Newsletter | Give to the Unexpected
EXPERT ADVICE: Leave a legacy through gifts of life insurance

As we begin the new year, what better time to strategically plan our donations for 2020. Rather than just focusing on how much we’d like to give to various causes, why not also focus on ways to give that can be tax-effective 

Donors have a variety of ways they can choose to donate to a charity: write a cheque, use a credit card, donate appreciated marketable securities, where there is the added benefit of paying no capital gains tax on the accrued gain, or even donate an RRSP, RRIF or TFSA.  

One seldom understood opportunity, however, is the donation of a life insurance policy, which can be quite tax-effective, depending on the circumstances of the donor and the way the life insurance gift is structured. 

The basics 

Charitable donations to registered charities or foundations, such as Weizmann Canada, attract both federal and provincial non-refundable tax credits. On the federal side, you get a credit of 15 per cent for the first $200 of annual charitable donations. The federal credit rate jumps to 29 per cent for cumulative donations above $200 (and 33 per cent for high income earners).  

Parallel provincial credits work similarly, although not all provinces have adopted their top tax rate as their top provincial donation credit rate. In total, therefore, someone who donates over $200 in a particular year to charity will get back between 40 and 54 per cent in tax credits, depending on their income level and province of residence.  

Gifting life insurance 

Donors who wish to leave a significant legacy gift to charity can turn to life insurance as a way of funding a much larger gift than they may have otherwise been able to afford. There are two main ways this can be accomplished. 

The first is to buy a policy and name the charity as the beneficiary. Upon death, the charity will receive the death benefit and your estate would be entitled to a donation tax credit equal to the death benefit paid to the charity. 

Since the death benefit is tax free, the donation receipt can be used by the estate to help fund potential taxes payable on the deemed disposition of various estate assets or the liquidation of an RRSP or RRIF (assuming no spousal rollover was available). 

The second way to structure a life insurance policy gift is to have the charity own the policy. If you transfer a life insurance policy to Weizmann, for example, you can receive an immediate tax receipt for the fair market value of the policy (as determined by an actuary) at the time you make the gift. 

Factors used in determining the fair market value include: the cash surrender value of the policy, any policy loan value, the face value, the state of health and life expectancy of the life insured, conversion privileges and replacement value.  

In addition, if you gift a policy on which you are still paying premiums, you will be entitled to a charitable donation receipt each year for the amount of the premiums you continue to pay on the policy. 

Be sure to discuss both options with your tax and insurance advisor, who can review the pros and cons. 

Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice. 

Leave a legacy, change the world. Make Weizmann Canada part of your estate plans to make the future brighter for all of humanity. Learn more. 

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