Transfer wealth to future generations.
An RRSP or RRIF will be one of the most heavily taxed assets upon death as 100% of the fund balance will be taxed as income. This tax may be deferred by a roll-over to a spouse or a disabled child.
Many Canadians have established RRSP's and upon reaching the age of 71, their plan must be collapsed or rolled over to an annuity or RRIF providing a prescribed annual taxable payout.
Often there will be a significant balance in the fund upon death. Those without survivors, or who have other assets to leave to family, may consider naming the QEII Foundation as a beneficiary of their RRIF. With the exception of Quebec, a client may directly designate the Foundation as beneficiary of the plan without having to the gift included in probate. The Foundation will issue a tax receipt for the value of the fund, offsetting the income tax owing on the funds when transferred. The amount creditable on the final lifetime tax return is 100 percent of net income, so the donation tax credit will always offset the tax.
Amount of charitable gift from RRIF - $100,000
Amount included in taxable income - $100,000
Income tax payable (assuming 50% marginal tax rate) - $50,000
Donation tax credit - $50,000
Net tax payable - $0
To arrange such a gift a “multiple beneficiary” form from the financial institution must be completed and returned for the change to take effect.
A lifetime gift from an RRSP or RRIF may be of interest to those who have other assets available to fund their retirement. Again the tax credit from the donation will offset the income tax owing on the withdrawal.
Note: The plan carrier is required to withhold income taxes at source. Therefore the client will need to use other funds temporarily to replace the withholding tax when making the donation. These funds will be refunded when the annual tax return is processed. For this reason the client may want to wait until near the end of the tax year to make the donation. There is no withholding tax levied on end of life RRIF or RRSP gifts.
Planning idea: tax-sheltered plans offer some creative approaches to charitable giving. One strategy is to combine the withdrawal of funds from a tax-sheltered plan with the gift of publicly listed securities. This can be accomplished by contributing appreciated listed securities and then making a withdrawal from the RRIF equal to the value of the contributed securities. The credit from the gift of securities offsets the tax on the withdrawal from the plan. As mentioned above, the withholding tax issue would need to be addressed.
Gift of stock - $100,000
Tax credit from gift - $50,000
Tax on capital gain from stock - $0
Withdrawal from RRIF - $100,000
Tax on withdrawal of RRIF - $50,000
Net tax cost - $0
Cash available from RRIF withdrawal - $100,000
This example illustrates how your client can contribute to the QEII Foundation, dispose of stock with an uncertain future value, and generate $100,000 for a present purpose. Or, depending on the client's age, an annuity could be purchased with this cash providing guaranteed annual payments for life, entirely or significantly tax-free, and at a substantially higher payment rate than provided by fixed income investments. These payments could be used to support the education of grandchildren, provide for future nursing home costs, or make additional charitable donations.