Charitable Life
Insurance . . .
the low-cost,
high-benefit gift
This article was written by Randall Reynolds and reproduced from
The Province, October 24, 2004
Thanks to legislation introduced by the Federal Government in its spring budget of 1997, Canadian taxpayers now have an opportunity to eliminate taxes when they pass their estate assets to their children, while at the same time assisting a Canadian charity of their choice, all with the Federal Government's blessing.
Prior to 1997 the most you could receipt to offset net income at death was 20 per cent of income. Today this has increased to 100 per cent. The Federal Government changed the rules in order to lighten the taxpayers’ load of fiscal responsibility. It is all part of a bigger plan by government to change the way Canadians perceive their overall social services. The desire seems to be to shift from government support to private support for charities. Through this legislation the government is encouraging Canadians to give generously.
Never before has it been more attractive for Canadians to pass on their wealth to charities. Basically what the government is saying is ….. give your money to charity or we will take most of it from you in the form of taxes.
In
the past most people believed it was only the rich who left large amounts to
charity. But because of this legislation, and because today the average
Canadian has a sizeable taxable income at the time of death, (even higher in
the future), almost every taxpayer can benefit by making a charitable gift through
life insurance.
If Canadians exhibit the same level of altruism towards
their children as Americans (and we can assume due to the similarities of the
two countries it would be very close), then over the next decade or two older
Canadians will bequeath about $2.6 trillion to their children.
In
the absence of significant philanthropy, you can bet that the income tax
collector will be there to claim the lion's share of this wealth transfer.
The
average Canadian faces a significant tax liability on his or her death. For
most Canadians their biggest tax year will be the year in which they die. Due
to a tax regulation known as the "deemed disposition" rule, their
estate will be "deemed" to have been sold at fair market value and
will be taxed accordingly.
The
Government does allow for the resulting tax debt to be financed and paid over
time with interest, of course, but it must be paid, and even then acceptable
collateral must be posted with and be acceptable to the Minister of Finance.
The size and implications of the tax problem at death depends on the amount of taxes owing. Most people are unaware of the tax liabilities they are building up with every working year. These liabilities could potentially devastate your estate and your children's legacy.
An
attractive method of eliminating your tax liability at death is to leave a
significant gift of life insurance to a Canadian Charity. When the life insurance
proceeds are received by the Charity an official tax receipt will be provided
to the executor of the estate. The executor attaches the receipt to the
deceased's final income tax return and claims a deduction for 100 per cent of
the proceeds. This deduction offsets net income and thereby reduces or
eliminates the tax payable.
The
cost of the gift of life insurance over life expectancy is less than half the
cost of the taxes themselves. To ignore this tax liability and do nothing is
the expensive approach. More information can be obtained on an individual basis
by contacting a financial advisor.
Other
articles included this month:
Charitable Gift Annuities – new guidelines and tax rules
Return to
January/February 2005 The
$$$ Maker Report