One of the most significant questions looming over retirement and the later years in life is, do I have enough? It’s important for each household to assess this question to determine how long they should work and what lifestyle they can really maintain in retirement.
It’s important to really dig for the answers. Take a deep dive into your financial picture, uncover all those assets and liabilities you may have forgotten about, and get a full understanding of where you stand. Ask your financial advisor to give you a full retirement projection that allows for inflation and contingencies.
Once you have a detailed projection, you can gain clarity: either you have more work to do or you are in the enviable position of having more than enough money. If you fall into the second category, you have the good fortune to be able to open your heart and mind to the exciting possibilities of what you can accomplish with your excess wealth.
As we see time and again, business owners continue to be pillars in our community, supporting local charities and giving back to the community. This generosity often extends to their years beyond the boardroom as they transition out of working life and into retirement.
Philanthropists are beginning more and more to think outside the box and find new and creative ways to benefit the causes that are important to them.
Rather than just making small, sporadic, unplanned donations, philanthropists are beginning more and more to think outside the box and find new and creative ways to benefit the causes that are important to them. They can do so in ways that are quite simple. For example, if the financial analysis shows that the household will already have more than enough set aside for retirement when the individuals begin to receive their CPP income, that money is often just deposited in the bank account and forgotten about. However, when the retirees notice they are paying up to 47.5% tax on that income, they often take notice.
The solution is really quite simple: if you don’t need your CPP income to support your lifestyle, give it away!
EXPLORE WAYS TO GIVE EXCESS INCOME
Consider an example couple and a few different options they might consider for their CPP income.
Ross and Rachel are both 65 and living comfortably in retirement. They do not require their combined CPP income of $20,000 annually to support their lifestyle. Instead, they wish to benefit some charities in their community. They have the following options:
- Give the $20,000 of CPP income to their favourite charities annually in cash. The donations will create a tax credit to offset any tax owing on the CPP income, so the couple is essentially at net zero and the charities are ahead.
Use the $20,000 of CPP income to fund a life insurance policy owned by the charity or foundation of their choice. When a charity or foundation owns the insurance policy, premium payments that Ross and Rachel make on the policy are eligible for a donation tax credit. This puts the couple in the same financial position as in the first option, where the CPP income is offset by the donation for tax purposes. The difference is that in this option, the charity does not receive cash today, instead receiving a legacy gift of about $1.1 million on the death of the second spouse.
Most Canadians donate to charity using cash, credit cards, or a cheque. There are more efficient ways to be philanthropic. It’s more about giving from assets rather than only from income.
This short video introduces new ways of philanthropic giving in Canada in 2020 and demonstrates five interesting examples. Watch New Philanthropy by Continuity.
Depending on the donor’s wishes – either to benefit the charity annually with smaller cash contributions or to provide a larger legacy in the future – this simple redirection of funds eases the tax burden for the couple and creates significant change in the community.
REFRAME TAXABLE EVENTS
Another way that donors are creating more opportunities for giving is by matching the timing of gifts with large “taxable events.” The largest taxable event for many business owners is selling the business. The work of a lifetime suddenly becomes monetized and there is an influx of cash, with the dreaded corresponding tax bill.
Let’s say Ross and Rachel have sold their operating business for $5 million. Because they grew the business from the ground up, after using the lifetime capital gains exemption for both of them, there will be about $775,000 in tax to pay. Most business owners let out an audible groan after hearing a number like this, but an easy way to reduce this amount is to make a charitable donation.
Such a contribution is in line with what many business owners are already doing each year – giving back to the community that has supported them over the years. For example, a gift of $500,000 will reduce the tax owing in the year of sale by just under $250,000. This reduction is due to the tax credit on charitable donations being at the highest marginal tax rate, currently 47.5%. In this scenario, instead of paying $775,000 in tax, Ross and Rachel instead make a gift of $500,000 to charity, and then pay approximately $525,000 in net tax. This is a larger total outflow of just over $1 million in cash, but the couple has redirected some of the taxes owing to causes close to their hearts, rather than sending the whole amount to the CRA.
ASSESS YOUR OPTIONS
Does the extra cash needed to make such a donation seem like too much? Here again, the clarity needed to make such a gift comes from determining whether you have enough. If you have some extra cash flow that you are confident you won’t spend in your lifetime, it could be exciting to explore the different ways in which these funds could be shared. Perhaps the funds will be spent today – you will be able to see the money that would otherwise have collected dust (and taxable interest) in your bank account deployed in exciting ways. Or perhaps the funds will be multiplied with insurance and a legacy gift, and your loved ones will have the honour of memorializing you by supporting your favourite charities for years to come.
With some forethought and planning, you can arm yourself with the financial knowledge you need to integrate tax-efficient charitable giving into your financial and retirement plans.
First published in the March 2020 edition of The Business Advisor.