Many Canadians choose to donate to charities in an effort to make life better for those less fortunate.
Charities play an important part in Canadian society, raising money for programs that would not otherwise be able to financially survive.
Before donating, it is important to make sure it is a legitimate recognized charity, and that your donation is being spent properly. Unfortunately, there are some unscrupulous people posing as charities in order to illegally profit from donations.
With so many different charities to choose from, potential donors need to exercise some caution before committing to donating their money. A simple way to verify if a charity is legitimate is to see if they are registered under the Income Tax Act. The Canada Revenue Agency registers qualifying organizations as charities and handles auditing and compliance issues. All registered charities are required by law to file an annual tax return, which is available to the public.
They must meet government requirements regarding their expenditures and activities. If a charity is registered, it is entitled to issue official receipts for donations, which can be used by the donor to reduce their payable income tax.
It is advisable to do some homework on the charity that you are interested in. A reputable charity will offer information if asked, such as budget information, annual reports, etc. It is important as well to ask exactly how your money will be spent, i.e. how much goes to operating costs vs. directly going to the intended cause.
Never give out your personal information to someone over the phone or the internet. Beware of solicitors who pressure you into giving a donation immediately, without allowing you the opportunity to investigate the charity first. This may be an indication that they are not a charity at all, but rather a “scam” that relies on high-pressure tactics to dupe unsuspecting citizens. These scams may also use “sound-alike” names of reputable charities, trying to trick a potential donor believe that they are legitimate, when in fact they are not.
Once you have decided on a reputable charity, you may want to consider donating a life insurance policy. This can be done by either gifting ownership of an existing policy to the charity, or by having the charity take out a policy on the donor’s life. With either of these options, the charity becomes the owner of the policy.
Choose carefully which option will suit your taxation purposes, as they carry very different results.
If you donate an existing policy or have the charity take out a policy on your life, a tax receipt can be issued for the fair market value. This is calculated by the cash surrender value of the policy minus any outstanding loans plus any accumulated interest. Premiums paid on the policy by the donor, either directly (by you to the insurer) or indirectly (funds paid to the charity that are specifically earmarked for payment of premiums) are considered charitable donations.
The charity can issue an annual receipt in regard to these premiums. The beneficiary designation does not need to be irrevocable in order to obtain this charitable tax credit. The donor may also be entitled to a tax deduction for the value of the donated policy. Upon death, however, the estate will not be entitled to any further tax benefits.
The other option is to purchase a policy and name your estate as beneficiary. You can then directly specify that the benefits go to your charity or charities. This option does not entitle the donor to a tax receipt for the premiums but instead entitles the individual for a charitable donation tax credit on the proceeds on their terminal return.
However, it is important to remember that there is no “carry-over” for gifts made in the year of death. If the full amount of the tax credit cannot be used, there is a provision in the tax laws to carry back any unused donation for one year. The donation limit for the year of death and the preceding year is limited to 100% of the net income.
Donating a life insurance policy can be beneficial to both the donor and the charity. Discuss with your family your intentions of donating a life insurance policy to charity. It is also advisable to seek help from a qualified Canadian insurance broker in order to ensure that you understand your options, and can select the method which best suits your taxation requirements.
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