’s the big deal – and why the rush, he is only 26. Registered Retirement Savings Plans (RRSPs) are not new having been introduced in 1957 and the purpose has remained true to its roots – encouraging people to take responsibility for their own future financial independence. The Government does this in two ways. First, it allows taxpayers to deduct (up to the annual and cumulative maximum limits) RRSP contributions from our taxable income which reduces our taxes owing by our marginal tax rate.
Afshin asks the logical question: what is a marginal tax rate?
Each person has a marginal tax rate that is calculated each year based on the combined top tax brackets (Federal and Provincial) based on their taxable income. For Afshin, who’s current income from employment is $52,500, his top combined tax rate or marginal tax rate (MTR) is 20.5% Federal (2016 rate) and in BC, his Provincial rate is 7.7% (2016 rate) for a total of 28.2% – his MTR. This means that on the last dollar Afshin earned, the Governments keep 28.2 cents and he keeps 71.8 cents. Since RRSP contributions are deductible from our last dollar earned, he will save $282 in taxes for every $1,000 he contributes. If he wanted to save $1,000 per year outside the RRSP,
Afshin would need to earn $1,393, pay 28.2% tax ($393) and have $1,000 left to invest. By using the RRSP, he only has to earn $1,000. On to the second key point about RRSPs – the Government does not tax growth in the fund as it occurs – only when you finally choose to withdraw the money – normally as a retirement income of some form. What does this mean to Afshin? Normally investment income or growth is taxed each year at his MTR.
So for every $1,000 of investment growth each year, Afshin would pay an additional $282 is taxes. Let’s look at this another way – if Afshin’s investments earn 6% a year outside his RRSP, he will only keep 71.8% of that or 4.31%. Contributions of $1,000 per year grow to $104,623 by the time he is 65 years old. But inside his RRSP and growing at the full 6%, the $1,000 per year grows to $159,428 at age 65 – an INCREASE of 52.24%! The cost of waiting 1 year to start his RRSP is $9,998 since he only has 38 years to age 65, his fund will be $149,430 rather than $159,428 by starting today – nearly $10,000 for waiting one year.
|Income required per $1,000 contribution
|| $ 1,000
|| $ 1,393
|Tax Paid before net contribution
|| $ 0
|| $ 393
|Gross investment earnings
|Tax on investment earnings
|Net investment earnings
|Value at age 65 of $1,000 saving per year
|| $ 159,428
|| $ 104,623
Would you benefit from assistance in exploring your RRSP options?