20 May 2011 Roundtable, 2011-0398461C6 - Charitable donation of life insurance policy

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: 1. Do the premiums paid by an individual in respect of a life insurance policy that is owned by a registered charity, where the individual is the life insured under the policy, and the charity is the sole beneficiary qualify as a gift for tax purposes?
2. Under otherwise similar circumstances, would the premium payments qualify as a gift for tax purposes if the terms of the policy provide that the death benefits are split between the charity and the individual?

Position: 1. General comments provided. 2. Factual determination. Discussed proposed split-receipting legislation.

Reasons: 1. See comments in IT-244R3. 2. Such a determination is to be made on a case by case basis upon review of the terms and conditions of the particular arrangement.

CLHIA Roundtable - May 2011
Question 7 - Charitable Donation of Life Insurance Policy

Consider the hypothetical situation where a registered charity is the policyholder of a universal life insurance policy. The basic death benefit is $100,000. On death of the life insured, the death benefit payable is the basic death benefit of $100,000 plus all premiums paid for the policy. The taxpayer who donated the life insurance policy to the charity is the life insured and pays all the premiums.

Situation A

The registered charity is the beneficiary for the entire death benefit payable on death (i.e., the basic death benefit plus the "excess" death benefit equal to all premiums paid for the policy).

Question: Does the CRA agree that the charity should issue tax receipts to the taxpayer for all premiums paid when the charity is the policyholder? If not, why not, and for what amount should the charity issue a tax receipt?

CRA Response:

As set out in Interpretation Bulletin IT-244R3, Gifts by Individuals of Life Insurance Policies as Charitable Donation, a gift by an individual of a life insurance policy to a qualified donee, such as a registered charity, is considered to be a gift within the context of section 118.1 of the Income Tax Act, provided that the policy has been absolutely assigned to the donee and the donee has become the registered beneficiary of the policy. In such circumstances, an amount donated by the individual to the qualified donee to enable the donee to pay the premiums in respect of that policy is considered to be a gift for the purposes of the Act. Where the individual pays the premiums under the policy directly to the insurance company at the request of, or with the concurrence of, the donee who owns the policy, the amount paid is also considered to be a gift for the purposes of the Act.

In Situation A, to the extent that the conditions set out in IT-244R3 are met, the amount donated by the taxpayer to the registered charity in respect of the premiums on the policy or the premium payments made directly to the insurance company on behalf of the charity will be considered as a gift to the charity for tax purposes. The charity may issue an official donation receipt to the taxpayer for the eligible amount of the gift in accordance with the proposed split-receipting legislation (i.e., subsections 248(31) and (32)). Provided that there is no advantage in respect of the gift, the eligible amount would be the amount donated to the charity or the premium payments made to the insurance company on behalf of the charity.

Situation B

The registered charity is the beneficiary for the basic death benefit of $100,000 and the taxpayer's estate is the beneficiary for the "excess" death benefit equal to the amount of all premiums paid for the policy.

Question: Does the CRA agree that the charity should issue tax receipts to the taxpayer for all premiums paid when the charity is the policyholder? If not, why not, and for what amount should the charity issue a tax receipt?

CRA Response:

Situation B involves a split beneficiary designation arrangement that is beyond the scope of the CRA's position in IT-244R3. Whether, under such an arrangement, the transfer of a life insurance policy to a qualified donee or the payment of premiums in respect of a life insurance policy held by a qualified donee would result in a gift for tax purposes is a factual determination. A review of the terms and conditions of the life insurance policy and any other relevant documentation would be required in making such a determination.

Given that the charity is not the sole beneficiary under the life insurance policy, there is a potential benefit to the individual as the other beneficiary under the policy. The CRA has previously noted the possibility that a portion of the life insurance premiums paid by an individual under a split dollar or shared ownership arrangement may be considered a gift under the proposed split-receipting legislation. If, having regard to the facts of a particular situation, it is reasonable to consider the transfer of the life insurance policy or the payment of life insurance premiums as a gift under the proposed split-receipting legislation, it will be necessary to determine the eligible amount of the gift and the amount of the advantage in respect of the gift for receipting purposes.

Where an advantage is provided in respect of a gift, the donee must be able to support the basis for the determination of the amount of the advantage provided. As stated in Income Tax Technical News No. 26, the CRA's position is that if the value of an advantage cannot be reasonably ascertained, no charitable tax deduction or credit will be allowed. In accordance with proposed amendments to section 3501 of the Income Tax Regulations, it is the responsibility of a qualified donee to identify the advantage, and the amount thereof, on a receipt provided to a donor in respect of a gift.

Robert Demeter
2011-039846