Principal Issues:
Value of a term to 100 life insurance policy donated by a policyholder to a charity.
Position:
The value is based on the amount by which the cash surrender value of the policy at the time of the donation exceeds any policy loans outstanding and any accumulated dividends and interest assigned at the time of the donation as described in paragraph 3 of IT-244R3 Gifts by Individuals of Life Insurance Policies as Charitable Donations.
Reasons:
Paragraph 3 of IT-244R3.
XXXXXXXXXX 2006-016859
May 17, 2006
Dear XXXXXXXXXX:
Re: Value of a Life Insurance Policy With No Cash Value Donated to a Charity
We are writing in response to your letter dated January 26, 2006, requesting our views on the donation of a life insurance policy. In particular, you have requested our views on the factors to be considered by a charity when valuing a life insurance policy, where a policyholder continues to pay the future premiums, but decides to donate a term to 100 life insurance policy with no cash surrender value that the policyholder has owned for many years.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
General Comments
Where a policyholder makes a gift of a life insurance policy our position on the value of the life insurance policy is outlined in paragraph 3 of IT-244R3 - Gifts by Individuals of Life Insurance Policies as Charitable Donations. As described in paragraph 3 of IT-244R3 the amount of the charitable gift is equal to the value of the policy (i.e., the amount by which the cash surrender value of the policy at the time of the absolute assignment exceeds any policy loan outstanding) and any accumulated dividends and interest, which are also assigned at that time. If the policy has no value, there is no charitable gift when it is transferred, but donations of subsequent premium amounts will qualify as charitable gifts in accordance with paragraph 2 of IT-244R3. It should be noted that the increase in the cash surrender value of the policy as a result of the subsequent payments of policy premiums has no effect in determining the amount of the donation once the policy has been absolutely assigned to the qualified donee. We have not yet had the opportunity to reconsider our position outlined in paragraph 3 of IT-244R3 on the value of a life insurance policy that is donated by a policyholder to a charity
Yours truly,
F. Lee Workman
Section Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch