The Retiree’s Easy Guide to Leaving Something Behind

by Rick Harcourt, PFA | Capital Estate Planning Corporation

It’s been said that there’s nothing certain in the world except death and taxes. What if I told you that phrase may only be half true?

We spend our working lives earning and spending — and we pay taxes every step of the way. In our working years, our priority is building for the future — paying down debt, building life experience, maybe supporting family. Once we’ve taken care of those pieces, many of us start to think about leaving something behind — making a mark on our community and family that will outlast any of us.

Charitable giving is a way to do that.

How Charitable Giving Works

When we die, we leave everything we own behind. The Canada Revenue Agency (CRA) looks at all the things you own that could be taxable and charges all the taxes all at once. So, for example, all of these things will be taxable:

  • all RRSPs (Registered Retirement Savings Plans)
  • all RRIFs (Registered Retirement Income Funds)
  • any property other than your principal residence
  • any employment or pension income from that year

For example, suppose this list adds up to $200,000 in taxable income.

Taxable Income (ex: RRIF) $200,000 – $63,000 taxes to CRA, $127,000 to your estate

However, CRA rules let you donate significant amounts to charity and get charitable receipts back to cancel out your taxes. How much can you donate? If you add up all of the income sources for the past two years (things like pension, CPP, OAS, and so on) plus everything that hasn’t been taxed yet (like RRSPs, RRIFs, capital gains, and so on) and put all those together, that’s how much you’re allowed to donate to charity and get a tax credit back.

It sounds great, right? There’s one catch. (There’s always a catch.) If you donate everything to charity, you’re leaving less to your heirs. For a lot of people, that doesn’t match with their priorities. So how do you solve that? With insurance and a special fund.

Smart Planning Using Insurance to Fund Charitable Giving

With this strategy, an insurance policy is built to “fund” the charitable contribution. It pays out to your estate, and you have a clause in your will directing the charities you’d like it to go toward. They give your estate a tax credit — which cancels out the taxes. The net result: a significant donation to your community, your entire estate goes to your heirs, and you’ve negated the taxes owing on your death.

If you’re married, this tax issue won’t come up when the first person dies — everything passes over to the spouse, tax-free. The issue arises when the second spouse passes away. Because of this, we use a tool called a joint-last-to-die (JLTD) insurance policy (if you’re single, you use a Single Life Insurance Policy). Since the JLTD doesn’t pay out until the second spouse dies, it costs significantly less than two individual policies.

Other Ways to Give

There are other ways to donate to charity too:

  1. Name a charity as a beneficiary in your will (without insurance funding) — this will give your estate a tax receipt.
  2. Donate stocks, securities, or mutual fund investments while you’re living — you’ll get a tax receipt now, and the charity won’t pay capital gains on the donated investments.
  3. Name a charity as the owner and beneficiary of a life insurance policy. You deduct the premiums now, and the charity gets the face value upon your death.
  4. Create a charitable foundation and donate to that. Your donations now (and until your death) will be a tax deduction, and the foundation will pay out to the charities of your choice every year as long as funds remain.

Where to Start?

Just this once, start at the end. Look to the end of life and decide if you want to leave a donation that will outlast you. Look at the assets you have saved up. This will be your starting point for your “tax risk.” From there, decide how much of that tax risk you want to take care of through giving.

Rick Harcourt, PFA, is the Manager for Group and Voluntary Benefits with Capital Estate Planning Corporation — the providers of the ATA Voluntary Benefit Program, a suite of financial services purpose-built for teachers, retired teachers, and non-teaching education staff across Alberta.