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| Giving the Cottage Tax Away |
It may sound impossible, but for the philanthropically minded, it is possible to structure a gift to charity that will literally be like giving away their cottage's capital gains tax.
 Consider a couple aged 65, wrestling with the dilemma of how to leave a significant bequest to a charity they care deeply about, yet worried about the drain taxes will already have on their estate. They want to make the gift, but they don't want the gift to take away from their children, who will already be facing capital gains tax on the family cottage and possible liquidity problems.
Let's suppose the cottage is currently worth $200, 000., they bought it for $130, 000. and they aren't making any
major enhancements. We'll use an assumed growth rate of 5%, (conservative for waterfront) an investment rate
of 8% and a statistical mortality of 20 years for our time horizon, based on actuarial tables.
The projected tax bill calculation below shows an amount owing at statistical mortality of $100, 000. Since this is based on a deemed disposition by Revenue Canada, there may not be any accessible cash available from the cottage unless it is actually sold, which may not be consistent with the client's objectives. Since the money must come from other assets there is a real possibility of liquidity problems. Their hesitation in making the gift is very understandable.
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| Projected Tax Bill |
Projected Tax Credit |
| Cottage, value, current |
$200,000 |
| Cottage , value, 20 years |
530,000 |
| Adjusted Cost Base |
130,000 |
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| Capital Gain |
400,000 |
| Taxable Gain (50%) |
200,000 |
| Tax Bill (50%) |
$100,000 |
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| Gift of Insurance |
$200,000 |
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| Annual Deposits |
11,000 |
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| Deposit Period |
3 |
| Total Deposits |
33,000 |
| Tax Credit |
$100,000 |
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The 2000 budget allows them to now purchase a life insurance policy, naming the charity as beneficiary, and the tax credit for the full face amount will be available to them in their final tax return to offset other tax owing. In the above example, the tax credit came at exactly the same time as the tax bill, the one wiping out the other.
The clients cost was cut to one third, the gift of two hundred thousand dollars came at no additional cost to the donors, the gift did not take funds from the estate, there were no liquidity issues and the cottage was passed fully unencumbered to the next generation. |
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| Smaple Tools |
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