Principal Issues: [TaxInterpretations translation] (1) What is the value of a gift related to a life insurance policy? (2) Are amounts received from the insurer following the death of the insured taxable to the beneficiaries?
Position: (1) We are unable to determine the eligible amount of the gift. (2) Usually not.
Reasons: (1) Fair market value is a question of fact. (2) Subsection 148(1) applies to the holder, not the beneficiary.
XXXXXXXXXX 2009-031202 Michel Lambert CA, M. Fisc. November 19, 2009
Dear Sir,
Subject: Life Insurance Premiums and Charitable Giving
This is further to your email of February 27, 2009 in which you asked our opinion regarding the donation of life insurance policies to qualified donees.
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is our practice not to issue written opinions on proposed transactions otherwise than by way of advance rulings1. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, the determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, in certain circumstances, not apply to your particular situation.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act") as it would have been amended had Bill C-10 (39th Parliament, 2nd Session) been assented to as passed by the House of Commons.2
Your Scenarios
1. You described scenarios for the donation of a universal life insurance policy that includes a return of premiums on death (ROPD) rider. This rider provides for the payment of an additional premium to the required base premium (these two premiums are called the "total premium") for the life insurance portion and allows for the payment of an additional benefit following the death of the insured that is equal to the total premiums paid. You are asking our opinion regarding the tax credit for donations to registered charities with such a policy.
2. In the first scenario you submitted to us, a registered charity holds the universal life insurance policy whose insured person is Mr. A. The latter pays the total annual premiums to the insurer. The registered charity is the beneficiary of the benefit payable on Mr. A.'s death and Mr. A.'s estate is the beneficiary of a benefit equal to the total premiums paid by Mr. A. to the insurer during his lifetime.
3. In your second scenario, Mr. A. is the life insurance policyholder. He is also the insured person and pays the total annual premium. The registered charity is the beneficiary of the benefit following Mr. A's death, and Mr. A's estate will be entitled to a benefit following his death equal to the total amount of the total premiums he paid to the insurer during his lifetime.
Our Opinion
Our response assumes that the life insurance policy is an exempt policy as defined in section 306 of the Income Tax Regulations.
4. The donation tax credit under section 118.1 is based, inter alia, on the eligible amount of a donation. Proposed subsection 248(31) sets out how that amount is determined as follows:
The eligible amount of a gift ... is the amount by which the fair market value of the property that is the subject of the gift ... exceeds the amount of the advantage, if any, in respect of the gift ....
5. The determination of the fair market value of a property is a question of fact that can only be determined after considering all relevant facts. Therefore, we cannot determine for you the eligible amount of a gift in the above scenarios.3
6. Paragraph 2 of Interpretation Bulletin IT-244R34 states that premiums on a life insurance policy held by an eligible donee, paid directly by an individual at the request of, or with the concurrence of, the donee, are considered to be a gift. In our view, the premium for the ROPD rider will not be a gift where the beneficiary of the benefit payable on death under the ROPD rider is not an eligible donee.
7. With respect to the taxation of benefits paid on the death of Mr. A., subsection 148(1) provides that the policyholder of the life insurance policy may have an income inclusion. The subsection reads in part as follows:
There shall be included in computing the income for a taxation year of a policyholder in respect of the disposition of an interest in a life insurance policy ... the amount, if any, by which the proceeds of the disposition of the policyholder’s interest in the policy that the policyholder, beneficiary or assignee, as the case may be, became entitled to receive in the year exceeds the adjusted cost basis to the policyholder of that interest immediately before the disposition.
Generally, a beneficiary of a life insurance policy (who is not otherwise the policyholder) does not have an income inclusion when receiving a benefit from a life insurance policy as a consequence of the death of the insured.
8. In addition, the definition of disposition in subsection 148(9) provides as follows:
Disposition, in relation to an interest in a life insurance policy, includes
[certain payments listed therein]
but does not include [...]
(j) a payment under a life insurance policy (other than an annuity contract) that … is an exempt policy
in consequence of the death of any person whose life was insured under the policy… .
Since such a payment is not a disposition, it is not taxable to the policyholder.
9. In your second scenario, it is expected that the registered charity will receive a benefit following Mr. A.'s death. A life insurance contract is one in which an insurer, in return for a premium or contribution, undertakes to pay the policyholder or a third party a benefit following the death of the insured person. The payment of the insured sum is an obligation of the insurer and, subject to subsection 118.1(5.2), cannot be considered a gift from the policyholder since the proceeds of the life insurance policy never formed part of the patrimony of that person.
However, if subsection 118.1(5.2) applies, the payment by the insurer to the registered charity as a consequence of Mr. A's death will be deemed to be a gift made by the individual to the registered charity immediately before his death. The fair market value of that gift is then deemed to be equal to the fair market value, at the time of Mr. A.'s death, of the qualified donee's right to the transfer of money from the insurer, determined without taking into account the risk that the insurer will default. Subsection 118.1(5.1) lists the conditions that must be satisfied in order for subsection 118.1(5.2) to apply.
10. Proposed subsections 248(35) to (37) provide special rules for determining the fair market value of gifted property.
Proposed subsection 248(35) provides that if any of the following facts apply, the fair market value of the gifted property is deemed to be the lesser of its fair market value otherwise determined and its cost or, in the case of a capital property, its adjusted cost base immediately before the gift is made:
(a) the taxpayer acquired the property under a gifting arrangement that is a tax shelter as defined in subsection 237.1(1),
(b) the taxpayer acquired the property less than three years before the date that the gift is made (except where the gift is made as a consequence of the taxpayer’s death), or
(c) the taxpayer acquired the donated property less than 10 years before the date that the gift is made (except where 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 property, one of the main reasons for the acquisition was to make the gift.
Proposed subsection 248(37) excludes several types of gifts from the application of proposed subsection 248(35) but does not exclude a gift of a life insurance policy.
As stated in Information Circular 70-6R5, this opinion is not an advance income tax ruling and is not binding on us.
Best regards,
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 If you decide to submit a request for an advance income tax ruling, we will need, inter alia, a copy of the donated life insurance policy and a copy of the deed of gift.
2 Bill C-10 could not be assented to before Parliament was dissolved on September 7, 2008. To date, some of the provisions of Bill C-10 have not yet been reintroduced in Parliament. These include the amendments proposed in Bill C-10 to subsections 248(30) to (42) dealing with gifts. These provisions are referred to in this paper as "proposed subsections".
3 The Income Tax Rulings Directorate does not provide opinions on matters involving the determination of the fair market value of property. Similarly, as stated in paragraph 15(f) of Information Circular 70-6R5 Advance Income Tax Rulings issued on May 17, 2002, the Income Tax Rulings Directorate will not issue an advance income tax ruling when determining the fair market value of a property.
4 CANADA REVENUE AGENCY, Interpretation Bulletin IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donations, December 6, 1991, number 2.