Some Pitfalls to Avoid in Charitable Giving
When you consider making charitable gifts, either during your lifetime or after your death, the selection of recipients can be overwhelming. If you or a loved one has benefitted from a charitable organization, or if you have a history of giving to certain charities, the choice may be easier. But whenever a charitable gift is contemplated, there are pitfalls of which you should be aware in carrying out your philanthropic wishes.
One of the many benefits of charitable giving is the tax receipt. When the gift is made at death, 100% of the donation can be used to offset income received or deemed to be received at death. (For example, the “deemed disposition at death” rule results in a mandatory inclusion in taxable income of the value of RRSPs or RRIFs owned at death subject to exceptions when these assets are rolled over to a spouse or other qualified individual.) However, a charitable tax receipt will not be accepted by Canada Revenue Agency unless the charity is registered with its Charities Directorate. You or your legal adviser should always confirm that the charity is registered. This is easily done online at http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html
A different problem arises when the charity you have chosen later changes its name, amalgamates with another charity, loses its registered charitable status or winds up. If you are aware of any of these events, you may change your will or other planning documents. But if you do not, the gift to the charity may fail, but your general charitable intention will not. Generally, a court application will be required to determine whether the general charitable intent can be carried out by giving the gift to another, similar charity. Such applications can be costly and cause delays in the distribution of your estate. It is therefore preferable to include in your will or other planning document a direction that the executor or trustee has the power to make the gift to a charity carrying out similar work in the event that your chosen charity no longer exists in the form it was when you contemplated the gift. This is sometimes called a “cy pres” clause and should be drafted by a lawyer familiar with this area of law.
Sometimes, you may wish to place conditions on the gift to the charity. For example, it may be important to you to ensure that a hospital has particular equipment or services, or to encourage a minority group to attain higher education. While such conditions may have great attraction when you are planning or making the gift, there can be difficulties in implementation in the future. The hospital may have eventually have sufficient funding from other sources for the equipment or services. The minority group may no longer have a need when the gift is received. The charity is then left with funds that cannot be effectively used. A better approach is to direct that the gift be used for your desired purpose, but to include an “out” which permits the charity to use the gift for another purpose in the event that the desired purpose is already satisfied.
For those wishing to make a charitable gift through a trust (often a joint partner or alter ego trust), there are two pitfalls. First, if the charity is named as a beneficiary, Canada Revenue Agency generally treats the gift as a distribution of a capital interest of a trust which does not qualify as a “donation” for which a tax receipt can be issued. (An exception is the charitable remainder trust.) It is possible to draft the charitable gift provision in the trust so as to qualify as a donation, but you will require the assistance of a lawyer qualified to do so.
The second pitfall of charitable giving through a living trust (other than a charitable remainder trust) is that the tax receipt can only be used to reduce the tax liability of the trust. It cannot be used in your terminal tax return to reduce personal taxes. Moreover, timing can be a problem: if the donation is made in the year of death, then the tax receipt will offset the capital gain tax liability (if any) arising from the deemed disposition at death. But where the donation cannot be made until the following year (for example, where the death occurs late in the year and the gift cannot be made before December 31), there is no “carry back”.
There are a number of alternatives for charitable gifts though a trust, including designations of life insurance, RRSPs or RRIFs, the transfer of ownership of life insurance, and charitable remainder trusts. Expert advice should be sought when considering such gifting.
Finally, for some, there is the problem of choosing the charities you wish to benefit. There are so many requests for help from so many good causes, you may be reluctant to restrict your giving to one or more charities. The solution here is to make one gift to a community organization such as the United Way or the Victoria Foundation, and direct that organization to use the gift for certain charitable purposes. For example, if your preference is the relief of poverty, you can “direct” the organization to make gifts to any charity that works in that area. You may also name your current favoured charities and direct that they be the recipient of your gift. “Donor directed” gifting should of course be done in consultation with the organization to whom the general charitable gift is made.
There is something deeply satisfying about giving back to your community through charitable gifting. Whether you make gifts now, or from your estate, you are “doing good”. Avoiding the pitfalls outlined above will ensure that it is the best” good” that can be done.
This article is informational only. For advice on your specific situation, we would be pleased to assist.