The will of Mr. Donor provided for a gift of his life insurance policy on the life of his daughter (which was originally intended to be transferred to his daughter, but this became inappropriate) to a private foundation (the “Private Foundation”). On his death, the policy had a cash surrender value, adjusted cost basis and fair market value of $200,000, $50,000 and $500,000, respectively. This gift was made by his estate (a graduated rate estate) within three years of his death. Could the GRE claim a gift of $500,000 in his terminal return (assuming sufficient income)?
CRA first noted that the gain on death would be based on the policy's cash surrender value of $200,000. After referencing the three requirements in s. (c)(i)(A) of "total charitable gifts," CRA noted respecting the first condition that “where subsection 118.1(5) applies to a gift, the gift is generally deemed to have been made by the individual's estate at the time the property to which the gift relates is transferred to the qualified done,” and that s. 118.1(4.1) “provides that subsection 118.1(5) applies … to a gift made by the individual’s estate,” and then stated:
If, as you stated, the transfer of ownership of the interest to the Private Foundation was made within three years of the death, subsection 118.1(5.1) would apply because the property that was the subject of the gift (the interest in the policy) was acquired by the estate on and as a consequence of the death. In such circumstances, the eligible amount of the gift could be included in the total charitable gifts for the taxation year of death under clause (c)(i)(C) of the definition of "total charitable gifts" in subsection 118.1(1). Consequently, the tax credit for charitable gifts could be claimed in Mr. Donor's final return.
If the Private Foundation was currently designated as contingent policyholder, so that on his death there would be an automatic transfer of the policy to it, would a different result obtain? Before turning to s. (c)(i)(A), CRA stated:
[T] he eligible amount of this gift could not be included in the total charitable gifts for the taxation year of death under clause (c)(i)(C) of the definition "total charitable gifts" in subsection 118.1(1). Subsection 118.1(5) would not apply because in this situation the gift would not be made by Mr. Donor under his will nor would it be made by his estate and would not be deemed to have been made as a consequence of the death of Mr. Donor by virtue of subsection 118.1(5.2).