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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
-Whether the payment of premiums on a life insurance policy represent additions to the policy.
-Whether the proceeds from a life insurance policy donated to a private foundation must be held for a period of 10 years.
Position TAKEN:
-The premiums paid may be included in the adjusted cost basis of the policy.
-The insurance proceeds must be held for at least 10 years after the last premium is paid.
Reasons FOR POSITION TAKEN:
-The "B" component of the meaning of the term "adjusted cost basis" in subsection 148(9) of the Act.
-Published Departmental positions and the definition of the term "disbursement quota" in subsection 149.1(1) of the Act.
950052
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
October 12, 1995
Dear Sirs:
Re: Donation of a Life Insurance Policy
This is in reply to your letter of December 1, 1994, wherein you requested our views concerning a donation of a life insurance policy to a private foundation. We apologize for the delay in responding.
The policy is on the lives of the donors and the private foundation is the beneficiary. The donors also make a yearly gift of cash in an amount equal to the annual premiums on the policy. These annual gifts or its replacement must be held for a period of not less than ten years.
You have asked us whether the policy is a capital property, whether the premiums constitute additions to the policy and our views concerning the proceeds of the policy in respect of the ten year rule.
The situation described in your letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation. As stated in paragraph 14(f) therein, the Department may not rule where a matter on which a determination is requested is primarily one of fact and the circumstances are such that all the pertinent facts cannot be established at the time of the request. However, we can offer the following general comments.
Paragraph (b) of the definition of the term "capital property" in section 54 of the Income Tax Act (the "Act") refers to any property, other than depreciable property, any gain or loss from the disposition of which would, if the property were disposed of, be a capital gain or a capital loss, as the case may be, of the taxpayer. Accordingly, it is a question of fact whether a life insurance policy represents capital property to a foundation.
Subsection 148(9) of the Act provides several definitions pertaining to life insurance policies. The meaning of the term "adjusted cost basis" to a policyholder of the policyholder's interest in a life insurance policy is determined by a formula. The B component of the formula "is the total of all amounts each of which is an amount paid before that time by or on behalf of the policyholder in respect of a premium under the policy other than amounts referred to in...the definition "proceeds of disposition"....".
Paragraphs 6 to 8 of Interpretation Bulletin IT-244R3 entitled "Gifts by Individuals of Life Insurance Policies as Charitable Donations" and paragraph 37 of Information Circular 80-10R entitled "Registered Charities" outline the Departments view concerning 10 year gifts.
As stated in paragraph 6 of IT-244R3, where a registered charity receives a gift subject to a trust or direction by a donor that the property given, or property substituted therefor, is to be held by the charity for a period of not less than 10 years, the gift is excluded from the income of the charity by virtue of subparagraph 149.1(12)(b)(i) of the Act. The gift is excluded from the "A" component of the formula used to define the "disbursement quota" by virtue of paragraph (b) thereof, but in a subsequent year to the extent that such an amount is expended it would be included in the "A.1" component of the formula in subsection 149.1(1) of the Act. Therefore, provided that the trust stipulates, or the donor directs, that the gift be held for at least 10 years, the value of a life insurance policy and the proceeds from the policy, whether on a voluntary disposition or upon the death of the life insured, will be exempt from the disbursement quota set out in the Act.
As stated in paragraph 8 of IT-244R3, where a gift of a life insurance policy qualifies for exclusion from the charity's income and disbursement quota, the amount of subsequent premiums donated relative to that policy will also qualify for such exclusions. It should be noted, however, that since each payment of a premium is itself a gift, each payment must be subject to a direction that it be retained for 10 years if that gift is to be excluded from the disbursement quota. One way of achieving this is for the donor, at the time the policy is given, to require the charity to keep the policy, or property substituted for the policy, for at least 10 years after the last premium is paid by the donor. As life insurance proceeds relate to both the gift of the policy and of the subsequent premiums, such insurance proceeds will have to be held for at least 10 years after the last premium is paid by the donor.
As stated in paragraph 37 of IC 80-10R, a gift received subject to the donor's written trust or direction that the gift be held for at least ten years is excluded from the amount required to be expended by the charity. A trust document or direction must be executed by the donor for each gift made and must clearly identify the donee charity (ie. official name and registration number), the amount of the gift, the date the gift is made, the name and address of the donor, and the serial number of the "official receipt" issued to the donor for the gift. The trust or direction should be attached to the charity's duplicate copy of the receipt and maintained with its other books and records.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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