Canadian Business Franchise Articles

Author: Tony Gilbert with Aligned Capital Partners

These are copies of archived articles Tony wrote for Canadian Business Franchise Magazine.  They cover a wide breadth of areas and some details such as taxation may have changed since the original article was written. 

Read About:

• Disability Insurance (Income Replacement)
• Life Insurance
• Investing 101
• What Business Structure Is Best For You?
• Overhead Coverage
• Starting A Business
• Partnerships

Planned Giving

Many charities today are in search of much needed financial support.  There are many worthy causes to give to, so how can you as an individual help make a large impact upon a charity that is close to your heart?

Instead of doing the $20 here or the $100 there what if there was a way to make a larger donation and keep it tax efficient so that you and your estate benefit?  Well there are several options to consider when giving to charities and the government actually helped out by changing the Income Tax Act back in 1997.

The government increased the maximum credit allowed when gifting to a charity in the year of death and the prior year to 100% of income.   Prior to this it was 20% so quite a significant change.  This change has made the use of permanent life insurance much more advantageous and I will explore some of the reasons.

Firstly to make charitable gifts, you can do it while you are alive by simply donating an asset such as a stock portfolio to a charitable organization and by doing this you will receive a tax receipt.   What if we don't want to donate such an asset but would rather make a very large donation at the time of our death to benefit the charity?

The use of life insurance is the best method and there are several ways to structure a program.

Ownership of the life insurance policy by the charity.

The donor, applies for some permanent life insurance on their life.  Once the policy is approved, they assign the ownership over to the charity which is also the beneficiary.  By doing this, the donor (who will pay the premiums) can now use the premiums as a tax credit on their annual tax return.  So it is really no different than giving a charity $20 or $100/mth as the tax credit is the same, however what happens is when that donor dies a large sum of tax free money is paid out to the charity.   The end result is a much larger donation than could have ever been done via monthly cash donations.

Some things to be aware of via this method are that once ownership is assigned to the charity, you lose control.  This means that if you change your mind you cannot take back ownership or change the beneficiary as the charity owns the policy.  You could, however, stop paying the premiums but the charity could simply take on that obligation keeping the policy in force.

Ownership of policy by individual with charity as beneficiary

An individual could take out a life insurance policy on their life and make the charity the beneficiary which would enable the donor to retain control, however structuring it this way leads to no tax benefit while alive or at death as the premium cannot be deducted and by having the charity as direct beneficiary there is no tax receipt issued.

Owning the insurance personally with estate as beneficiary and gift made via will

This is the most optimal solution I believe.  First the donor retains control of the policy and if they decide to change the beneficiary in the future it can easily be done.  There is no tax credit for premiums however at the time of death is when the major tax benefit occurs.

At death the policy would be paid out tax free to the estate, via their will they would have a gift/bequest to donate $X to a given charity.  The executor would write a cheque to the charity who then would issue a tax receipt to the estate.  So the insurance has flowed into the estate and now been paid out generating a tax credit.

Example: the person at death had a taxable income of $400,000 from RRIF's, capital gains on stocks and other income.  Remember everything you own is deemed disposed of at death.  Some assets will rollover to a spouse however when the last spouse dies, taxes have to be paid by the estate before passing onto the next generation.  So in this example the estate has $400k of income with potentially $200k of tax owing (50% marginal tax bracket), if the person had insurance of $400k that was paid to the estate and subsequently paid to a charity via the will, a tax credit for $400k would be created which would for the most part nulify the tax burden the estate would have faced.

By doing this, the deceased has eliminated $200k of tax which heirs of the estate are pleased about (Canada Revenue Agency isn't happy of course as they were cut out) while at the same time donating a large amount of money to a worth while charity.

This is a long term plan but is certainly a win win.  Now you don't have to do the full amount but even small insurance policies can help much needed charities and provide tax relief for your estate.  The important thing is you are helping in a much greater financial way.

What type of insurance should you use?

Permanent insurance such as Universal Life, Term to age 100 or Whole Life are the ones that will work as they usually have level premiums for life and will be in force when you die.  Term life such as 10 or 20 year will just get too expensive to keep and therefore will not work.

To help keep the cost affordable purchase the insurance at a younger age or look at joint last to die policies.

For those looking to explore this idea further please don't hesitate to contact us at our toll free line or via email.  We are licenced in BC and Ontario and do a great deal of insurance via phone/email.