17 April 2003 External T.I. 2003-0182165 - GIFTS AND LIFE INSURANCE POLICIES

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 portion of a death benefit paid to a qualified donee as a result of a direct beneficiary designation under a life insurance policy would qualify as a charitable gift.

2. Where a term life insurance policy is jointly held by an individual and a registered charity, can the premiums paid by the individual on behalf of the charity qualify as a charitable gift?

Position:

1. Provided that all the conditions set out in subsection 118.1(5.1) are met, subsection 118.1(5.2) will apply to deem the payment of the death benefit to the qualified donee to be a gift for purposes of section 118.1.

2. Possibly, depends on the facts of the particular situation.

Reasons:

1. Legislation.

2. We would need to review the terms and conditions of the particular policy.

XXXXXXXXXX 							2003-018216

April 17, 2003

Dear XXXXXXXXXX:

Re: Charitable Gifts and Life Insurance Policies

This is in reply to your facsimile letter of January 8, 2003 and further to our letter of December 24, 2002 concerning a XXXXXXXXXX. You have asked in respect of a life insurance policy held by an individual whether the payment of a portion of a death benefit by direct beneficiary designation to a registered charity would result in a charitable gift. You have also asked whether the payment of premiums made by an individual on behalf of a registered charity would qualify as a charitable gift in circumstances where the individual and the registered charity each own an interest in a life insurance policy.

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 following general comments.

With regard to your first question, to the extent that all the conditions set out in subsection 118.1(5.1) of the Income Tax Act (the "Act") are met in respect of a transfer of proceeds under a life insurance policy to a qualified donee, paragraph 118.1(5.2)(a) of the Act will apply to deem the transfer to be a gift made by the individual immediately before the individual's death for purposes of section 118.1 of the Act. Pursuant to paragraph 118.1(5.2)(b) of the Act, the fair market of that gift will be deemed to be the fair market value, at the time of the individual's death, of the right to the transfer (determined without reference to any risk of default with regard to obligations of the insurer). There is no requirement in subsections 118.1(5.1) and (5.2) of the Act that the qualified donee be the sole beneficiary of the policy. Therefore, the payment of a portion of the life insurance proceeds made to a registered charity as a result of a direct beneficiary designation will be deemed to be a gift for the purposes of section 118.1 of the Act as long as all the conditions in subsection 118.1(5.1) of the Act are met.

Regarding your second question, as indicated in our letter of December 24, 2002, Interpretation Bulletin IT-244R3, Gifts by Individuals of Life Insurance Policies as Charitable Donations, contemplates a situation where a qualified donee becomes the sole owner and beneficiary of a life insurance policy. We have not had an opportunity to review in detail a situation where a registered charity and an individual are joint owners of a single life insurance policy. However, depending on the circumstances, it is possible that a gift could result where the individual pays the life insurance premiums on behalf of the charity. For example, assume that a life insurance policy is owned 90/10 by a registered charity and an individual whose life is insured under the policy. The policy is a term policy with no cash value. The only value in respect of the policy is the death benefit payable on the death of the life insured, 90% of which will be paid to the charity and the remaining 10% will be paid to the individual's estate. The term coverage cannot be converted to another type of insurance coverage. Pursuant to the terms of the policy, the premium obligation is split on a basis of 90/10 between the registered charity and the individual. If the individual pays the charity's share of the premium directly to the insurance company at the request of, or with the concurrence of, the charity, the amount paid by the individual on behalf of the charity will generally constitute a charitable gift. However, the individual may derive some benefit or advantage by virtue of this arrangement, particularly if the individual's premium obligation in respect of 10% share of the death benefit is less than would have to be paid on a separate policy owned solely by the individual with comparable rights. This determination can only be made following a review of all the facts relating to the particular situation. We note that in this case the death benefit received by the charity would not qualify as a charitable gift as the requirements of subsection 118.1(5.1) of the Act will not have been satisfied.

As noted above, should you wish to apply for an advance income tax ruling with regard to a specific proposed transaction, you should provide us with all of the relevant details and documentation.

We hope that our comments will be of assistance.

Yours truly,

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