The charitable gift annuity is a popular planned giving instrument for elder Canadians, as it allows a person to make a significant contribution, while maintaining financial security.
There are many benefits of a gift annuity:
- A gift annuity allows you to make a significant gift, yet still enjoy the income from that gift;
- A gift annuity frees you from investment and management worries;
- Payments are fixed for your lifespan and, depending upon age, much of the income may be tax-free;
- An immediate tax receipt is available for a portion of the gift;
- You may make an annuity gift for as little as $10,000 and may add future gifts anytime; and,
- You may name your spouse as a joint survivor and the payments will continue for as long as either lives.
What Are Gift Annuities? (Also known as Gift Plus Annuities)
A gift annuity allows a donor to make a gift, in most cases receive a generous charitable tax receipt and receive an annual tax-free payment, an annuitant, for the rest of their lives. The can be established by and for an individual or a couple.
A gift annuity is a type of “irrevocable deferred gift.” This sort of classification, pure legalese, does not go far in describing what the gift annuity accomplishes for the Canadian Medical Foundation and its philanthropic efforts across Canada and the Donor. It is a useful classification for comparison purposes, though. While the bequest made in a will can be defined as a type of “revocable deferred gift” (since the Donor (or Testator) can change his or her mind about the gifts made in a will (bequest)), an annuity is a final decision.
How Does It Work?
Starting with a minimum gift of $10,000 (that can be funded with cash or other valuable property, such as stocks), a charitable gift annuity is established with the Canadian Medical Foundation, and, in return, the Donor receives a charitable tax receipt (calculated using annuity tables), a regular income (the annuity) for as long as the donor lives, and of course the opportunity to meaningfully support the philanthropic programs of the Canadian Medical Foundation, such as those providing financial aid for medical students, investments in timely research, and support for programs and services to address physician health and well-being from coast-to-coast-to-coast.
What Does a Gift Annuity Accomplish?
Using a gift annuity, a Donor can accomplish achieve their philanthropic goals, such as:
- The Donor may give a larger and more impactful gift in their lifetime;
- The Donor receives a tax-favorable income – for life; and,
- The gift provides ongoing support for the good charitable work of the Canadian Medical Foundation.
Who Utilizes the Gift Annuity?
Donors who are 70 years of age, or older, usually see the greatest advantages to using this type of gift vehicle because annuity income is taxed based on life expectancy tables approved by the Government. The plan allows a Donor to give a substantial gift, without losing the benefit of the investment revenue that could be earned. In fact, when the tax advantages are factored in, many Donors will find that their net return is higher through a gift annuity.
Mark Peters, age 70, wants to make a donation to the Canadian Medical Foundation but is concerned about having enough funds to meet his living expenses. He holds a $10,000 Canada Savings Bond. His annual return is 7.5%, or $750 per year. He will pay 40% tax on this amount, leaving him only $450 to spend after he has paid his taxes.
Now, if Mr. Peters had purchased a CMF Gift Annuity at 8.5%, he would receive an immediate tax receipt of $2,265, which would save him $906 on his next tax return. Of more significance, is the fact that the $850 would be tax-free for his lifetime.
This option is relatively new, available only after January 1, 2003. Now, there are good reasons to fund gift annuities with appreciated stocks, mutual funds and dividend reinvestment plans held outside of Registered Retirement Income Funds (RRIFs) and Registered Retirement Savings Plans (RRSPs).
An 83-year-old Donor or other CMF supporter funded an annuity with a transfer of stocks worth $100,000, which was originally purchased for $50,000. This is a capital gain of $50,000. Gift annuities funded with appreciated stocks will result in favourable tax treatment for a portion of the gain. Actual amounts will vary according to your own circumstances.
- If she transfers ownership of stocks to fund the CMF Annuity:
If she transfers ownership of stocks to fund the CMF Annuity:
|Charitable Gift Tax Receipt (A)||$45,942|
|Capital Gain Inclusion||46% gift, at 25% inclusion rate = $5,743|
|(Split receipt)||54% non-gift, at 50% inclusion rate = $13,514|
|Reported Capital Gain Income (B)||$19,257|
|Income Tax Payable @ 45% marginal rate X (B)||$8,666|
|Income Tax Receipt Remaining (A) – (B)||$26,685|
Now, compare the same Donor who sells stocks first, then funds the annuity with cash:
|Charitable Gift Tax Receipt (A)||$45,942|
|Capital Gain Inclusion||46% gift, at 25% inclusion rate = $0|
|(Split receipt)||54% non-gift, at 50% inclusion rate = $25,000|
|Reported Capital Gain Income (B)||$25,000|
|Income Tax Payable @ 45% marginal rate X (B)||$11,250|
|Income Tax Receipt Remaining (A) – (B)||$20,942|
The result is that while the tax receipt in both cases covers the taxes owing, the direct gift of stocks results in a much greater tax savings. The split receipt treatment of the capital gain inclusion has created tax savings that simply were not present before.
Also, the remaining tax receipt can be used to offset other income tax payable or to relieve tax liability in other assets the donor may have. For example, one could sell some highly appreciated stocks, pay the capital gains tax with the tax receipt and buy the stock back at a new higher rate. Very beneficial!