Introduction to charitable gift annuities

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Charitable Gift Annuities

A charitable gift annuity is an arrangement under which a donor transfers a lump sum to a charity in exchange for fixed, guaranteed payments for the life of the donor and/or another person, or, alternatively, for a term of years.

All or a substantial portion of the annuity payments will be tax-free.

Note: Not all charities offer annuities, as certain resources are required to administer them.


There are two types of charitable gift annuity: self-insured and reinsured.

Self-insured : the charity invests the contributed assets and guarantees payments, pledging its own resources as security. These annuities are offered mostly by religious institutions having authority to issue gift annuities either under their charter or by special permission.

Reinsured: also known as the "Gift Plus Annuity"

An insurance company issues the annuity rather than the charity.

The charity works with a life insurance agent on the donor's behalf to arrange for a commercial annuity.

Generally, the charity retains 25%-30% of the contributed amount for its immediate charitable purposes or for endowment, whichever the donor prefers.

The balance of the donor's lump-sum contribution is used to purchase the commercial annuity.

Benefits to the donor

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The donor (and/or other beneficiaries) receives guaranteed payments for life (or a term of years), all or substantially tax-free.

The donor's after-tax income often increases significantly after contributing assets to a gift annuity because:

Gift annuity rates tend to be higher than interest rates paid on GICs and other fixed-income investments; and

The annuity payments are all or substantially tax-free. (Interest paid on GIC/fixed-income investments is fully taxable.)

The donor receives the satisfaction of having completed a gift during his or her lifetime.

Annuities may be established with modest amounts of capital, usually $10,000 or more.

The donor is relieved of managing investments and will receive a regular, stable income.

The donor receives a donation receipt for the excess (if any) of the amount contributed over the total annuity payments to be paid during the life expectancy of the annuitant (or the term of years if that form of arrangement has been chosen).


The tax benefits to the donor are the same whether the charity self-insures or reinsures a gift annuity. Generally speaking, the older the donor, the larger the tax receipt. Refer to the book "Planned Giving for Canadians" by Frank Minton and Lorna Somers for some sample financial illustrations. (See Resource section).

Benefits to the charity

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All charitable gift annuities require an irrevocable commitment of principal.

Self-insured : upon the death of the annuitant, the charity has whatever remains of the contribution after satisfying annuity payment obligations.

Depending on investment performance and annuitant longevity, this could be 50% or more of the original contribution.

Reinsured: the charity has whatever remains (usually 25% - 30% of the lump-sum contribution) after purchasing the commercial annuity.

If the charity has purchased a commercial annuity with a guarantee period, and if the annuitant passes away before the end of the period, the charity will receive the remaining annuity payments.

Who are best prospects for Annuities

Donors (usually age 65 and older, with optimum age group 75 - 90) who want the security of guaranteed payments that gift annuities offer, and who wish to benefit from after-tax rates of return that are significantly better than GICs and Canada Savings Bonds.

Often, the donor has a medium-level income, and would like to receive higher dependable income, free of worry. Some donors may choose use an annuity in place of a bequest to simplify the estate process and reduce probate and other estate settlement fees in the future.

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Some may contribute by way of a gift annuity and a bequest.

Still others start with a modest contribution for a gift annuity and are so pleased with the results that they make further contributions for additional annuities.

How is an annuity established

The annuity is established by way of a legal agreement between the donor and the charity. The agreement may include provisions dealing with the size of the lump-sum payment, annuity payment frequency and timing, and uses and purposes of the charitable gift.

Ordinarily, the donor writes a cheque for the lump-sum contribution. The donor may also contribute marketable securities.

Things to watch for:

Unlike GICs and other fixed-income investments, the capital contributed to establish a gift annuity is irrevocable. The donor cannot get the contribution back and has no control over how it is invested.

Annuity payments are fixed and cannot be changed even if interest or inflation rates rise.

Foundations may not incur debt except for current operating expenses and certain other allowable purposes. (Income Tax Act, section 149.1 (3)(4). Gift annuities are problematic for foundations because self-insured and even reinsured gift annuities are viewed as debt obligations by CCRA.

Care must be taken to use the correct life expectancy tables when calculating the donation receipt and the tax-free portion of annuity payments.

In some instances, it is advisable to consult an actuary.

Administrative Costs

When considering an annuity arrangement, especially smaller amounts, it is advisable to inquire into the administrative costs that will be associated with the annuity.

As always, it is wise for the donor to consult with his or her legal and tax advisors before finalizing the gift.

Both the donor and the charity should have the annuity agreement reviewed and approved by their own legal counsel.

Most charities that offer annuities have simple, standard form agreements available and are happy to work with donors and their advisors to ensure that the process of establishing the annuity is straightforward, clear and worry-free.

Last modified: Monday, 4 February 2013, 10:11 AM