This short note discusses why a major gift combined with a bequest to a Canadian registered charity may be more tax effective than just a bequest to that same charity.
Let’s face it - few people donate to charity to make money but a little bit of planning can result in a gift costing less, which either benefits your estate or could be used to provide a greater gift to a charity of your choice. When an individual wants to leave in their will a large bequest to a charity, it may be worthwhile to consider whether it would be more tax advantageous to make a gift while one is alive and a smaller gift by will?
Let’s take Patricia. She is widowed, has a house worth $500,000 (with the mortgage paid off) and $500,000 in GIC savings. Her husband Jim passed away five years ago. She has no children. Patricia earns every year $50,000 from her pension and the income on her savings. Patricia has volunteered with a Canadian charity for the last twenty-five years and cares deeply about the fate of children around the world. Patricia has many options, but let’s look at 2 options:
Option 1 - leave everything by bequest
Patricia can leave her approximately 1 million dollars estate to the charity she cares about in her will. When she dies her estate would receive an official donation receipt for 1 million dollars. That donation receipt, although for 1 million dollars, can only be used as a credit against up to 100% of Patricia’s income in the year of her death and the immediately preceding year. In those two years she only earned $100,000 in income. Therefore, the 1 million dollar gift can only be used used $100,000 in income and consequently she will only have tax savings of $30,000 - $40,000.00. We can learn from this that if a donor leaves his or her whole estate to a charity, then it should be realized that in many cases the amount of the official donation receipt received will be far greater than the income of the deceased in the year of death and the previous year. Consequently, the official donation receipt may not be utilized fully.
Option 2 - leave something now and the rest by bequest
If the person has far more assets than he or she needs to live on, then it may be prudent from a tax-planning point of view to arrange for some donations during one’s lifetime as well as a large, but reduced, bequest. The donations during one’s lifetime can be utilized against up to 75% of current income and carried forward for 5 years. It is important that your client crunches the numbers otherwise he or she may lose out on substantial tax savings. So in the case of Patricia - if she donated $100,000 a few years before she died and $900,000 on death she may be able to dramatically increase the amount of tax saved because the $100,000 donation can be utilized against her income in the year of the donation and also in subsequent years and also the $900,000 donation can be used against income in the last two years of life. From a non-tax point of view, making a gift during one’s lifetime in addition to a bequest may be attractive because you get to see your money being used during your lifetime and also the charity of your choice gets to benefit immediately with part of the gift.
If you are going to leave a substantial bequest to a charity it may be worthwhile to discuss such a gift with a charity lawyer.
Mark Blumberg is a lawyer at Blumberg Segal LLP in Toronto, Ontario. He can be contacted at or at 416-361-1982 x. 237. To find out more about legal services that Blumbergs provides to Canadian charities and non-profits please visit the Blumbergs’ Non-Profit and Charities page at http://www.blumbergs.ca/non_profit.php or http://www.globalphilanthropy.ca
This article is for information purposes only. It is not intended to be legal advice. You should not act or abstain from acting based upon such information without first consulting a legal professional.
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Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.