12 charity does not sell the shares within five years, the donor will not receive a receipt and the gain will never be tax- able. RRSPs/RRIFs People may find that they have more than enough money in their RRSPs once they get to a certain age and are willing to make donations in their lifetime to see the fruits of those donations while they are still alive. The RRSP rules do allow for withdrawals from the plan but, upon withdrawal, the institution that holds the account (usually a bank) is required to withhold certain amounts. These amounts on a per withdrawal basis (i.e., not cumulatively for the year) are: • 10% (5% in Québec) on withdrawals up to $5,000; • 20% (10% in Québec) on withdrawals between $5,001 and $15,000; and, • 30% (15% in Québec) on withdrawals of more than $15,000. * Québec may apply its own provincial withholding amount The amounts withdrawn are claimed as income to the owner of the RRSP in the year withdrawn and tax is paid at the owner’s marginal rate. Thus, if a poten- tial donor wants to donate $50,000 and has that money in his or her RRSP, a withdrawal of $50,000 would give the potential donor outside of Québec $35,000 cash to donate. The remaining 30 per cent ($15,000 in this case) would be remitted to the government by the bank and credited as income tax already paid when the donor files his or her tax return for that year. A donor may also wish to donate his or her RRSP or RRIF upon death. There are two ways to do this. One way is to list the charity as a beneficiary of the RRSP in the donor’s Will. The other way is to make use of the direct beneficiary elec- tion, which is signed when the RRSP is first opened (and can usually be changed at will). If the first method is used, the RRSP will fall into the donor’s general estate before passing on to the charity. Under the second method, the RRSP will automatically become the property of the charity without going through the estate. The advantage of using the RRSP direct beneficiary election is that the RRSP will not pass through probate. When a Will is probated, the various provinces charge different amounts of tax on the total value of assets passed on in the Will. Thus, the amount of money in an RRSP is added to the other assets and a portion is taken by the government before any of the assets are passed on. INSURANCE Sometimes an insurance policy becomes superfluous. If the policy is unnecessary, the donor may decide to donate it to charity. From a tax perspective, the donor of a life insurance policy will have an income inclusion of the proceeds of disposition less the adjusted cost base (ACB). An income inclusion is distinct from a capi- tal gain and effectively means that a donation of an insurance policy has no net tax benefit for the donor. The ACB calculation is rather complicated and considers the premiums paid, dividends received, and – for policies purchased after 1982 – the Net Cost of Pure Insurance (NCPI). Despite the ominous name, the NCPI is not overly difficult to calculate, although it will likely require professional advice from either an expe- rienced advisor or the insurance compa- ny involved. In a February 2008 bulletin— and later in another setting — the Canada Revenue Agency (CRA) laid down cer- tain guidelines for determining the Fair Market Value of a disposed-of policy. In these pronouncements, the calculation of the proceeds of disposition (POD) of an insurance policy considers: • the policy’s loan value; • the face value of the policy; • the state of health of the insured and their life expectancy; • conversion privileges; • other policy terms, such as term rid- ers, double indemnity provisions; and, • replacement value. The idea here is that the value of a poli- cy may or may not be accurately reflect- ed by any cash surrender value held by the policy. When valuing the policy for both tax and receipting purposes, the donor and the charity must take into account the fact that the donor may be very ill and the policy may mature shortly after donation. A policy that would otherwise be impossible to receipt would become valuable to the donor. To do this, the advice of an actu- ary and an appraiser is critical to cor- rectly valuing the policy. The charity may either cash the policy and use the funds immediately or pay the premiums on the policy and collect the larger death benefit when the insured dies. Of course, a very generous donor may not only donate the policy to the charity but also donate the yearly premiums to the charity. In this case, both the donation of the policy and the donated premiums would be receiptable. ANNUITIES An annuity is a contract under which one person deposits a sum of money with another in exchange for a subse- quent income. It is basically the reverse concept of insurance. The income may be paid for either a specified period, for life, or for life with a minimum guaranteed period. Under the latter method, if the purchaser of the annuity dies during the guaranteed peri- od, the annuity will be paid to some other person whom the purchaser had designated to receive it. Although annuities are normally pur- chased from insurance companies or trust companies, life annuities are some- times purchased from charities. Essentially, a person gives the charity a sum of money irrevocably in exchange for a promise by the charity to pay the donor a monthly income for life. The funds received would then be invested by the charity at a higher rate than it would pay to the donor. For annuities issued after December 21, 2002, the donor would be eligible to receive a receipt for an amount equal to the excess of the amount contributed by the donor over the amount that would be paid at that time to an arm’s-length third party to acquire an annuity to fund the guaranteed payments.
