Charitable gift annuity

A charitable gift annuity (CGA) is an instrument that involves transfer of capital to a registered charity, while still receiving regular income from the charitable capital. An individual, typically a retiree, irrevocably transfers cash or property to a charitable organization in exchange for the charity's promise to make fixed annuity payments, typically for life.

The charity will issue a tax credit receipt for a portion of the donation. On the other hand, the regular income provided to the retiree will be less than what would be obtained with an annuity purchased directly from a life insurance company with the same premium. The primary motivation for using a charitable gift annuity is the charitable intent.

A CGA is a type of a complex charitable giving instrument which requires due diligence from the retiree, particularly if the charity is planning to manage the funds directly.

This article first lists the basics of CGAs. In then presents the two types, reinsured and self-managed. After discussing the tax treatment of this product, the article presents marketing and alternatives.

Basics

• The donation can be in cash or "in kind"; such as a stock
• The annuity payments, which typically begin immediately, can be for life (equivalent to a prescribed Single premium immediate annuity (SPIA)) or over a fixed period
• The annuity can be for a single person or joint
• There are two types of CGAs: re-insured and self-managed

Reinsured CGAs

With a reinsured CGA, the charity keeps a portion of the funds for its immediate use (20% or more) and buys an annuity from a life insurance company with the rest, to provide the regular payments to the retiree. The tax credit receipt will correspond to the portion of the funds kept by the charity. The advantage for the retiree is that the annuity portion will be managed by the insurance company, and regulated by provincial governments in the same way as all other annuities.

The Canadian Institute of Actuaries estimates that the number of charities offering reinsured CGAs is "likely far greater than the number issuing self-insured CGAs".

With the reinsured model, it is quite obvious that the CGA combines a charitable donation (20% or more of the amount) and the purchase of a life annuity (up to 80%).

Self-managed CGAs

Some charities instead keep the full amount of the donation and manage the funds themselves to provide a regular income to the retiree. This model of CGA is called "self-managed", "self-issue", or "self-insured". Self managing CGAs means that the charity is taking on mortality, investment return and expense risks, instead of offloading those risks to a life insurance company.

The charity does not get any funds to use immediately, unlike in the reinsured model. However, it gets to keep whatever has not been spent on the regular payments at time of death, to use for its programs, perhaps about 50%+ of the original amount.

In the case of a self-managed CGA, significant due diligence is required, because charities don't have to follow the same strict rules as life insurance companies when managing the money in the annuity pool:

The various provincial insurance acts require any enterprise issuing insurance or annuity contracts to be licensed, but the provincial regulators have not pursued that requirement with the self-issuing charities. As a result, gift annuities issued by charities continue to be unregulated. One exception is British Columbia (...) Unlike a life insurer’s segregated funds, a charity’s assets supporting the gift annuity obligations may not be protected in the event of the charity’s bankruptcy. Further, unlike policyholders of insurance companies, gift annuitants may not have a priority claim to those assets over the charity’s other creditors.

The Canadian Institute of Actuaries writes that the self-managed model is on the decline: only "a few of these charities are still accepting new annuitants".

Tax treatment

In terms of the tax treatment of regular annuity payments, the Canada Revenue Agency (CRA) writes that "Charitable annuities issued after December 20, 2002, will be taxed in the same manner as all other annuity contracts are taxed under the Income Tax Act. 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."

According to RBC, a bank, "The Income Tax Act treatment of charitable annuities determines that the eligible gift amount is equal to the excess of the amount contributed by the donor over the amount that would be required to purchase an annuity from an arm’s length third party to fund the guaranteed payments". So for both types of CGAs, the tax credit receipt will be the same, as else equal.

Marketing and alternatives

Charities marketing CGAs may not clearly explain how they work financially, at least initially, because donors might be less motivated by technical financial terms than by an emotional appeal. Make sure you understand exactly what is being offered and how it compares with alternatives, both on the retirement income side and the charitable giving side.

On the retirement income side, if marketing materials for CGAs present a comparison with Guaranteed Investment Certificates (GICs), be aware that annuity payments involve a portion of your capital being paid back to you (return of capital), whereas GIC interest payments do not. So of course the regular payments from an annuity will be higher than GIC interest, but that is a misleading comparison. The correct comparison is with a prescribed life annuity without the charitable gift component; this will obviously generate a higher monthly income than the CGA, because no donation is involved.

On the charitable giving side, the obvious alternative to the CGA is to give cash or appreciated securities to your favorite charity. They will get to use 100% of the amount for their work, and you get a tax credit for the full amount.

Separate decisions

It is a lot easier to think about your retirement income needs (and decumulation strategies) separately from your charitable endeavours. In Safety-first retirement planning, the goal is to guarantee that minimum (essential) income needs will be met during retirement, and annuities including SPIAs are one way to achieve this goal. The obvious alternative to CGAs for retirees requiring a guaranteed lifetime income using non-registered funds is to buy the prescribed SPIA directly from a life insurance company, using an amount of capital required to provide the desired guaranteed retirement income. The retiree can shop around for the best annuity rate, gets the provincial regulation of insurance products including annuities (ensuring the money is invested by the life insurance company based on strict rules), and the Assuris guarantee.

Once the essential spending of their retiree is covered by guaranteed income sources, and that contingency planning has been done, if there is money left, the retiree can look at discretionary spending, legacy goals, and charitable endeavours. These sort of goals tend to the funded with investment portfolios (including stocks), not with annuities, to let the capital grow and preserve liquidity. In this context, a charitable donation can be done now or later, and the amount of the donation has no relation whatsoever to the capital that may have been used to purchase an annuity. The donation (which would not involve a CGA because the retiree does not require additional income at this stage of the planning) could be less than 20% of the annuity premium, or a lot more if the retiree can afford it: those are separate decisions.

See also

• Charity selection
• Retirement goals

Further reading

• Financial Wisdom Forum topic: "Charitable gift annuities"