10 December 1992 Income Tax Severed Letter 9219195 - Life Insurance Policies Gifted to Charities

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.

921919
XXXXXXXXXX
Glen Thornley
(613) 957-2101

Attention: XXXXXXXXXX

December 10, 1992

Dear Sirs:

Re: Life Insurance Policies Gifted to Charities

This is in reply to your letter of August 9, 1991 addressed to the Charities Division which was given to us for response, and further to our telephone conversation (Thornley/XXXXXXXXXX) of September 23, 1992 concerning the above issue. We regret the delay in replying.

You ask for a technical interpretation with respect to the application of clause 149.1(1)(e)(i)(B) of the Income Tax Act to certain hypothetical facts and questions you have posed. You set out a scenario similar to the following:

• An individual purchases a life insurance policy and makes a gift of this policy to a charitable organization with a direction for the property to be held by the charity for a period of not less than 10 years. The charity is now the owner and beneficiary of the policy. The donor will pay the premiums directly to the insurance company. The life insurance company will notify the charity of the donor's payment, and the charity will issue a charitable donation receipt to the donor.

Our Comments

The Department's published opinion on matters related to gifts by individuals of life insurance policies to charitable organizations is set out in Interpretation Bulletin IT-244R3. Our answers follow the point order of your questions and are cross-referenced to the Bulletin where appropriate.

• 1. The "gift" and the "property" referred to in clause 149.1(1)(e)(i)(B) of the Act is the insurance policy and where applicable, each premium payment. The amount of the gift, in the case of a gift of a policy, will be its cash surrender value at the time of gifting the policy. The amount of the gift in the case of premium payments will be the amount of each premium payment. The 10 year rule applies to the cash surrender value at the time of gifting the policy and to each and every premium payment. See paragraphs 6,7 & 8 of IT-244R3. The words "property substituted therefore" in the subject clause would suggest that the charity could surrender the policy as long as it held an amount equal to the amount of that gift. However, if the policy is surrendered the charity would, presumably, no longer be the beneficiary of the policy in the event of the death of the measuring life and would, thus, forego the policy's death benefit. Note, however, that the gifting of annual premiums is not effectively the gifting of a new policy. They are merely premiums to be used by the charity to fund the policy and in this respect it does not appear that there could be substituted property for them. Paragraph 8 of the Bulletin would appear to support this view as "property substituted therefor" is, in the context of the sentence, in reference only to the "policy".
• 2. According to paragraph 6 of the Bulletin, "provided that a trust stipulates, or the donor directs, that the gift be held for a least 10 years, the value of a life insurance policy and the proceeds from the policy, whether on voluntary disposition or upon the death of the life insured, will be exempt from the disbursement quota set out in the Act". Thus, in our view the charity would have to hold the death benefit proceeds for the remaining part of the 10 year holding period. In this respect the death benefit would be considered as substituted property.
• 3. There are no special rules regarding the investment of funds arising from the holding of 10 year gifts other than the general prohibition relating to "non-qualified investment" contained in section 149.1 of the Act. Detailed information and explanations are provided, however, in Information Circular 80-10R to enable registered charities to understand and comply with the law as it applies in particular circumstances.
• 4. 10 year gifts are subject to the donor's written trust or direction (see Ten year gifts, paragraph 37 of IC- 80-10R) and much would depend on what was included in the donor's directions. For instance, if the donor stipulated that the gift included all dividends, interest earned or other earnings then such income would also be subject to the 10 year gift restrictions. Where the direction is silent in this regard it would appear that such income would not be subject to the 10 year gift restrictions. The income would, however, have to be expended in accordance with the charity's purposes.
• 5. The property given or property substituted therefor is to be held by the charity for the 10 year period. The fact that substitutions are specifically mentioned indicates, subject to contrary instructions in the trust documents or breach of trust, that the cash surrender value could be withdrawn and used to acquire a substitute property of equal value and earning potential.
• 6. As indicated in 2. above the death benefit is considered a substituted property and therefore would have to be held for the remainder of the holding period, if any.
• 7. Subject to any restrictions set out in section 149.1 of the Act, including those concerning non-qualified investments, the charity can invest such funds or acquire other property as a substituted property.
• 8. Income earned on the invested money may be spent as outlined in 4. above.

We trust our comments will be of assistance to you.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

• c. c. Charities Division