In the previous e-newsletter we discussed the Lifetime Capital Gains Exemption (LCGE), the Lifetime Capital Gains Deduction (LCGD) and Cumulative Net Investment Losses (CNIL). We provided two questions on this topic. Below are the answers.
Answers to the questions in September’s Education Tip
Question 1. Answer: b. $31,500.
Rationale: Capital Gain = $900,000 [$1,500,000 FMV - $600,000 ACB]
Taxable Capital Gain = $450,000 [$900,000 X 0.50]
Net Taxable Capital Gain = $75,000 [$450,000 Taxable Capital Gain - $375,000 Lifetime Capital Gains Deduction]
Tax Payable = $31,500 [$75,000 X 0.42]
Question 2. Answer: b. $360,000
Rationale: Capital Gain = $780,000: $900,000 FMV ($90 X10,000 shares) - $120,000 ACB ($12 X10,000 shares). Taxable Capital Gain = $390,000 ($780,000 X 0.50). There is a $360,000 LCGD ($390,000 - $30,000 CNIL) that Donald could use towards reducing his $390,000 taxable capital gain. The question asked specifically for the LCGD that Donald could use which is $360,000. He will be required to pay tax on $30,000 ($390,000 - $360,000.)
We hear a lot in the media about the philanthropy of billionaires like Warren Buffet and Bill and Melinda Gates. As a CFP Professional, you are unlikely to see that level of wealth, but you will be called upon to help older Canadians of varying wealth with their charitable giving. With baby boomers aging and starting to focus on their legacy, the need for financial planning expertise in this area is growing in importance.
Below are some statistics about Canadians and their giving:
- About 84% of Canadians age 15 and older made a financial donation to a charitable or non-profit organization in 2007.
- Only 4% of the population made a financial donation of any amount in their will.
- Canadians donated about $10 billion dollars in 2007.
- CRA reports that within Canada there are over 160,000 registered charitable and not-for-profit organizations.
- The top three types of organizations supported by Canadians are 1) religious, 2) health and 3) social services.
Overview: In this e-newsletter, to assist you with your knowledge about charitable giving, we have included two general facts, which are followed by questions. The answers to these questions are at the end of this e-newsletter.FACT ONE: Generally, you can claim part or all of the eligible amount of your gifts, up to the limit of 75% of your net income for the year. If you give capital property you may be able to increase this limit by 25% of the taxable capital gain.
Question 1: Dwayne, who already donates $50 to charity each month, gifted some vacant land to the Boy Scouts of Canada, for a summer camp. At the time of the gift, the land had a fair market value (FMV) of $120,000 and Dwayne’s adjusted cost base (ACB) on the property was $80,000. In 2010 Dwayne elected to transfer the property to the charity, at its FMV of $120,000. Dwayne’s net income for 2010 was $60,000. What is the maximum amount that he could claim, for 2010, as a charitable donation for the purpose of the donations tax credit?
FACT TWO: If a life insurance policy is gifted to a registered charity while the donor is alive, the donor will receive a charitable donation receipt from the charity equal to the fair market value of the policy at the time of the transfer. The transfer of the policy from the donor to the charity will also trigger a disposition of the policy. Any policy gain must be reported by the transferor as income for the year of the transfer.
Question 2: Robert Nelson, a widower, is considering donating his life insurance policy to a charity and has called on his financial planner, Mabel Star, for her help. Before going out to see her client, Mabel reviewed the latest information on Robert’s $100,000 whole life, non-participating policy.
|Policy Beneficiary||Robert Nelson’s Estate|
|Issue Date||February 1, 1991|
|Cash Surrender Value||$9,500|
|Adjusted Cost Basis||$6,200|
Assume that Mr. Nelson gifts the policy today to his favourite charity and he will continue to pay the premiums himself. What statement below is correct?
This scenario is not possible. Mr. Nelson must gift the policy at death, at which time the policy’s death benefit can be gifted through Mr. Nelson’s will.
Mr. Nelson could transfer the policy to the charity today, but he would gain no tax advantage from the gift, from future premium payments or from the policy pay-out to the charity at the time of his death.
Mr. Nelson could transfer the policy to the charity and he might be able to claim a charitable gift at the time of transfer equal to the CSV ($9,500), plus claim the premiums ($800) he pays after the transfer as a charitable gift. The death benefit ($100,000) cannot be claimed as a tax deduction, on his terminal tax return, when he dies.
Mr. Nelson could transfer the policy to the charity today. An election could be filed on his income tax return deferring his right to use the charitable tax credit now, but claim the death benefit ($100,000) after his death as a charitable gift on his terminal return.
Question 3: Assume that Mr. Nelson did not absolutely assign his life insurance policy to the charity today but appointed the charity as the beneficiary in his policy. What statement is correct?
After the charity is named the beneficiary, Mr. Nelson could claim the premiums he pays each year as a charitable gift for income tax purposes. The $100,000 death benefit could also be claimed on his terminal tax return, as a charitable gift.
He should make the beneficiary appointment “irrevocable.” This is required in order to receive a charitable tax receipt after his death, on the death benefit paid to the charity.
He can only designate the charity as the beneficiary of the life insurance policy through his will. He cannot designate the charity as a beneficiary through a beneficiary designation in the insurance policy.
He will receive no charitable tax receipts from the charity for the cash surrender value or the premiums paid, but he will receive a charitable tax receipt for $100,000 from the charity to be used on his terminal tax return.
1. Answer: b. $65,000
For the year of transfer, the most that Dwayne could claim as a charitable donation for the purpose of the donations tax credit, would be 75% of his net income, plus 25% of any taxable capital gain arising as a result of the transfer.
His income for the year was $80,000 ($60,000 of net income, plus a $20,000 taxable capital gain arising from the transfer of the property to the Boy Scouts). This would result in $60,000 in donations tax credit room (75% of $80,000). Additionally, he would have $5,000 that he could use for the tax credit; 25% of the $20,000 taxable capital gain. The capital gain is $40,000, ($120,000 - $80,000) and 50% of the amount ($20,000) is taxable. Therefore, a total of $65,000 of the $120,000 gift could be claimed for the donations tax credit for the year 2011.
2. Answer: c.
Mr. Nelson has the legal right to gift the policy to the charity. The gift of the policy today gives rise to a charitable receipt to Robert of $9,500. In addition, charitable receipts will be provided for premiums paid by Mr. Nelson on the policy, after the gift is made to the charity. However, at the time of Mr. Nelson’s death, the charity will own the policy, so the payout of the death benefit would not constitute a charitable gift on Mr. Nelson’s part.
3. Answer: d.
Mr. Nelson appointed the charity as beneficiary in his life insurance policy. In this case the charitable gift is the life insurance policy death benefit only. The gift can be made through the policy or through the will. His estate would be able to claim the death benefit as a charitable gift on his terminal tax return. The charity would not issue any charitable tax receipts on premiums paid or the cash surrender value (CSV) because no gift is received until after Mr. Nelson’s death.
Good luck with your studies! Our November e-newsletter will deal with the retirement risk zone.
Ron Foran, CFP, CFA, CLU, FCSI
President, Foran Financial Institute
Ron Foran is the founder of Foran Financial Institute. He has lectured extensively around the world over 24 years on investments and financial planning. Ron has a passion for teaching, training and assisting students to pass exams, and is the primary instructor for Foran securities and investment management seminars. If you want to learn more about Ron or Foran Financial Institute, please go to www.foranfinancial.com.