Life Insurance - Maximizing Your Charitable Contribution
The Canada Revenue Agency currently recognizes that a non refundable tax credit is available for a charitable contribution up to 75% of a donor’s net income. There is also a 5 year carry forward of excess donations. In the year of death, the limit is 100% of net income, with any excess carried back to the prior year, which also benefits from the 100% limit.
Life Insurance provides a vehicle to effectively maximize the size of the gift. Here are a few examples to consider:
- What appears to be the simplest approach unfortunately does not provide any tax relief for either the premiums paid each year, or the amount of the life insurance proceeds at the time of the donor’s death. This situation is created when the donor has or acquires a life insurance policy, and simply names The Laurel Foundation as the beneficiary under the policy. No tax benefits flow to the donor at all, and is the least effective method of using a life insurance policy as a charitable donation.
- If a donor gives a policy to The Laurel Foundation, naming The Laurel Foundation as the new owner and beneficiary, the amount of premium paid each subsequent year is eligible as a charitable donation, and earns a tax credit. A donation receipt is issued at the time of the gift based on the cash value of the policy. There would also be a disposition of the policy at the time, and could produce a taxable policy gain. If The Laurel Foundation receives the life insurance proceeds upon the death of the donor, there are no tax implications to the deceased donor, or the estate.
- If a donor has, or acquires, a life insurance policy, and names the estate as beneficiary, which donates the life insurance proceeds to The Laurel Foundation through the will, the charitable donation tax credit for the amount of the proceeds can be claimed on the deceased donor’s last tax return. There are no tax deductions available for the premiums paid each year.
If these options are of interest, please discuss the ramifications with your insurance representative, or financial planner to ensure that one of these approaches fits comfortably with your financial plans.
The President or Executive Director would be happy to provide more details as background for your investigations in this area.