Is cash passé? Why more people are donating securities or an insurance policy

It’s great to give money to charity. And as wonderful as gifts of cash are, more donors are realizing the benefits of donating securities or a life insurance policy instead.

The tax benefits of charitable giving

The tax benefits that go with making a donation to a worthy cause can be a nice incentive to bump up your contribution. When Canadians donate money to a registered charitable organization, they’re eligible for a non-refundable tax credit. According to the Income Tax Act, they can claim a charitable credit up to 75% of their net income in any given year (the figure to 100% in the year a taxpayer dies). For eligible donations over $200, the amount of the credit is equal to between 40-50% of the donation, depending on the province in which the donor resides. (Donations can be pooled between spouses. As a couple, you only need to break through the $200 threshold once.)

The charitable donation should be included on the tax return for the year in which the donation occurred. However, the tax credit does not have to be claimed in the same year, as the Canada Revenue Agency (CRA) and Revenu Québec allow you to claim it until five years after the gift was made.
As great as these tax credits are, donating securities or an insurance policy instead of cash can increase your donation amount and tax-savings potential.

Transferring securities

Many charities will gladly accept the gift of securities, and if the securities you donate have accrued capital gains, then this strategy has a clear advantage for you. Both the CRA and Revenu Québec let you avoid paying any capital gains taxes on gifts of eligible securities. Securities that qualify include stocks listed on public exchanges, mutual fund units, and certain bonds.

You can only avoid the capital gains taxes if you donate the securities to the charity directly. If you sell appreciated securities in order to make a cash donation, the disposition will trigger a capital gain with a corresponding tax liability. For individuals in the highest income brackets, this means roughly one quarter of the gain will be owed as tax. As a result, the amount available to donate to the charity would be reduced by around 25%, as will the tax credit.

Donating a life insurance policy

The process for donating a life insurance policy is a bit more complex than donating securities, and there are actually a few ways to go about it. But as with donating securities, it can be beneficial both for the charity and the donor. Along with tax incentives, donating insurance can be a way to make a large gift without having to make a large cash outlay.

One method is to simply name a charity as the beneficiary of your existing life insurance policy. Upon your death, your estate will receive the tax credit. This can be used to offset any tax that may be payable. Another advantage of going this route is that you’ll retain control of the policy. Should you so choose, you can change the beneficiary of the policy at any time. One drawback of retaining ownership of the policy until your death is that you won’t receive a tax credit for the premiums you paid.

A second approach is to transfer your life insurance policy to a specified charity while you’re still living. This transfer must be ‘irrevocable’. In other words, once you give the charity your policy, you won’t be able to take it back.

Transferring ownership of your insurance policy means you’ll be eligible for a tax receipt immediately. Unlike with securities, where the amount is pretty straightforward, the fair market value (FMV) of the insurance policy can take one of two forms. In the first case, you may claim an amount equal to the cash surrender value of the policy, less any policy loans outstanding.

However, it may be that, for a variety of factors (such as your age or health), the fair market value of your policy is much greater than the cash surrender value. For example, on a term policy, you will have a cash surrender value of zero, and if the premiums are too expensive to continue or you no longer need the insurance for the original purpose, you may deem the policy to be worthless to you. As such, you might consider closing the policy. Before doing so, you would be wise to consider whether the FMV is something higher than zero; if it is, then a donation to charity would be worth exploring.

In this event, you can have an independent valuator determine the value of the policy for the purpose of claiming a tax credit. You also need to find a charity willing to take on the policy, as it involves a bit more paperwork than a cash donation for both the donor and the charity, and the donor may incur some extra expenses.

As with many issues involving personal finance, your strategy for donating to charity should take into account your personal circumstances. Before donating cash, it’s worth thinking about whether an in-kind gift of securities or insurance makes more sense.

Andrew Hepburn is a freelance financial writer and journalist based in Toronto. He has written for the Globe and Mail, Maclean’s, and Morningstar.

This article was published in T.E. Wealth’s Strategies newsletter, June 2018 edition. Read the full edition here.

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These articles are for general informational purposes only. Please obtain professional advice before taking any action based on this information. No endorsement or approval of any third parties or their advice, information, products or services should be implied by any references to third parties contained in any article. Trademarks cited in these articles are the respective properties of their owners.

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