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:
How should the insurer, policyholder and/or charity determine the capital gain to be excluded from income in respect of the donation of an interest in a segregated fund trust?
Position: See comments below
Reasons: See comments below
CALU - Conference for Advanced Life Underwriting (2008)
Question 10
Donation of an interest in a segregated fund trust
In 2006 the Income Tax Act was amended so that the capital gain on a listed security that is donated to a charity is deemed to be nil. The result is that the charity receives the security and issues a charitable donation receipt for the fair market value of the security and the donor has no capital gain inclusion on the donation, resulting in a net tax benefit to the donor. An interest in a related segregated trust is a listed security, and therefore the capital gain on the donation of an interest in the segregated fund trust should be nil.
But, there are some unique problems with segregated funds because of the nature of the tax reporting the issuer is required to do. Gains resulting from trading within the fund are allocated to the policyholder and reported on a T3 slip. In addition, when a policyholder withdraws or surrenders an interest in the segregated fund, any gain resulting from dispositions or deemed disposition of the trust property as a result of the surrender of the interest are also reported on the T3. As a result, the policyholder includes in income the amount the total capital gain reported on the T3.
The assignment of ownership of the segregated fund policy to a charity would be a disposition of the policyholder's interest, but would not necessarily mean that the policyholder had withdrawn or surrendered their interest in the segregated fund. In addition, the determination of the adjusted cost base of the policyholder's interest is complex and normally determined by the insurer, and in fact as the insurer reports both trading and disposition gains on the T3, there is really no need for the policyholder to know their ACB.
Question:
Does the CRA have any suggestions as to how the insurer, policyholder and/or charity determine the capital gain that is excludable from income?
CRA Response
T3 information slips prepared by the insurer for segregated fund units include both capital gains and losses realized throughout the year by the segregated fund in accordance with subsection 138.1(3) and deemed capital gains and losses resulting from an election by the insurer under subsection 138.1(4). This election is only available to the insurer when the policyholder withdraws all or part of his interest from the segregated fund. The donation to a charity of an interest in a segregated fund is not a withdrawal of an interest but a change of ownership. Therefore, no election is available under subsection 138.1(4). The T3 will only include capital gains and losses resulting from trading within the segregated fund that have been allocated to the donor based on the terms and conditions of the segregated fund policy.
The transfer of ownership to the charity is considered to be the disposition of a capital property under subsection 39(1). The insurer does not report this disposition on the T3. Any resulting taxable capital gain is deemed to be zero by subparagraph 38(a.1)(i). However, the donor must still complete form T1170 - Capital Gains on Gifts of Certain Capital Property to determine the amount of taxable capital gain, if any, to report on Schedule 3 of his T1. The donor will need to contact the insurer for a determination of the ACB of the segregated fund units donated. The amount of the donation for tax purposes is the fair market value of the units at the time of the ownership transfer. The onus is on the charity and the donor to determine the fair market value. Donors should refer to P113 - Gifts and Income Tax for more information.
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