More than 86,000 registered charities operate in Canada, which offers residents opportunities to give back to society while also providing the benefits of tax relief.
But recently, the federal government and Canada Revenue Agency have become more vigilant in removing the registered status from organizations they feel are merely posing as charities and not fulfilling the requirements of registration.
Donating a life insurance policy used to qualify for a deduction in computing taxable income.
However, the government changed the Income Tax Act 15 years ago to provide relief in the form of a non-re-fundable tax credit.
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To qualify for such relief, the life insurance policy must be absolutely assigned to the registered charity and the charity must be the registered beneficiary of the policy.
The donor cannot have any continuing advantage from the policy except for the allowed tax advantage.
The amount of the gift is determined by calculating the fair market value of the policy, including cash surrender value, policy loans and the state of health and life expectancy of the donor.
Accumulated dividends and interest that are also assigned to the charity add to the value of the donation.
Loans against the policy that the donor repays after assignment will also provide a tax credit, as will any premiums on the policy if the donor continues to pay them.
A donor can also structure a charitable gift to benefit the charity while at the same time providing an income stream for the donor.
For example, the donor provides a gift of $100,000 to a charity. The charity gets some of the money right away but uses the rest to buy an annuity that pays the donor a guaranteed predetermined annual income.
The donor gets a charitable donation tax receipt for a portion of the lump sum gift in the year of the gift.
The donor also gets favourable tax treatment on the income from the annuity because it is a mix of principal and interest.
I recommend that potential donors consult with their financial or tax adviser on the best path for them before making a decision to donate to ensure that they and the charity receive the most benefit.
