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Retired couple with simple lifestyle want to maximize charitable giving

With their three children grown up and launched into successful careers, Ada and Alvin find they have more than they need.

Alvin, 66, retired a couple of years ago with a company pension of $3,850 a month, but he still does some consulting work. As well, he and Ada get $2,630 between them in Canada Pension Plan and Old Age Security benefits. Ada is 65.

They own a home in Ottawa, a rental condo in Vancouver, where they had planned to retire but have since changed their mind, and a modest cottage that they want to hang on to for as long as they can manage the upkeep. They also have substantial savings and investments.

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Their goal: to give as much as possible to charity.

"We have a simple lifestyle and consider giving to others very important," Ada writes in an e-mail. "Our retirement is secure, and we have worked hard and learned to live without a lot of extras so that we can give a substantial amount of our income to charity each year," she adds.

"Our life goal is to leave a legacy gift for a cause we deem to be important and that will carry on important work in peace and social justice," Ada writes. "We want our current investments to accrue so that maximum use can be made of these financial resources after we are gone."

She wonders: "Is it better to give the money now or invest it wisely for maximum effect?"

We asked Ross McShane, director of financial planning services at McLarty & Co. in Ottawa, to look at Alvin and Ada's situation.

What the expert says

Ada and Alvin are in a strong position financially, Mr. McShane says. This enables them to donate a tidy sum to charity each month, an amount they could raise thanks to their monthly surplus.

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"By donating money now, they get a sense of satisfaction from seeing the charities putting their funds to good use," the planner notes. But Ada and Alvin are too young to give it all away at once, he cautions.

Instead, he recommends they monitor their finances year by year to ensure they hang on to enough readily available capital to cover large and unexpected costs such as nursing care. They also have to take into account repair and maintenance of their properties and the cost of replacing their vehicle. As well, their priorities might change; for example, they may want to leave something to their grandchildren.

Donating money to charity has significant tax advantages. Donors can claim a charitable tax credit for gifts of up to 75 per cent of their net income each year. People donating publicly traded securities may increase their tax saving by reducing the amount of capital gains tax that would be payable on the eventual sale.

Hence Alvin and Ada should focus first on donating stocks on which they have a capital gain, Mr. McShane says. When they put their condo up for sale, they face another capital gain, so they should plan to make a substantial donation that year.

Some time ago, the couple bought a universal life insurance policy to offset taxes that would be payable by their estate when they die, a use that isn't really required anymore because of their donation tax credits.The premiums are being paid out of cash value. They should continue to fund this policy because it provides tax sheltering on a portion of their investable assets, the planner says. They could always make their chosen charity the named beneficiary.

When Ada reaches the age of 72 and they are forced to make minimum withdrawals from their RRSPs, which will be converted into registered retirement income funds, their combined income will leap to $200,000 a year. Their Old Age Security benefits will be clawed back. Making a charitable donation will not reduce income for the purposes of calculating the OAS clawback, although it will still reduce tax payable.

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To preserve their OAS benefits, they could consider an early RRSP withdrawal strategy between now and the age of 72, the planner says. That would mean increasing their net income to about $70,000 each, the threshold at which OAS begins to be clawed back. They could increase their charitable donations to help offset the tax payable on the RRSP withdrawals. The downside of this strategy is that they would give up the tax deferral and tax-sheltered growth RRSPs offer.

As it stands, Ada and Alvin hold units of a mortgage fund outside of their registered plans; this investment might have been better held in their RRSPs, especially since it may have some restrictions on when the units can be redeemed for cash.

Because they don't need the money, Ada and Alvin can afford to target a heavier equity weighting than if they were dependent on their investments for income.

A thorough review of where their fixed income and equities are located is required in order to maximize tax efficiency. For instance, RRSPs should hold the fixed income and the non-registered portfolio should hold the equities. They have different accounts such as RRSPs, tax-free savings accounts, non-registered investments, and an insurance policy with each treating investment income differently.

Finally, Ada and Alvin may want to consider setting up a foundation to manage their charitable donations now and after they are gone.


The people

Ada, 65, and Alvin, 66

The problem

How to arrange their affairs so as to leave as much as possible to charity.

The plan

Start with a little tax planning, using charitable donations to offset capital gains on securities and the Vancouver condo. Then ensure investments are arranged in a tax-effective manner, holding fixed income securities in RRSPs and stocks outside. Be sure to keep enough for unexpected expenses.

The payoff

The satisfaction of seeing their money being put to good use while they are still alive, the flexibility to change course if they choose to, and the comfort of knowing they will leave a lasting financial legacy to a cause they hold dear.

Client situation

Monthly net income (variable): $7,915


Cash and term deposits $83,000; closed-end mortgage fund $151,000; stocks $329,000; cash value of universal life insurance policy $63,000; cottage $75,000; TFSAs $52,800; his RRSP $380,000; her RRSP $307,000; residence $300,000; rental condo $386,000. Total: $2.1-million.

Monthly expenditures

Property tax, home insurance, utilities, maintenance $785; transportation $295; groceries, clothing $500; charitable $2,800; travel $200, personal discretionary (entertainment, dining out, club membership, grooming, subscriptions $155; health and dental insurance $250; dentist, drugstore $50; telecom, TV, cable $280; TFSA $675. Total: $5,990.


Condo mortgage $37,000

Special to The Globe and Mail

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Some details may be changed to protect the privacy of the persons profiled.

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