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Tax Advantages of a Charitable Gift Annuity

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It’s important for donors to consider their giving options before making a gift to ensure they can provide the most support for their cause of choice, while also being mindful of future cash requirements.

Through a combination of an annuity and a Donor Advised Fund (DAF), donors can be guaranteed a steady income stream while also maximizing tax benefits and supporting their preferred charity during their lifetime.

A Charitable Gift Annuity is a gift vehicle that, when combined with a Gift Funds Canada Donor Advised Fund, enables a donor to make a charitable gift during their lifetime without jeopardizing their access to supplemental income, both now and in the future. There are several different ways to make this kind of gift and it is a good idea for donors to consult their financial planner to assist.

When it comes to tax advantages and charitable annuities, the opportunities vary and depend largely on a donor’s unique situation and giving strategy. For example, a donor may choose to acquire a life insurance policy to replace some or all of the capital used to acquire an annuity. In this case, the annuity could be gifted to the charity and the donor would receive an immediate, partial tax receipt based on the donor’s life expectancy and anticipated income stream. At the same time, a portion of the annuity income can be used to pay the insurance premiums.

Other than registered assets, annuity income is tax advantaged. The Canadian Revenue Agency (CRA) treats all or part of annuity income as a return of capital, offering the donor access to greater monthly income than would otherwise be the case with a comparable low risk investment vehicle.

There are, of course, other benefits to charitable gift annuities, including:

  • An income stream for the donor’s lifetime
  • An immediate, partial tax deduction based on donor life expectancy and anticipated income stream
  • Potential for a portion of the income stream to be tax-free
  • Donation may include: cash, securities plus personal property
  • Reduce or eliminate capital gains tax liability for gifts of appreciated securities and personal property
  • Supporting an organization the donor cares about

Understanding what an annuity is and how combining it with a Donor Advised Fund through Gift Funds Canada can provide donors with a unique opportunity to support their charity of choice and plan future investments. In the example above, leveraging a gift of life insurance combined with a charitable gift annuity can be one of several ways to support a donor’s preferred charity, enjoy tax advantages, and arrange a guaranteed income stream today based on future needs.