Managing Your Money

The Importance of Giving

A wide range of research supports the fact that giving makes us feel happier and enjoy better health. In fact, a 2008 study* by a Harvard Business School professor found that giving money to someone else, lifted participants’ happiness more than spending it on themselves (despite participants’ prediction that spending it on themselves would make them happier.)

Giving can also be contagious. And numerous studies have shown that when one person behaves generously, it inspires observers to be generous as well. If there’s someone who has inspired many by his generosity it’s P.K. Subban with his donation to The Montreal Children’s Hospital. He wanted to make a difference, and he has, not only to The Montreal Children’s, but to all of those who have been inspired by his act of generosity.

According to Statistics Canada, in 2010, approximately 85% of the population aged 15 and over, made a financial donation to a charitable or non-profit organization. So obviously, giving is important to many people, and people want to feel like they can make a difference. Whether you wish to support medical research, the world’s underprivileged children, the arts, or any other causes, giving back speaks volumes about who you are and the values that are important to your family. It could mean planning a one-time gift or leaving a family legacy. More and more, charitable giving is becoming a part of people’s wealth transfer plans, and developing a long term charitable giving strategy can be an integral part of your financial plan.

As people look at the assets they’ve accumulated and start deciding how, and to whom, to transfer that lifetime of wealth, they’re looking for ways to build in charitable giving into their plans. Obviously, financial needs and abilities must be considered, as well as wishes to include children or other beneficiaries in the transfer. Each individual investor or business owner has unique objectives and priorities that must be considered. Although charitable gifts are eligible for tax credits, these credits do not usually offset the amount of the gift, but these tax incentives do make giving more cost effective. When planning your giving through your estate, you should be careful to ensure that the estate will be able to fully utilize the donation tax credit up to 100% of net income in the year of death, and previous tax year.

There are various ways you can structure your charitable donations to receive the best tax treatment. Many investment firms, such as ours, have in-house Tax & Estate Planning professionals to deliver customized wealth managements solutions, as well as already established programs to make setting up your charitable giving program simpler and more cost effective.

Without getting into too much detail, here are some ways that you may consider giving:

Donor Advised Funds:

One way you could realize your charitable objectives is by using what’s called a donor advised fund (DAF). It’s sometimes referred to as a “mini-private foundation”. It’s a simple and cost effective way to do charitable giving, and it’s accessible to a wide range of donors and philanthropists. It’s basically an account that you set up with a charity, and you make an up-front, irrevocable donation to the account. Eligible donations include cash, stocks, bonds, mutual funds, and some investment firms have a structure set up to work directly with the charity.

Gifts of RRSPs/RRIFs

The value of your RRSP or RRIF is fully taxable on your death, unless you have designated it to be rolled over to a spouse (or dependent child). RRSPs or RRIFs left to other beneficiaries such as children or friends, are fully taxable, and the tax bill can be very high, over 50%! But if you designate a registered charity as the beneficiary in your will, your estate will receive a donation receipt for the full value of the plan on your death to reduce the taxes payable.

Gifts of life insurance

There are two basic ways that gifts of life insurance can be accomplished. By making the charity the owner and the beneficiary of the life insurance policy, the annual premiums paid by you are eligible for a tax receipt. By naming the charity as the beneficiary of the policy or designating the bequest in your will, your estate will receive a charitable donation receipt equivalent to the life insurance death benefit amount. In the second case the annual premiums are not eligible for the donation tax credit.

Charitable Insured Annuity and Charitable Remainder Trust

These are two alternatives that are set up quite differently, but can attain similar objectives. They allow for a continuation of income to go to the donor (you), during your life time, and at death, the charity receives the capital (either from the charitable remainder trust, or the insurance from the insured annuity). So for someone who needs to continue receiving income from their assets, this could be a good solution. The major difference is the tax credit. With the Charitable Remainder Trust, you would receive the tax receipt up front, when you set it up (based on a present value calculation). With the charitable insured annuity, you would receive annual donation receipts for the premium amounts.

Charitable giving strategies can become quite complex. It’s important that your gift complements your overall wealth management strategy and supports your cause in a way that’s effective and lasting. Discussing your goals with your financial planner will help you to consider the best possible options to realize your charitable giving objectives.

*Dunn, Elizabeth W., Lara B. Aknin, and Michael I. Norton. “Spending Money on Others Promotes Happiness.” Science 319, no. 5870 (March 21, 2008): 1687–1688

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with 20 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or Lynn.MacNeil@RichardsonGMP.com.
The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.