Donating RRSP/RRIF to charity

Re-directing final tax dollars to your chosen causes

As a regular supporter of your favourite charity, you’re pleased that your annual donations help keep the lights on. Ideally though, you’d also like to contribute in a way that sustains the organization over the longer-term.

One way to do this – without reducing what you need to live on – is to direct some or all of the remaining value of your RRSP or RRIF on death to your chosen charity. Not only will that make for a substantial gift in and of itself, but you’ll also be pleased to know that it comes
‘at the expense’ of some of the tax that would otherwise have been paid at your death.

Indeed, after the tax break, the donation may only cost you half of what the charity receives .

Tax imposed on registered plans at death

For many Canadians, registered retirement savings plans (RRSPs) are the primary tool used to accumulate retirement savings. Contributions are tax-deductible, with income and growth tax-sheltered while in the plan.

Commonly on retirement, an RRSP is converted into a registered retirement income fund (RRIF), which continues to enjoy tax-sheltered income and growth. Withdrawals from the plan are taxable income, but usually spread over multiple years at graduated tax bracket rates.

Still, the entire value of a RRSP/RRIF is eventually taxable.

On death, the remaining balance is treated as income that year, though that can be deferred by rolling over to a registered plan of a spouse or financially dependent child or grandchild. Otherwise, the full amount is taxed in a single year, pushing up through those graduated brackets toward the top bracket, which is within a couple percentage points of 50% or more, varying by province.

Tax relief on charitable donations

When someone donates to charity, the person may claim a credit to reduce annual taxes. The tax credit is at the lowest bracket rate on the first $200 of donations claimed in a year, being 15% federally, and ranging by province from about 5% to 20% depending on where the donor resides.

Above $200 of annual donations claimed, the tax credit jumps to a higher rate. The high rate applied against federal tax is the 4^thbracket 29% rate, or the top/5^th bracket rate of 33% if income is over that level ($246,752 in 2024). For provincial tax, Quebec and BC use the federal approach, with the other provinces applying a single high credit rate that is near or equal to their top bracket rate. This puts the combined federal-provincial credit rate near or above 50%, varying by province.

The maximum annual donation that can be claimed is equal to 75% of a taxpayer’s net income. That limit is increased to 100% in the year of death, and if the donation is larger than that final year’s net income, the excess can be used to recover tax from the preceding year’s tax bill, also based on up to 100% of net income.

Donating registered plans to charity at death

The owner of a RRSP/RRIF may designate one or more beneficiaries to receive the proceeds of a plan upon the person’s death. The plan administrator will provide a form to make that direct designation, or alternatively most provinces allow for a person’s Will to direct the proceeds of such a plan. (Note that direct designations are not available to Quebec residents, whether on the plan directly or by Will.)

A named beneficiary may be another person, or it may be an organization, such as a charity. When a charity is named, by either method, the donation is deemed to have been made immediately before the person’s death. This then qualifies the donation for that 100% threshold for both the year of death, and excess carryback to the preceding year.

Spousal flexibility

A spouse could be designated as primary beneficiary, with the charity named as contingent beneficiary. This would assure that a living survivor would continue to have full use of the couple’s savings on a first death through the usual tax-deferred rollover. Meanwhile that contingent designation would serve as a backup plan if the survivor forgets to name the charity as beneficiary after the first spouse’s death, or if there is an unfortunate common disaster.

Note that once a RRSP/RRIF has rolled to a spouse, the original owner’s instructions will have no further control over the proceeds. When carried out by beneficiary designation, the past plan ceases to exist, as does any contingent designation. When the transfer to the spouse is as successor annuitant on a RRIF, the plan and contingent designation may remain intact, but the surviving spouse has full legal control over the plan, including the right to change any designation.

Providing a legacy through the Will

Sometimes a person may be uncertain whether their estate will have enough liquidity to fund desired legacies, or even to commence administration of the estate. For example, some provinces require that the probate fee/tax is paid before the executor is granted legal authority to deal with estate property. Potentially a RRSP/RRIF could be made available for this purpose, either by foregoing the naming of a beneficiary for the plan, or by making a direct designation to the estate (on the plan or by Will).

Once the estate liquidity need has been satisfied, the net remaining funds could then be paid as a legacy to the charity. So long as the donation occurs within 36 months of the date of death, it may be claimed in the estate year when it is made or in an earlier estate year (in either case up to 75% of net income), or in the year of death or preceding year (once again, up to the 100% threshold).

Probate and estate creditors

The trade-off in allowing the RRSP/RRIF to come into the estate is that it will be subject to probate fee/tax in provinces where such applies, and estate creditor/claimants may latch onto those plan proceeds.

Comparatively, a direct beneficiary designation (other than to the estate) bypasses probate and creditors. This bypass generally applies even when the Will is the instrument used to make the designation, though this should be verified with the drafting lawyer, as probate has been levied in some provinces based on the facts in a few court cases.

Illustrating donation of RRSP/RRIF on death

To illustrate how this can work, meet Greg who lives in British Columbia. He wants to give back to the local hospital that provided such compassionate support when his spouse Jean went through palliative care. He confirms the legal name of the hospital foundation, and names it as beneficiary on his RRIF administrator’s form.

Greg understands this will reduce how much will go to their children – all financially secure adults – but expects it will also reduce the estate tax bill, making it an efficient way to donate. On his death, Greg was living in long-term care, which consumed his $25,000 income to-date that year. On death, there was a $500,000 non-registered portfolio with a $150,000 capital gain (1/2 ** being the taxable capital gain of $75,000), and a $200,000 RRIF.

Four tax strategies to get more bang for your charitable donation buck

Making the most of the donation credit

You support your favourite charitable causes because you care. Sometimes you share their message, sometimes you volunteer, and sometimes you donate.

While all those activities are positive contributions, you can also receive some favourable tax benefits. And for simplicity, we’ll assume a cash donation in our examples .

Don’t apologize for the tax break

Now, some people may think it’s distasteful to talk about tax breaks in the same breath as charitable giving. Shouldn’t it be about the caring, and not cashing-in?

True enough, caring about the cause must be at the core of your decision to donate. At the same time, if you have given out of a kind heart and are still entitled to a tax break, why would you not claim it? There are at least two ways to look at this:

- Using the tax break allows you to reduce your out-of-pocket cost to donate the same intended amount
- Understanding that the tax break is coming, you can share it with the charity by choosing to give even more

1. Basics of the donation tax credit

For starters, the government literally pays you back when you make charitable donations. It does so by giving you a tax credit that reduces your annual income tax bill.

Let’s say that you make a $100 donation, whether that’s to one charity or across a number of them. The federal government and the provincial government will each reduce what you would otherwise owe them. On average across the provinces, the credit rate is around 25%, so in this case your taxes are reduced by $25.

Put another way, it cost you $75 for the charity to have $100 to work with. Not a bad deal.

2. Breaking the $200 threshold

Okay, now we’re going to make you even more generous, and we’ll see how the tax system is generous back to you in return.

If you make donations over $200 in the year, on average across the provinces the tax credit is increased to around 45%. That’s almost half back from the tax collectors what you gave to the charity in the first place. In fact, in some provinces, the combined rate is actually 50%.

Keeping with the 45% average to illustrate, here’s what a $400 donation would look like:

In this case, it costs you $260 for the charity to receive $400. That’s a deal that continues to get better as you make even larger donations, with additional amounts entitled to the higher credit rate.

3. Combining with your spouse to accelerate into that top tier

There is one simple way to get up to that higher credit rate faster, and that’s by combining donations in your household. Spouses are allowed to report their combined donations on one of their tax returns.

If two spouses had each made $200 in donations and separately claimed them, the total credit would have been $50 x 2 = $100. But as we saw in that last example, by claiming on one of their income tax returns they would receive a $140 credit, a 40% increase just for filing with this in mind.

4. Carrying forward, to obtain more of the high-rate tax credits

Whether or not you have a spouse, you can still be strategic in how you claim donations, by carrying donations forward up to five years to claim multiple years’ donations in a single year. Rather than facing the low credit rate on the first $200 each year, the low rate will only apply once this way.

Modifying our example, suppose that our couple consistently donates $200 annually. They decide to defer for the maximum five years on the earliest donation, so that six years’ donations are claimed at once. Either way, a total of $1,200 is given to charity.

In this example, that’s a whopping 67% increase in tax credits, though it comes at the expense of waiting up to six years to claim them. At this level of donations, it’s worth pooling up at least a couple or few years at a time, though maybe not to the extreme timeframe above. On the other hand, when annual donations are larger, the low rate on the first $200 becomes proportionately much less of a concern, so donating and claiming in the same year will likely make the best sense.

Charity first, tax in support

Once more, charitable giving is first and foremost about being charitable. But when you combine it with being tax savvy, you can make your money go further, whether you take that benefit yourself or you share it with the charity.

Charities’ investment portfolios

Maintaining charitable status by complying with the disbursement quota

To maintain charitable status under tax rules, a charity is required to spend an annual minimum dollar amount on its programs or on gifts to other qualified donees, generally other registered charities. This is the disbursement quota (DQ).

The DQ applies to property not used in charitable activities or administration of the organization, and for about two decades leading up to the end of 2022 it was 3.5%. Effective January 1, 2023, the DQ is 5% on the portion of a charity’s property over $1 million, with the 3.5% rate continuing to apply below that level .

Threshold for application of the disbursement quota

The DQ only applies once non-active property exceeds a certain level, but then it is calculated on all property not used in charitable activities or administration of the organization:

- For operating charities, the DQ applies once non-active property exceeds $100,000; or,
- For charitable foundations (those funding operating charities or other qualified donees), the threshold is $25,000.

Purpose of the DQ

Registered charities are allowed to issue receipts to donors, who in turn may claim a tax credit for their donations. For the charity, the full amount of the donation is available to use (i.e., it pays no tax on the donation), and there is no tax on income generated by the charity on invested funds.

The DQ is the device used by the Canada Revenue Agency (CRA) to assure that the charity consistently applies a portion of its funds to its charitable purposes on a current basis, while allowing it to grow its remaining principal so that it may continue to act on its mandate into the future. To be clear, the DQ is a mandatory minimum, leaving it to the charity’s discretion to spend more if desired.

While adhering to its primary responsibility to deliver on its charitable purposes, commonly a charity will then try to keep as close as it can to the DQ. This will allow it to meet its CRA regulatory obligation, while maximizing the amount that can be invested to produce income and growth that will fund future operational needs and capital projects.

Example before and after the change

Consider a charity that has $1.5 million of property not used in charitable activities or administration.

We’ll look at the scope of property in that calculation a little further on, but for now let’s assume it’s the same amount to begin each
year in 2022 and 2023.

DQ comparison:	2022	2023
First $1,000,000	$35,000	$35,000
Next $500,000	$17,500	$25,000
Total	$52,500	$60,000
Required extra spending resulting from 5% DQ		$7,500

Scope of affected property

For the DQ calculation, property includes real estate not used in charitable activities or administration, and passive investments such as chequing and savings accounts, inventory, stocks, bonds, mutual funds, term deposits, land and buildings.

To distinguish the treatment of real estate, take a charity operating a drop-in centre for at-risk youth on the first floor of a plaza, with rental units on the second floor and its own office in the basement. The value of the rented space would be part of the DQ calculation, but the rest of the property fits its charitable activities or administration.

Of course, investment and real estate values can fluctuate, which can then affect a charity’s spending requirements. Fortunately, valuation is not at one point in time, but instead is based on average property value over the 24 months before the beginning of each fiscal year. This smooths out the impact of short-term market movements, leading to more predictable and confident planning for the charity, and for the community it serves.

Impact on investment practices

It’s important to reiterate that the DQ change will only affect charities with property over $1 million. As well, if a charity already grants 5% or more annually, then the new rate will have no practical impact.

Still, it’s a wake-up call that CRA and other government bodies are more actively scrutinizing the activities of Canadian charities. It presents an opportunity for all charities to review, and possibly revise, one or more parts of their governance, investment management or operations. Some discussion points follow.

Spending/gifting

Where might more gifting have the greatest effect? For example, are there any worthy projects of existing grantees that could be expanded, or can you identify other/prospective grantees who are presently underserved?

Investment policy

Review the investment policy statement (IPS) to determine whether a re-draft may be in order. Should a higher priority be given to preservation of capital and consistency of returns?

Asset mix

Are there asset classes that better align with this new regulatory regime?

Alignment with values

Would an environmental, social and governance (ESG) investment approach make sense, to make a measurable impact on society generally and to better serve the charity’s own purposes specifically?

Communications

Will endowed gifts be able to keep pace in this new regime? Will donors need to be contacted? What should the message be?

Donations

Will fundraising efforts need to ramp up to help narrow any shortfall in years to come?