In the context of estate planning, charitable giving after one's passing is an important consideration for many people. Planned gifts offer a powerful way to give back to one's community and enhance contributions to causes that have been important during lifetime. In addition to fulfilling philanthropic goals, these gifts often come with significant tax benefits.
Many factors play into charitable giving, including which charity or charities to benefit, the size of the gift, the purpose of the gift, the timing of the gift, and the way to donate. This article provides an overview of different ways to give on death.
Understanding tax benefits in charitable giving
Individuals often donate to satisfy charitable objectives. To provide a framework for charitable giving on death, it is helpful to understand the tax benefits of making donations.
When individuals make donations to eligible charities, they can claim charitable tax credits that can be used to reduce their income taxes. A person is able to claim charitable tax credits for donations in a given year up to 75% of their net income, subject to certain exceptions. The charitable tax credit can be carried forward for up to five years. In the year of death, the limit increases from 75% to 100% of net income.
An individual can deduct 80% of the charitable tax credit to reduce any Alternative Minimum Tax (AMT) payable. The AMT system imposes a minimum level of tax on individuals who claim certain tax deductions, exemptions or credits to reduce their taxes to very low levels. Changes to the AMT rules are effective for tax years 2024 onwards (previously a charitable tax credit could be fully applied against AMT owing). AMT does not apply on death.
On death, various factors impact the overall tax liability of a person's estate. There is a deemed disposition on death of all capital property resulting in capital gains being triggered. Additionally, the fair market value of a registered retirement plan (i.e., an RRSP or RRIF) at death is included as income on the terminal tax return.
There are ways to defer the taxes, including by rolling over assets to a spouse or common-law partner, or there may be ways to mitigate the taxes, including with life insurance. Individuals are able to reduce the taxes owing on death by effectively utilizing charitable tax credits. Charitable tax credits can be used against 100% of net income in the year of death, which can include, for example, large gains on private company shares or an investment portfolio or the income that will be payable on a registered retirement plan.
If an estate is designated as a graduated rate estate (GRE), as defined in the Income Tax Act (Canada), there is added flexibility in allocating donation credits. Donations made while the estate is designated as a GRE - within a period of up to 36 months post-death - allow for the use of these credits across different tax years, including a carryback to taxable income in the year immediately prior to death. In addition, the usual rule for five-year carryforward will apply.
Giving under a will
Many individuals choose to make charitable gifts under their wills. They can do so by providing for a fixed amount or a specific asset or by leaving a percentage of the estate.
Gifts can be made in cash or in-kind, which has additional tax considerations. Certain property will qualify for an inclusion rate of zero on any capital gains realized on the gift and there will be an elimination of the taxable capital gain on the appreciated value of the gift for income tax purposes and a partial reduction for AMT purposes. In addition, the donation tax credit will be issued for the fair market value of the gift.
For example, if an individual dies with a portfolio of publicly listed securities with substantial accrued gains, then it may be advantageous to donate the securities in the portfolio to a charity as opposed to liquidating the securities and then donating the cash value after-tax.
Registered plans and life insurance
In addition to bequests made under a will, individuals can designate a charity as the beneficiary of life insurance proceeds and registered plans. Upon death, the charity would receive the proceeds and the deceased's estate would claim a donation tax credit.
Similarly, with life insurance, a charity can be designated as the beneficiary and on death the charity would receive the insurance proceeds and the deceased's estate would claim a donation tax credit. An individual can also donate a life insurance policy to a charity during their lifetime by assigning ownership to the charity and designating the charity as the beneficiary of the policy. In this case, the individual would realize the tax advantages during their lifetime.
Additional considerations
An individual can consider leaving the gift for a general purpose or for a specific purpose. For example, funding a specific project or benefiting a specific group or department at an organization.
Consideration can be given to sharing information about a planned gift with the charity in advance. This may be a good idea where an individual wants to specify the purpose of the gift. Additionally, charities often wish to recognize donors providing planned gifts.
For long-term charitable giving which can engage the next generation, individuals can consider setting up a private foundation or establishing a donor-advised fund with a public foundation or financial institution.
As individuals consider their estate planning, it is essential to thoughtfully assess charitable giving options that align with personal values and objectives. Consulting with professionals can help ensure that charitable intentions are fulfilled effectively. Ultimately, a well-considered approach to charitable giving can have a lasting impact on the chosen causes and the greater community and, as an added benefit, reduce the tax bill.
Originally published by Guardian Partners Inc. (Winter 2025 edition of Amplify)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
