2 June 2003 External T.I. 2003-0004115 - GIFTING SPLIT DOLLAR AND SHARES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Whether a tax receipt could be issued in a situation involving a life insurance policy under a split dollar arrangement.

2. Whether the reduced inclusion rate under paragraph 38(a.1) would apply to part of a capital gain realized by an individual on the donation of publicly traded securities to a registered charity if the individual receives partial consideration.

Position:

1. Depends on the facts of the particular situation. Provided general comments only.

2. Yes, to the extent permitted by proposed section 38.1 of the draft legislation released on December 20, 2002.

Reasons:

1. Such a determination is to be made on a case by case basis upon review of the terms and conditions of the particular arrangement.

2. Draft legislation.

XXXXXXXXXX                                            2003-000411

June 2, 2003

Dear XXXXXXXXXX:

Re: Gifting - Split Dollar Insurance and Publicly Traded Securities

This is in response to your letter of February 12, 2003 which was forwarded to us for reply by the Charities Directorate. You have requested our comments on two questions relating to charitable gifting.

Your first question is whether a tax receipt could be issued in a situation where a life insurance policy is jointly owned by a registered charity and an individual whose life is insured under the policy. The individual pays all the premiums on the policy and has the right to access the cash value of the policy and the right to designate a beneficiary in respect of this benefit. The charity is the beneficiary of the death benefit under the policy. Your second question is whether the reduced inclusion rate would apply to the "gift portion" of a capital gain realized by an individual in circumstances where the individual has donated publicly traded securities to a registered charity and receives an annuity as partial consideration.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the general comments.

With regard to the first question, we have not had an opportunity to review in detail a situation such as that described in your letter and therefore do have a general position on this matter. To determine whether in a particular situation any portion of the premiums paid by an individual would qualify as a charitable gift, it would be necessary to demonstrate that the charity has a premium obligation under the policy and that this premium relates exclusively to the benefits under the policy that will accrue to the charity. Also, since there may be some cost reduction by virtue of having a single policy from what would be the premium obligation if two separate policies were issued, it would seem that this saving should be taken into account. Therefore, absent a review of the particular arrangement, we are not in a position to confirm that the calculation of the amount of the gift, if any, is simply the excess of the annual premium over the cost of pure insurance for the year. As noted above, should you wish to apply for an advance income tax ruling with regard to a specific proposed split dollar arrangement, you should provide us with all of the relevant details and documentation.

Regarding your second question, the draft legislation released on December 20, 2002 proposes to add section 38.1 to the Income Tax Act (the "Act"). Proposed section 38.1 of the Act provides that, where a taxpayer is entitled to an advantage in respect of a gift of property described in paragraph 38(a.1) or (a.2) of the Act, only part of the taxpayer's capital gain will be entitled to the reduced inclusion rate. The part entitled to the reduced inclusion rate is that proportion of the capital gain that the eligible amount of the gift is of the taxpayer's proceeds of disposition in respect of the property. We note that, in the situation described, the eligible amount of the gift is the excess of the fair market value of the publicly traded securities at the time the gift was made over the fair market value of the annuity issued to the individual provided that the fair market value of the annuity does not exceed 80% of the fair market value of the publicly traded securities.

We hope our comments are of assistance.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c.: Terry de March
Charities Directorate