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Using Charitable Donations in Your Estate Plan

08/02/2011


It is important when considering a charitable donation in your Will that your Executors are left with clear instructions. The gift must be directed by your Will so the charitable donation will be utilized in your final income tax return. In order to receive a tax credit, it is necessary to receive a charitable donation receipt.

In many provinces, there are substantial tax credits for charitable gifting. In Alberta for instance, once you have donated in excess of $200 in a year, the tax savings are equal to 50% of the total amount donated. What this means is you can receive a tax refund equal to 50% of the donation amount.

For tax purposes, you are deemed to dispose of your assets immediately before your death at their fair market value. When you sell an asset for more than you paid for it, a capital gain will result. There are a few exceptions to this rule, for instance, when assets are transferred to your spouse, or certain farming assets are left to your children. At the date of death, you will be subject to tax on the capital gain that is not sheltered by your capital gain deduction.

Below is a summary of an Alberta resident making donations though his or her Will. In each of these scenarios, we have assumed the capital gain is not sheltered by the capital gains deduction.

Capital Gain on Death Assume Tax on Death Donation Required to Eliminate Tax Taxes after Donation $1,000,000 $200,000 $400,000 NIL $5,000,000 $1,000,000
$2,000,000
NIL
$10,000,000
$2,000,000
$4,000,000
NIL

There are many different types of assets that can be donated, each with different tax effects. If your Estate will have cash, you can simply donate a sum of money to your favourite charity. It is also possible to donate your registered accounts like RRSPs, life insurance proceeds, personally held assets, and shares of private and public corporations.

In addition to deciding which type of asset to donate, you may consider using an existing charity, a public foundation, or even setting up a private foundation.

As with any solid estate plan, it is advised that you work closely with your accountant, a tax specialist and your lawyer to ensure your goals are met and the tax effects are understood.