to a charity, the cash surrender value proceeds free of tax. The charity would the property exceeds its adjusted cost
rather than the fair market value will be issue a receipt for the amount of the base, determined in accordance with a
relevant. As a result, the donor will be bequest. The gift could then be used to formula applied by CRA.
subject to tax on the amount by which reduce tax in the terminal return or in the
Using a charitable remainder trust or
the cash surrender value (less any return for the prior year, if there are
a gift of a residual interest often involves
outstanding policy loans) exceeds the excess credits. In some provinces,
reliance on administrative policies of
adjusted cost basis (a defined term) of the probate tax on the value of the proceeds
CRA and raises a number of technical
policy. CRA hasconfirmed that this will passing through the estate may be a
issues. The Department of Finance is
not be affected by the issuance of an factor. A direct designation of a charity
considering changes in the ITA dealing
official receipt by the charity reflecting a as a beneficiary will be treated as a
with charitable remainder trusts, but no
fair market value that is higher than the donation in the year of death of the
amendments have been introduced.
cash surrender value.
insured.
Specific advice should be sought before
In some cases, if the charity is concerned that it will not be able to fund 4. Gifts of Residual Interests A donor can give property to a charity, 5. Gifts of Capital Property 4 this type of planning is utilized. the premiums on a policy it acquires as a gift, the donor may make a further cash but maintain the right to use the property A person who makes a gift of capital gift, which the charity can use to purchase for his or her lifetime. Alternatively, the 5
property is deemed to have received
an annuity to provide regular payments donor can establish a charitable
proceeds of disposition equal to the fair
to pay the premiums as they become due. remainder trust by transferring cash
market value of the property. If the fair
The cash payment should be eligible as a assets to a trust, reserving a right to
market value exceeds the cost, a capital
separate gift and the charity will generally receive payments for life and transferring
gain will be realized. The capital gains
be able to treat the annuity, along with the balance on death to a charity. CRA’s
inclusion rate is 50%. In addition, if the
the insurance policy itself, in a manner administrative position on this type of
property is depreciable property, there
that does not cause problems in meeting gift is set out in IT-226R, entitled “Gifts to
may be recapture of capital cost allowance
its disbursement quota.
a Charity of a Residual Interest in Real
previously claimed, which is fully
As a further alternative, the donor included in income.
Property or an Equitable Interest in a
whose life is insured can continue to own
Trust”. If certain conditions are met,
A donor can reduce capital gains tax
CRA considers the donor has made a gift
the policy, and name the charity as the
on a gift of appreciated capital property
which will qualify for a tax receipt. This
beneficiary of the policy. The donor will
to a charity, by designating in the tax
type of gift could be made during a
receive no tax relief for the premiums
return in the year in which the gift is
person’s lifetime or by a will. It is
paid or the value of the policy, since
made, the transfer price as an amount not
necessary to value the residual interest.
nothing currently is being given to the
greater than the fair market value of the
This value will be the fair market value of
charity. Under insurance law, the donor
property and not less than its adjusted
the transferred property (usually cash)
can change the beneficiary from the
cost base. The qualifying donor will then
less the present value of the reserved
charity to another person. If the charity
be deemed to have disposed of the
interest, taking into account an
is the named beneficiary, it will receive
property for this designated amount and
appropriate discount rate, the life
the death benefit on the donor’s death.
will also be considered to have made a
expectancy of the donor, current interest
For deaths prior to 1999, neither the
gift equal to the designated amount when
rates and any other relevant circumstances.
donor nor the estate received a tax credit
This type of gift is analogous to a
calculating the tax credit or deduction.
when the death benefit was paid to the This permits the donor to avoid a capital
charitable annuity. If there is a right to
charity. For deaths after 1998, the donor gain altogether, or create the desired
encroach on the capital of the property,
is deemed to have made a gift to the amount of capital gain (for example to
CRA takes the view that the value of the
charity immediately before death, if the offset capital losses). Certain restrictions
residual interest will be nil. A trust will
charity receives the death benefit under apply in the case of a non-resident
generally be required for gifts of property
the policy within 36 months after death. individual disposing of Canadian real
other than real estate, so a residual
The fair market value of the gift is interest in the trust is donated to the estate to a charity.
deemed to be the fair market value, at the charity.
For gifts of securities traded on a
time of the individual’s death, of the right
For example, an individual donor designated stock exchange (such as
to that transfer.
may wish to donate a work of art to a shares, bonds, warrants and debentures)
A donor can also use life insurance charity, but retain possession of the art and mutual fund shares or units or shares
proceeds to pay a bequest in a will to a until her death. In these circumstances, or interests in certain segregated funds,
charity. The donor who owns an if the donor transfers title in the art to a the amount to be included as a taxable
insurance policy can fund the bequest, trust of which the charity is the residual capital gain is nil. The March 19, 2007
naming the estate as beneficiary of the beneficiary at the time of the gift, the budget extended this incentive to gifts to
policy. The will would include a bequest donor has made a gift of a residual private foundations made on or after that
equal to the death benefit from the interest in the trust, the value of which is day. It is thus more tax-efficient for the
insurance policy. On the donor’s death, based on the factors mentioned above. A donor to give such securities directly to a
the estate would pay the bequest to the gift of a residual interest may result in a charity, rather than sell them and give the
charity and receive the life insurance capital gain to the donor if the value of proceeds to the charity.
