A charitable gift annuity is an arrangement under which a donor transfers a lump sum to a charity in exchange for fixed, guaranteed payments for the life of the donor and/or another person, or, alternatively, for a term of years. All or a substantial portion of the annuity payments will be tax-free.
Two types of charitable gift annuity: reinsured and self-insured.
If you wish to create a reinsured gift annuity, also known as the “Gift Plus Annuity”, an insurance company will issue the annuity rather than the organization. The organization works with a life insurance agent on your behalf to arrange for a commercial annuity. It is standard practice for donors to permit charities to retain 25% - 30% of the contributed amount for its immediate charitable purposes or for an endowment, whichever the donor prefers. The balance of your lump-sum contribution is used to purchase the commercial annuity.
Benefits to you?
- You (and/or other beneficiaries) receive guaranteed payments for life (or a term of years), all or substantially tax-free.
- Your after-tax income often increases significantly after contributing assets to a gift annuity because:
- GIC/fixed-income investments that is fully taxable.)
- You receive the satisfaction of having completed a gift gift annuity rates tend to be higher than interest rates paid on GICs and other fixed-income investments; and the annuity payments are all or substantially tax-free. (As opposed to interest paid on during your lifetime.
- Annuities may be established with modest amounts of capital, usually $10,000 or more.
- You are relieved of managing investments and will receive a regular, stable income.
- You receive a donation receipt for the excess (if any) of the amount contributed over the total annuity payments to be paid during your life expectancy (or the term of years if that form of arrangement has been chosen). Generally speaking, the older the donor, the larger is the tax receipt.
Who can create charitable gift annuities?
Donors (usually age 65 and older, with optimum age 75 - 90) who want the security of guaranteed payments that gift annuities offer, and who wish to benefit from after-tax rates of return that are significantly better than GICs and Canada Savings Bonds.
Often, the donor has a medium-level income, and would like to receive higher dependable income, free of worry. Some donors may use an annuity in place of a bequest to simplify the estate process and reduce probate and other estate settlement fees in the future. Some may contribute by way of a gift annuity and a bequest. Still others start with a modest contribution for a gift annuity and are so pleased with the results that they make further contributions for additional annuities.
How are annuities created?
The annuity is established by way of a legal agreement between the donor and the organization. The agreement may include provisions dealing with the size of the lump-sum payment, annuity payment frequency and timing, and uses and purposes of the charitable gift. Ordinarily, the donor writes a cheque for the lump-sum contribution. The donor may also contribute marketable securities.
Unlike GICs and other fixed-income investments, the capital contributed to establish a gift annuity is irrevocable. The donor cannot get the contribution back and has no control over how it is invested. Annuity payments are fixed and cannot be changed even if interest rates or inflation rise.
Planned gifts can provide beneficial results for a donor but, in order to ensure that all relevant issues have been considered and addressed and that all Income Tax Act, Canada provisions and regulations are met, prospective donors should seek qualified legal and accounting advice. The organization will likely have the annuity agreement reviewed and approved by their legal counsel.
Give Green Canada acknowledges and thanks Lorna Somers and Frank Minton for pre-approving the use of their book Planned Giving for Canadians as the basis for the information provided about different types of gifts.