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: Whether the adjusted cost basis is a reasonable proxy for "cost" of an interest in a life insurance policy in applying the deeming provisions of 248(35) with respect to a gift to a qualified donee in certain circumstances.
Position: Yes, generally.
Reasons: There is no definition of "cost" for interests in life insurance policies in the Act.
CALU CRA Roundtable - 2010
Question 6:Determining the "Cost" of Life Insurance Policies as a Charitable Gift
Proposed subsections 248(35) to (37) of the Act set out special rules for determining the fair market value (FMV) of a property that is subject to a charitable gift for purposes of determining the eligible amount of a gift under subsection 248(31). Proposed paragraph 248(35)(b) provides that the FMV of the gifted property is deemed to be the lesser of its FMV otherwise determined and its cost, or in the case of capital property its adjusted cost base immediately before the gift is made, if one of two conditions are met:
(i) The taxpayer acquired the property that is the subject of the gift less than three years before the day that the gift is made (except if the gift is made as a consequence of death), or
(ii) The taxpayer acquired the property that is the subject of the gift less than ten years before the day that the gift is made (except if the gift is made as a consequence of death) and it is reasonable to conclude that, at the time the taxpayer acquired the gifted property, one of the main reasons for its acquisition was to make the gift.
Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35). However, gifts of interests in life insurance policies are not excluded from the proposed application of subsection 248(35).
During the CLHIA Roundtable in May 2009, the CRA confirmed that proposed subsection 248(35) could apply to the gift of an interest in a life insurance policy such that the amount that can be receipted would be the lesser of the policy's "cost" and "fair market value".
In the commentary provided by the CRA it was stated:
"The cost of a life insurance policy is a factual determination. While premiums paid to acquire and maintain a life insurance policy may reflect the cost, this may not always be the case. We recognize that the Act does not specifically define the cost of a life insurance policy and we have brought this to the attention of the Department of Finance for consideration."
Where proposed subsection 248(35) is applicable, the draft legislation indicates the fair market value of a property in certain situations is deemed to be the lesser of the fair market value of the property otherwise determined and the cost. However, in the case of capital property, the fair market value is deemed to be the lesser of the fair market value otherwise determined and the adjusted cost base of the property immediately before the gift is made. Similarly, it would appear that the "adjusted cost basis" of an interest in an insurance policy is a much better proxy for the "cost" of an interest in an insurance policy as it reflects a number of transactions with respect to the policy including the payment of premiums.
While this legislation has yet to be enacted it is stated to be effective in respect of gifts made after 6:00 pm (EST), December 5, 2003, and most donors and charities have been operating as if this draft legislation is in effect. Therefore, it is important to have greater certainty in determining the "cost" of an interest in a insurance policy for purposes of subsection 248(35).
Question:
Could the CRA provide further guidance as to what factors it would consider in determining the "cost" of an interest in an insurance policy for purposes of proposed subsection 248(35).
CRA's Response
The fair market value of an interest in a life insurance policy otherwise determined and the cost of the interest in the policy must be considered in applying proposed subsection 248(35) of the Act to a gift of an interest in a life insurance policy to a qualified donee.
As stated by the CRA at the CLHIA Roundtable in May 2009, we recognize that the Act does not specifically define the cost of an interest in a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration.
The "adjusted cost basis" ("ACB") to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9) of the Act. In general terms, the ACB to the original policyholder will be the amount by which the cash premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the policy that has previously been reported for tax purposes, exceeds the "net cost of pure insurance" ("NCPI") under the policy.
It is our view that the adjusted cost basis of an interest in a life insurance policy as defined in subsection 148(9) would generally be a reasonable proxy for the "cost" of an interest in a life insurance policy for purposes of the deemed fair market value of an interest in a policy under proposed subsection 248(35) of the Act.
Sylvie Danis
2010-035939
May 4, 2010
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