D26. What are the general principles on the receipting of charitable annuities?

D26. What are the general principles on the receipting of charitable annuities?


Short answer

A charitable gift annuity is an arrangement under which a donor contributes funds to a charitable organization in exchange for guaranteed payments for life at a specified rate depending on life expectancy or for a fixed term. When this occurs, the advantage received by the donor is a stream of guaranteed payments for a period of time.

The eligible amount for receipting

 
of the amount contributed by the donor
is equal to the excess
______________over__________________
 
the amount that would be paid at the time of donation to an arm’s length third party, like a trust company or bank, to acquire an annuity to fund the guaranteed payments.

 

Example

A donor makes a $100,000 contribution to a charitable organization.
  • The donor’s life expectancy is eight years.
  • The donor is to be provided annuity payments of $10,000 per year, which amounts to $80,000 over eight years.
  • The cost of an annuity that will provide $80,000 over eight years is $50,000.

Tax treatment

  • The donor receives an official tax receipt for $50,000 for the year of donation.
  • The donor receives $80,000 in annuity payments, of which $30,000 will be included in income over the eight years.

 

As indicated, the eligible amount for receipting is equal to the excess of  
$50,000

over the amount contributed by the donor over

$100,000

The amount that would be paid at the time of donation to an arm's length third party, like a trust company or bank, to acquire an annuity to fund the guaranteed payments equals

$50,000

 

Long answer

Charitable annuities issued after December 2002 are taxed under the Income Tax Act in the same manner as all other annuity contracts are taxed. Assuming the annuity is a “prescribed annuity contract” as defined in subsection 304(1) of the Income Tax Regulations, annuity payments are included in the taxpayer’s income in the year the payments are received and the taxpayer may claim a deduction in respect of the capital element of the payments.

While charities are advised to seek professional help in sorting out charitable annuities, specific reference should be made to section 300 of the Regulations. The calculation of the capital element of a life annuity apportions the “adjusted purchase price” of the donor’s interest in the annuity (that is, the cost of the annuity) over the expected life of the donor. The expected life of the donor is determined by referring to the 1971 Individual Annuity Mortality Table as prescribed in Volume XXIII of the Transactions of the Society of Actuaries.