I get regular inquiries about donating funds from registered retirement income funds or RRIFs. The value of RRIFs has grown through careful saving and market gains, and these funds may represent surplus wealth. Some RRIF holders resent the requirement to take steadily increasing annual withdrawals from their RRIF. Add a dash of altruism and the idea of donating RRIF property arises.

The Basics

There are a couple of factors to remember when considering donating RRIF assets.

First, any withdrawal is taxed as income. So there is no advantage to donate appreciated public securities from within a RRIF. The taxation rate is not the 50% lower capital gains rate. If there is no capital gain and it will not be eliminated if securities are donated in kind.

Second, plan trustees are obliged to withhold 30% of any withdrawal for tax purposes. The withholding tax creates cash-flow problems for the would-be donor. For example, a desire to donate $100,000 is frustrated by having only $70,000 available. There is, however, a tax liability on the full $100,000 withdrawal.

Offset Donation Plan

From a tax perspective, it is a bad idea to make direct gifts from RRIFs during life. These gifts are tax inefficient and the withholding tax causes cash-flow issues. Still, it may make sense for a committed donor to use an offset plan to achieve charitable goals.

One approach is to donate appreciated publicly-list securities held outside the RRIF and withdraw an equal amount from the RRIF. The tax credit from the donation will offset the tax liability triggered by the RRIF withdrawal.

This donation is more tax effective due to nil capital gains from a gift of public securities.  It also allows the donor to reinvest funds from the RRIF in a lower tax environment that provides higher control over cash-flow. It does not eliminate the withholding tax, so it is best to make the RRIF withdrawal in December to reduce the period when the donor is out of pocket.

AMT Proposed Changes

On January 1, 2024 it is expected that Alternative Minimum Tax (AMT) will be applicable to donations from individuals for the first time.  This is worrying news for donors and the charities that rely on major donations.

The proposal is to increase the base AMT rate from 15% to 20.5%.  For individuals with net income in excess of $173,000 tax savings from donations would be reduced under the proposal.  Donation tax credits may be reduce by 50%.  Rather than nil capital gains for donation of the public securities, a 30% inclusion rate would apply.  This rate is a roll-back to 1997 levels.  Moreover, it represents a profound change in the tax policy of the last 30 years.

Donors who have a large RRIF and taxable securities may want to explore the benefits of making a large gift of public securities in 2023, before the new AMT rules come into effect.  This will allow them to receive the tax benefits described above.

The AMT proposals apply to individual not corporate donors.  Fortunately, AMT would not apply to donations in the year of death.  In other words, estate donations will not be affected.