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.
Principal Issues:
When calculating the eligible amount of a gift of a life insurance policy, what is the FMV the life insurance policy?
Position:
To establish the FMV of a life insurance policy for the purpose of paragraph 248(31), paragraphs 40 and 41 of Information Circular 89-3 must be taken into account. Furthermore, paragraph 3 of IT-244R3 must be read taking into account this new position.
Reasons:
Application of the Law.
CALU - Conference for Advanced Life Underwriting (2008)
Question 2
Valuation of a life insurance policy gifted to a charitable organization
At the 1993 CALU conference, the CRA stated that, notwithstanding the position stated in paragraph 3 of IT-244R3, Gifts by individuals of life insurance policies as charitable donations, it "...is an administrative position taken by the Department based on a legal opinion that the gift [of a life insurance policy] should be valued at the FMV of the policy to the donor and not the donee." (Document No. 9310135.) This position appears to have been reversed in May 2006 (Document No. 2006-016859) when the CRA confirmed its position as stated in IT-244R3. However, at the 2007 APFF conference, in its answer to question 1, it appears that the CRA has further modified its position, based on proposed subsection 248(31) of the Income Tax Act ("the Act"), contained in Bill C-10 (previously Bill C-33).
Given the CRA's response to question 1 at the 2007 APFF conference it would now appear that a charitable organization can issue a receipt for the fair market value of the life insurance policy at the time it is gifted to the charity. The factors to be considered in determining the fair market value of the policy are those listed in paragraph 40 of Information Circular 89-3 Policy Statement on Business Valuation. These are factors taken into account in valuing a corporate owned life insurance policy for the purpose of valuing the surviving shareholders shares.
Paragraph 40 states that the value of the life insurance policy should reflect the following factors:
(a) cash surrender value;
(b) the policy's loan value;
(c) face value;
(d) the state of health of the insured and his/her life expectancy;
(e) conversion privileges;
(f) other policy terms, such as term riders, double indemnity provisions; and
(g) replacement value.
In its response, the CRA stated that:
Paragraphs 40 and 41 of Information Circular 89-3 Policy Statement on Business Equity Valuations list the factors to be considered in valuing a life insurance policy. The CRA is of the opinion that these paragraphs must be taken into account in establishing the fair market value of a life insurance policy gifted to a qualified donee.
Paragraph 3 of Interpretation Bulletin IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donation must be read taking into account the CRA's new position.
In the scenario described above, the charitable organization will be required to indicate on the receipt the fair market value of the life insurance policy at the time of the gift.
As a result, the amount of the charitable gift could be different than the donor's proceeds of disposition. The donor would receive a tax receipt in an amount equal to the fair market value of the policy while he or she would include in income an amount equal to the cash surrender value of the policy, less its adjusted cost basis.
Questions:
a) Can the CRA please confirm that our understanding of its answer to question 1 at the 2007 APFF conference is correct?
b) Does the CRA intend to revise its position stated in paragraph 3 of IT-244R3 to reflect its new position?
CRA's Response
Firstly, it should be noted that at the 1993 CALU conference, the CRA was only explaining the reason for the position stated in paragraph 3 of IT-244R3.
In 2007, we revisited our long standing position and as stated at the 2007 APFF conference we are now of the opinion that the factors listed in paragraphs 40 and 41 of Information Circular 89-3 Policy Statement on Business Equity Valuations must be taken into account in establishing the fair market value of a life insurance policy gifted to a qualified donee.
Consequently, paragraph 3 of Interpretation Bulletin IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donation must be read taking into account this new position of the CRA.
In the situation described above, the charity will be required to enter on the receipt the fair market value of the life insurance policy at the time of the gift.
CRA will publicly state it new position in a future Income Tax Technical News.
Louise J. Roy
2008-027039
(613) 958-8968
April 29, 2008
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