TIM CESTNICK "Recession is coming," Rob said. "We've got to cut back now. My electrical bill for October will be one-third what it was in September," he said proudly.
"Rob, pass me those infrared goggles so I can see you," I replied.
Some people are cutting back their spending, and many charities today are concerned whether donors will be as generous this fall as they have been in the recent past. The fact is, those needs that are met by these charities don't just disappear in tough economic times. So, let's all make an effort to be generous this fall.
THE IDEAS
How can you be more generous when you may not have the cash to give? There are a few ideas. Today, let's talk about donating life insurance.
Donate life insurance today. Like many Canadians, maybe you've got an old life insurance policy that you don't need any longer. Consider assigning (that is, transferring) the policy to a Canadian registered charity. There are a couple of tax implications to this.
First, you'll be deemed to have disposed of the policy at its "value," which under Canadian tax law means the cash surrender value of the policy. So, there could be a gain on the transfer of the policy to the charity. By the way, this gain is taxed as regular income, not as a capital gain.
But don't fret. You'll also be entitled to a donation tax credit for the "fair market value" of the policy. This donation tax credit should fully eliminate the tax that might otherwise result from that gain I just spoke about. You'll also be entitled to a tax credit for any premiums you continue to pay on the policy after assigning it to the charity.
As an aside, there's a mismatch between two provisions in our tax law that could work to your advantage here.
First, any gain from the transfer of the policy to a charity is calculated using the cash surrender value of the policy as the definition of the "value" of the policy.
Second, your donation receipt will be calculated based on the "fair market value" of the policy, which the Canada Revenue Agency has said may be different than the cash surrender value (by the way, this is a relatively new position taken by CRA). In fact, that fair market value could be much higher than the cash surrender value in some cases since it will be based on a number of factors, including the health of the insured person.
So, if your policy has no cash surrender value, there won't be a taxable gain on the transfer of the policy to a registered charity, but there may still be a value for purposes of calculating the donation tax credit, so you could win from a tax perspective. Follow me?
Donate life insurance upon death. Another way to donate life insurance is to keep ownership of your policy and simply name your favourite Canadian registered charity as the beneficiary of the policy. You'll be entitled to a donation tax credit in the year of your death for the death benefit that is paid out to the charity. This could result in a much higher tax credit than what you might get by donating the policy today. The only catch is that you won't get the tax credit until the year of death, and you won't be entitled to a tax credit for the premiums you pay on the policy between now and your date of death. Prior to the year 2000, you wouldn't have received a tax credit for the death benefit left to the charity as the beneficiary of a policy, but thank goodness common sense prevailed and that tax relief is now available.
THE CHOICE
Which approach to donating life insurance is better? Well, that depends on whether you want a smaller amount of tax relief today, or greater tax relief on death. You'll want to make sure that you have sufficient income in the year of death, and the immediately prior year, to absorb the full donation tax credits you'll be able to claim if you opt for the second approach. If the insurance policy is big enough, and your income is low enough, you may not get the full tax relief in the year of death.
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