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.

Donating securities ‘in-kind’ to charity

Tax-optimizing your philanthropy

When it comes to charitable donations, the most likely type of donation that comes to mind for most of is cash. However, there are a variety of ways to support your favourite charitable causes, one of which is to donate publicly traded securities in-kind.

The Canada Revenue Agency (CRA) defines a publicly traded security to include a share, debt obligation or right listed on a designated stock exchange, a share of the capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust or a prescribed debt obligation.

When such securities are donated in-kind from a non-registered account, a tax receipt is issued for their fair market value (FMV) on the donation date. As with cash donations, a tax credit can then be claimed to reduce your income tax bill. In addition, in-kind donations can cost you less, and there is no reduction in what the charity receives.

How the donation tax credit works

When you make charitable donations, both the federal and provincial governments allow you to claim a credit against the income tax you owe. The tax credit is based on the total dollar value of all donations in the year, no matter how many individual donations you make. The value of the credit varies by province, with the credit rate ranging from 20% to 25% on your first $200 of annual donations, and 40% to 54% on the amount over $200.

You can claim donations up to 75% of your net income in a year. Donations not claimed in the current year can be carried forward to be used in any of the next five years. This assures that a large single donation can be fully utilized, even if it exceeds the net income threshold. As well, this gives you flexibility if it is more beneficial to forego claiming the entire credit in the current year, and instead strategically spread it across multiple years.

For more on the principles of the donation tax credit, see the article Four tax strategies to get more bang for your charitable donation buck.

Donating cash or selling appreciated securities?

Most people make periodic charitable donations in cash, but that may not be optimal when you own securities that have appreciated in value. Cash is worth what you have in your hands, but appreciated securities carry a waiting tax bill. More specifically, in the 2024 Federal Budget the income inclusion rate for capital gains was increased to 2/3, but the prevailing 1/2 rate remains available for individuals on the first $250,000 of capital gains in any year. For trusts and corporations, the 2/3 rate applies to all capital gains. The 1/2 rate is used in the examples in this article.

Let’s say you want to contribute to a local charity’s capital fund, and you have equal balances in your chequing account and your (appreciated) securities account. If you write a cheque, you still have your securities, but with their pending tax liability. If you sell the securities to make the donation, there is less money available for the donation due to the tax, which means that either the charity gets less, or you need to top up the donation from your chequing account.

One way or another, you or the charity will bear the brunt of the tax in these two scenarios. The question is whether there is a way for you to keep your fully spendable chequing balance, while making the maximum donation to the charity using your securities? This is where in-kind donations come in.

Donating securities in-kind to eliminate tax on capital gains

Typically, when there is a change of ownership of a security, a disposition is deemed to occur, and a capital gain or capital loss is triggered. However, when a security is transferred directly to a registered charity as a donation, the tax on any capital gain is reduced to zero. We can illustrate this with the following example:

- Donor is in a 40% combined federal-provincial tax bracket in a province with a top donation credit rate of 50%
- $10,000 donation, using a security with $10,000 FMV and $6,000 adjusted cost base (ACB)
- There has already been $200 in charitable donations made elsewhere this year

Donating securities in-kind to trigger a capital loss

The donation of appreciated securities is attractive, as we have just outlined. However, donating depreciated securities can also be a viable option, especially when it comes to your year-end tax planning.

When you donate depreciated securities, you trigger a capital loss that will be applied against capital gains realized in that same tax year. You can then carry back any remaining capital loss to offset capital gains in the three previous tax years or carry those losses forward indefinitely. So not only will you receive a tax credit for the FMV of the donated securities, you will also be reducing your tax bill if you have realized capital gains elsewhere.