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Life insurance offers a host of possibilities
for making a gift with significant value. Its appeal lies
in its affordability for those with little cash savings to
make large cash gifts-but it can also be attractive for the
elderly donor who is prepared to forego a lump sum to see
it returned as a death benefit. There are several options.
- The life insurance policy is owned by
the Community Foundation of the North Okanagan. A donor
purchases a policy and then immediately donates it to the
Foundation, which designates itself as beneficiary. The
donor will receive acknowledgment from the Foundation as
soon as the policy is purchased and assigned. The donor
continues to pay the premiums and receives a charitable
receipt for each premium payment. Upon the death of the
donor, the policy will be paid out to the Foundation who
will create an endowment fund as previously discussed.
- A donor can give an existing policy
to the Community Foundation of the North Okanagan, in which
case he or she received a tax receipt for the cash surrender
value of the policy.
- Paid up insurance policies may also
be given to the Community Foundation of the North Okanagan
during the lifetime of the donor, but care must be taken,
in the case of an absolute assignment, to check whether
this might trigger personal tax problems.
Life insurance can also be owned by the donor.
In this case, the donor does not receive a tax credit
for the premiums paid; instead, the donor’s estate
will receive a tax credit for the death benefit paid
to the Foundation. The charitable donation (to a limit
of 100% of income in the year of death and the year
preceding death - see Section
E: Gifts Made Through Wills) - will reduce taxes
otherwise payable at death, such as capital gains arising
from deemed disposition. The charitable donation tax
credit has been extended to include the proceeds from
Life Insurance Policies, RRSPs and RRIFs where a charity
is designated as the beneficiary, in the March, 2000
Federal Budget.
Note: At the time of this release,
Canada Customs and Revenue Agency does not permit charitable
foundations to offer charitable annuities as foundations may
not incur debt obligations, directly or indirectly. The
discussion in the first paragraph below is only included to
give the reader an insight into this technique.
- 1. An annuity is a life insurance product.
A charitable annuity is an annuity issued by the
Foundation, and underwritten by a life insurer. The donor
gives the Foundation a lump sum, and the Foundation in turn,
through the insurer, promises to pay the donor an agreed
upon series of payments for life. Revenue Canada publishes
a life expectancy table that allows the Foundation to calculate,
as a lump sum, the level at which this stream of payments
represents only a return of the original capital to the
donor. Anything less is an immediate charitable gift that
generates a receipt, and all the payments made under the
annuity are tax free.
- 2. Donors frequently combine a non-charitable
annuity with a life insurance purchase. The annuity
payments are, in part, used to fund a Community Foundation
of the North Okanagan-owned life insurance policy, with
the result that the charitable receipt for the annual premiums
reduces the taxable component of the annuity. Those in the
life insurance field maintain that the use of this technique
produces a higher annual income for the donor than simply
investing the capital in a term deposit, paying tax on the
interest, and leaving the capital to charity by Will. A
close comparison should be made with the charitable remainder
trust (See Section F: Gifts Made Through
Trusts).
The charitable donation tax credit has
been extended to include the proceeds from Life Insurance
Policies, RRSPs and RRIFs where a charity is designated as
the beneficiary, in the March, 2000 Federal Budget.
Previously, the tax credit was available only
if the proceeds were left to the donor’s estate, which
would then make a cash bequest to the deceased donor’s
designated charity, pay income tax on the proceeds of a RRSP
or RRIF (although not on the proceeds of life insurance policies),
and claim the charitable tax credit for the cash bequest.
This option continues, but under the new rules, donors have
another alternative:
- To designate that the proceeds of his/her
RRSP, RRIF or life insurance policy be paid directly to
a charity (or charities) upon death, and
- The estate pay income tax on RRSP and RRIF
proceeds, but
- The tax payable is offset by the amount
of the charitable donation tax credit.
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Index | Part
J »
Technical Reference
IT-244R3 Gifts by individuals of life insurance policies as
charitable donations
IT-111R2 Annuities purchased from charitable organizations
Canadian Centre for Philanthropy, March 1, 2000
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