Principal Issues: Does the reply that the CRA gave to the APFF in October 2008 represent its current position?
Position: Yes
CLHIA Roundtable 2009
Question 7: Gifting a life insurance policy and proposed subsections 248(35) and 248(37) of ITA
Former Bill C-10 contained legislative proposals that "total charitable gifts" would depend on the eligible amount of a gift. Proposed subsection 248(31) of the Income Tax Act (ITA) stipulated that the eligible amount of a gift is the amount by which the fair market value (FMV) of the property that is the subject of the gift exceeds the amount of the advantage, if any, in respect of the gift.
At the 2007 APFF Round Table on Taxation of Financial Strategies and Instruments, the Canada Revenue Agency (CRA) indicated that the factors listed in Information Circular 89-3 must be taken into account in establishing the fair market value of a life insurance policy gifted to a qualified donee and that paragraph 3 of Interpretation Bulletin IT-244R3 must be read taking into account the position taken by CRA at the 2007 APFF Round Table.
Proposed subsections 248(35) to (37) of the ITA set out special rules for determining the FMV of a property that is the subject of a gift.
Proposed subsection 248(35) stipulates that if one of the following statements is true, 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:
(a) The taxpayer acquired the property that is the subject of the gift under a gifting arrangement that is a tax shelter within the meaning assigned by section 237.1(1) of the ITA.
(b)
(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).
(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 the taxpayer's 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 application of subsection 248(35), including the following:
- gifts of inventory
- gifts of real property situated in Canada
- gifts of cultural property
- gifts of certain shares.
Gifts of life insurance policies are not excluded from the application of proposed subsection 248(35).
At the 2008 APFF Round Table on Taxation of Financial Strategies and Instruments, the CRA was given two examples where a life insurance policy was donated to a charity and was asked to confirm that proposed subsection 248(35) of the ITA should not apply.
The CRA's view was that proposed subsection 248(35) of the ITA would apply to establish the fair market value of the gifted life insurance policy in both scenarios provided by the APFF. The scenarios were as follows:
An individual who is the owner of a business acquires a life insurance policy, under which his own life is insured, in order to cover his taxes at death. Two years after acquiring the policy, he sells his business and pays the taxes arising from the sale. Less than three years after acquiring the life insurance policy, he gifts it to a registered charity.
An individual who is aware that the cost of life insurance increases with age decides to purchase a life insurance policy with the intention of gifting it later to a registered charity. After holding the policy for eight years, he creates a private charitable foundation and gifts his policy to the foundation which is a registered charity. He will continue to pay the premium each year.
In both situations, the life insurance policy is fully assigned to a qualified donee who becomes the policyholder and the beneficiary.
Question
Does the reply that the CRA gave to the APFF in October 2008 represent its current position?
CRA Response
Yes, the CRA is of the view that proposed subsection 248(35) of the ITA will apply to establish the fair market value of the life insurance policy that was subject to a gift in the two scenarios described at the APFF in October 2008.
In applying proposed subsection 248(35) of the ITA to a gift of a life insurance policy, the fair market value of the policy otherwise determined and the cost of the policy must be considered.
The FMV of a life insurance policy gifted to a charity has been the subject of previous comments by the CRA, most recently at the 2008 CALU - Conference for Advanced Life Underwriting conference, where the CRA confirmed that to establish the FMV of a life insurance policy for the purpose of proposed subsection 248(31), paragraphs 40 and 41 of Information Circular 89-3 must be taken into account. Factors to be considered in the determination of fair market value include, (a) cash surrender value, (b) the policy's loan value, (c) face value, (d) the state of health of the insured and his/her life expectancy, (e) conversion privileges, (f) other policy terms, such as term riders, double indemnity provisions, and (g) replacement value. Furthermore, paragraph 3 of IT-244R3 must be read taking into account this new position.
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 their consideration.