2property (to a maximum of 25% of the lesser of the capital cost or the fair market value of the depreciable property). 2. Annuities Prior to December 20, 2002 a donor could transfer cash to a charity which undertook to pay an annuity for life to
to deal with “split-receipting”. CRA has
changed its administrative policy
dealing with annuities and no longer
applies the administrative policy in
the donor, or perhaps to the donor and
IT-111R2 for annuities issued after
a spouse, as long as one of them was
December 20, 2002. CRA has
TYPES OF GIFTS
alive. The annuity payment received by
acknowledged that its earlier
The following are some basic features
the donor would be a blend of interest
administrative position has no basis in
and tax consequences of certain types of
and capital, and only the interest
law and cannot be continued in the
gifts.
portion would normally be taxable. If
face of the proposed changes. Under
the proposed changes, the value of
1. Gifts by Will Gifts are often made by will, as “testamentary” gifts. The donor
the donor transferred cash to the charity
in excess of the amount expected to be
property received from a charity in
received over the term of the annuity,
exchange for a gift must be determined
the excess was considered under CRA’s
and that value will become the cost of
that property to the charity. As a result,
(“testator”) states in a will that on death,
administrative policy to be a gift and
where an amount is transferred to a
property is to be given as a bequest or
the charity could issue a tax receipt for
charity by a donor and the advantage
legacy to a specified charity or a charity
the excess. CRA’s policy as stated in
received by the donor is a stream of
to be chosen by the executors. The gift
IT-111R2 entitled “Annuities Purchased
annuity payments, the amount of the
can be cash or property, such as a work
from Charitable Organizations” was not
gift will be equal to the excess of the
of art or shares. If the testator leaves too
to tax any portion of an annuity payment
amount transferred by the donor to the
much discretion to the executors in
received by a donor in such
charity over the amount that would be
choosing a charity or the amount of the
circumstances.
required to purchase an annuity that
gift, CRA may allege the gift is made by
If the donor died earlier than
would provide the same payments.
the estate and not deemed to be made
expected, the charity would keep the
CRA has stated that despite the
in the year of death.
remaining funds. If the donor lived
withdrawal of its administrative
Otherwise, the testator is deemed to
beyond the life expectancy, the charity
position, it expects charitable annuities
have made the gift immediately before
had to meet its commitments and might
to continue as a means of fundraising
the date of death. Therefore, in the
need to use other funds to do so.
which could be more advantageous to
terminal return for the year of death, a
tax credit is available in computing tax
otherwise payable. Any unused tax
credits in the year of death can be
carried back and used to reduce taxes
payable in the prior year. The credit is
available to offset 100% of net income
for the year of death and the prior year.
This credit is of particular benefit in
calculating tax otherwise payable in the
year of death, since the deceased is
deemed to have disposed of all capital
assets immediately before death (subject
to certain exceptions, such as for
spousal rollovers) at fair market value,
thereby realizing capital gains in the
year of death.
Only charitable organizations can
issue annuities without adverse tax
consequences. Foundations can be
deregistered if they incur ineligible debt
obligations. Furthermore, a charity
must ensure that it has authority to
issue annuities pursuant to provincial
laws dealing with insurance or other
relevant laws. In many cases, the charity
will purchase an annuity from a financial
institution rather than issuing it itself,
to reduce its risk of loss.
The Department of Finance
announced a number of proposed
changes on December 20, 2002. These
proposals were modified on December
5, 2003, in response to so-called “art
the donor than in the past.
In an example mentioned by CRA,
for a donor with a life expectancy of
eight years, who actually lives for eight
years and makes a cash payment of
$100,000, in exchange for annuity
payments of $10,000 for each of those
eight years, the cost of the annuity that
will pay $80,000 over eight years is
$50,000.
Under
the
former
administrative practice, the donor
would be entitled to a tax receipt for
$20,000 in the year of the payment and
would receive a total of $80,000 as
annuity payments tax-free. Under the
proposed changes, the donor will
receive a tax receipt for $50,000 in the
CRA has stated that, consistent with
flip” transactions, and eventually
year of the gift, and will receive $80,000
its administrative policy allowing
introduced in Bill C- 33 in November,
in annuity payments, of which $30,000
spouses to decide which of them can
2006 and again in Bill C- 10 in
will be included in income over the
claim credit for a donation, regardless
November, 2007, after Bill C- 33 died
eight years, as blended payments.
of the name on the official receipt,
when Parliament prorogued. Bill C- 10
where a charitable gift is made by an
individual in his or her will, and is
deemed to be made in the year of
death, a surviving spouse will have the
3also died on the order paper. The proposed changes have not been enacted as at April 30, 2012. Nevertheless, CRA is administering the
3. Life Insurance A charity can benefit from gifts of insurance policies in several ways. From
option of claiming donations made by
the deceased spouse in the year of
death.
law as if these changes were in place,
since they will be retroactive.
One major change deals with the
measurement of a gift where the donor
receives some advantage in exchange,
the donor’s point of view, a gift of an
insurance policy allows a large donation,
at a relatively small cost to the donor.
CRA’s administrative position on
donations of life insurance policies is
