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Charitable
Gift Planning...using
an annuity
The following case study reflects the
changes that CRA made regarding Charitable Gift Annuities as of December
20, 2002.
A
Charitable Gift and Annuity
Bill is a
retiree at the young age of 77. His wife predeceased him two years ago
after a long battle with cancer. Bill would like to make a sizeable
donation to the Cancer Society to fund research. Bill wants to
maintain or even increase his income as he has been experiencing low
interest rates and some negative returns on his investment portfolio.
He would have to give up a some of the interest income
this money produces for his retirement if he gave an outright gift now. From a $100,000 GIC Bill
holds, it yields him $4,000 per year and after he pays income tax, he nets
out at $2,263.60 as Bill marginal tax rate is 43.41%. Bill is not
concerned with preserving the $100,000 for his estate as he has a sizeable
estate otherwise and his 4 adult children are all successful in their
careers.
Bill called upon his financial planner,
John, to see what options he has for his wishes. After a few meetings
and much discussion John suggested a Charitable Gift and Life Annuity.
The reasons for suggesting the Charitable Gift &
LIfe Annuity fit
Bill's goals and are as follows:
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Bill will give an immediate gift to the
Cancer Society.
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Bill will receive a donation receipt to
offset income tax.
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Bill will receive a
significantly increased lifetime income.
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The annuity will make up a part of his
fixed income portfolio to stabilize his annual income.
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The annual income is guaranteed and
insured through one of Canada's major life insurance companies.
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Bill finds great satisfaction in
realizing his gift during his life.
Bill, together with his financial planner
John and a representative from the Cancer Society, structure Bill's
Charitable Gift & Life Annuity. The procedure for this is as
follows:
Step
1 - Bill transfers the capital contribution of $100,000 to the Cancer
Society.
Step
2 - Bill would like to receive an income of $8,000 annually.
His marginal tax rate is 43.41%.
Step
3 - An amount of $72,085.55* is needed to purchase a prescribed
commercial life
annuity from one of Canada's major life insurance companies to produce $8,000
per year guaranteed to pay for a minimum of 5 years.
Step
4 - The remaining amount of $27,914.45 is retained by the Cancer Society
representing the gift.
Step
5 - Bill will receive a Donation Receipt of $27,914.45 which
will offset other income tax owing. Bill will be able to use the
full tax receipt in this income tax year.
Step
6 - Bill will receive an amount of $8,000 per year from the
annuity
for his lifetime. Only a small portion of this payment is taxable. The
taxable amount is $568.50 which represents the interest portion
of the payment and remains constant for his lifetime.
Because of the immediate donation receipt
of $27,914.45 Bill will realize a tax credit of approximately
$12,955.10. Bill's annual taxable income is reduced by $3,536.48
because of the prescribed taxation of the annuity. This gives him an
additional $240.41 of after tax income to bring his total after tax annual income to
$7,993.62.
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Bill's
Average Interest Rate: |
4.00% |
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Marginal Tax Rate: |
43.41% |
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Capital Used: |
$100,000.00 |
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GICs |
Gift Annuity |
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Total Capital |
$100,000.00 |
$100,000.00 |
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|
Gift to Charity |
$0 |
$27,914.45 |
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|
Donation Tax Credit |
$0 |
$12,955.10 |
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Gross Annual Income |
$4,000.00 |
$8,000.00 |
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|
Taxable Portion |
$4,000.00 |
$568.50 |
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Tax Payable |
- $1,736.40 |
- $246.79 |
85.79% Less Tax Payable |
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Add'l After Tax Income from OAS Clawback
Reduction |
$ - |
$240.41 |
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After Tax Return: |
$2,263.60 |
$7,993.62 |
253.14% more after tax income |
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Annual
Income Advantage over GIC: |
$5,730.02 |
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All quotes as of
March 24, 2006 and
are subject to change without notice.
E. & O. E. |
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Each
and every situation is unique. In
order to properly analyze and asses your own situation, be sure to have a
professional(s) involved that is well versed in Charitable Gift Planning and
the aspects of estate planning. You
will be pleasantly surprised to realize that you don’t need great wealth
to become a great philanthropist and to make your community a better place!
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