Charitable Giving | Personal and business | Business Owner Solutions

Canadians may donate up to a maximum of 75% of taxable income in any one year to qualify for charitable donation tax credits. Deposit and payment duration of the policy should be selected so as to fall within this limitation. Over payments may be carried forward for up to 5 years. The 1996 federal budget increased the limit on charitable donations to 100% of an individual's net income in the year of death and in the immediately preceeding taxation year.

The 75% limit remains in effect for other years except where appreciated capital property is gifted. In this case, the donation limit equals 100% of the net income that arises as a consequence of the gift.

Donations received by charities must be spent according to a set of rules known as "Disbursement Quotas" which dictate what proportion of the preceding year's donations must be spent by the charity for charitable purposes in the current year. The actual proportion depends on the category of the charity. Charitable Organizations and Public Foundations must disburse 80% of their income, and Private Foundations must disburse 100%. This places a limitation on the gifting of premiums for a life policy which are not available for disbursement until death of the donor. Care should be taken to review this aspect with all parties when considering a Charitable Insurance Plan.

There is a way around this Disbursement Quota. If the donor stipulates that the charity may not disburse the donation for ten years, then the donation is not added to the calculation for the disbursement quota, but the donor still gets a receipt in the year the donation was made. Therefore, in this case, the donor must stipulate that the charity may not disburse the donated premiums, or substituted property, until TEN YEARS after the LAST premium was paid on the policy. This is known as the "Ten Year Rule". Refer to paragraphs 6 through 8 of Revenue Canada's Interpretation Bulletin IT-244R2 for more details.

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