CRA illustrates the application of ss. 248(35) and (36) to gifts of life insurance policies

Pursuant to s. 248(35), the FMV of a gift to a registered charity of a life insurance policy is reduced (leaving aside other more adverse refinements) to its adjusted cost basis immediately before the gift if the policy had been acquired less than three years before the date of the gift (or less than 10 years before, if one of the main reasons for the donor’s acquisition of the policy was to gift it to a qualified done). S. 248(36) may further reduce the FMV if the FMV of the interest in the gifted policy was reduced under s. 248(35) because the donor acquired that policy within the 3-year or 10-year periods described in that provision, and the policy was, at anytime within the 3-year or 10-year periods, as applicable, acquired by a person not dealing at arm’s length with the donor.

CRA illustrated the two provisions’ application. S. 248(5) would apply where:

• Within 2 years of the s. 98(5) wind-up of a partnership that had held a policy on the life of the sole proprietor (A) for over 10 years, A donated the policy to a registered charity (a “donation”) (CRA indicated that the period of holding by the partnership would not count for s. 248(25) purposes);
• An individual transfers a newly-acquired policy for nil consideration to a wholly-owned corporation and, 35 months later, the corporation gifts the policy to a registered charity;
• A parent purchased a policy on the life of the parent’s 8-year old child and then gifted it to the child on attaining 21, with the child then making a donation within 3 years (s. 248(36) did not apply since the policy had been held by the parent for over 10 years); and
• A transfers a policy on A’s life that A had held for 15 years to A’s spouse (B) on a s. 146(8.1) rollover basis, and B makes the donation within 3 years thereafter (again s. 248(36) would not apply, and B’s gain under s. 148(7) would be attributed to A).

The last scenario above is varied by A holding the policy for only 2 years before gifting it to B, who makes the donation within the next year. Here, s. 248(36) would apply given that the policy was acquired by A within the 3 year period before the time of the gift by B, so that s. 248(36) in conjunction with s. 248(35) would restrict the FMV of the interest in the gifted policy to the least of its FMV otherwise determined, its ACB to B immediately before the gift and its ACB to A immediately before the gift to B (again, B’s gain under s. 148(7) would be attributed to A.)

Neal Armstrong. Summary of 7 May 2024 CALU Roundtable Q. 5, 2024-1007081C6 under s. 248(35).