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[Chronique de Sandy Lachapelle] Life insurance, an unrecognized gift

There is no shortage of causes and missions that we adhere to, and there are many organizations that appeal to our generosity, especially on the eve of the holiday season, which is already upon us. Quebecers have big hearts and our community benefits from volunteer time spent with non-profit organizations. But we would be less generous, financially speaking, and so philanthropy would lag behind the rest of Canada here.

Some will tell you that the Quebec state is more generous in its social programs. It thus takes more responsibility for the redistribution of wealth, with consequent higher tax levels, which can slow down the momentum that pushes us to put our “hands in our pockets” again.

Fundraising campaigns for the “general public” are generally based on monetary donations. You surely know that there is a tax deduction for donations, both federally and in Quebec, which is non-refundable. This applies to donations to registered charities or registered Canadian amateur athletic associations. For a cash donation, the credit represents the amount of the donation. But did you know that you can donate certain items to the same organizations while enjoying this credit? It can be anything from artwork to investments or even your life insurance!

Donate your old life insurance!

Estate planning makes it possible to determine the adequacy between your existing life insurance coverage and the needs of your estate. For some, the amount of life insurance may exceed established needs. Before canceling a life insurance policy, it is entirely possible to consider the possibility of naming a charity as the beneficiary. Your estate will be optimised, as your liquidator can choose to use the entire tax deduction for donations against the estate tax.

Rather, if your goal is to reduce your tax bill during your lifetime, you should immediately bequeath ownership of the policy already in effect to the organization, which becomes its owner and beneficiary, while you remain the payer. Certain tax considerations must be taken into account; it is thus possible for a gain on a policy to be realized by transferring an old contract. In return, the market value of the policy (to be established with an independent actuary) will also entitle the credit. Furthermore, it is obvious that the old premiums do not entitle to this credit.

Whether it’s to optimize your taxes during your lifetime, or when settling an estate, you can even take out a new life insurance policy to take advantage of the credit. Finally, you can decide to donate part of your life insurance in your will. The advantage here is that you can then share the death benefit between several organisations, or even between members of your family and a cause dear to you.

Collect small donations

Have you not reached this stage of your financial life? Don’t underestimate the importance of keeping and accumulating your receipts for the “small amounts” of donations you make here and there. Contrary to what you might think, it is not mandatory to use them in the tax year of the donation. It may even be more interesting to postpone them and apply for credit in the following five years. For example, for Quebec taxpayers, waiting to claim a minimum amount or more than $200 allows the credit rate to increase from 35% to 54%.

In Quebec as in Canada, you will also be able to combine donations to spouses without taking into account who actually gave the money; it is therefore imperative that the person with the highest tax rate benefits from it.

For the wealthiest among you, it should finally be considered that donations are subject to a ceiling! You cannot claim more than 75% of net income, more than 25% of the amount of taxable capital gains or recaptured capital cost allowances applied to your income when considering the gift of property.

In any case, you will understand that estate planning is an exercise to go through as you progress through the financial stages of your life. It is not necessary to “sign a check” in order to use one’s family inheritance to achieve one’s philanthropic goals.

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