Principal Issues: [TaxInterpretations translation]
Is the present value of the insured sum the amount of the charitable donation?
Position: No
Reasons: The payment of the insured sum is an obligation of the insurer.
December 19, 2000
Charities Directorate Head Office Headquarters
Policy and Communications Division Income Tax Rulings Directorate
Attention: Ms. Patrica Gore Michel Lambert
(613) 957-89532000-005446
Gifts of Life Insurance Policies
This is further to your memorandum in response to a request from XXXXXXXXXX for our views on whether the present value of the insured sum for a life insurance policy to be assigned to a registered charity can be considered a charitable donation where the registered charity is the owner and beneficiary of the life insurance policy.
Interpretation Bulletin IT-244R3, Gifts by Individuals of Life Insurance Policies as Charitable Donation, sets out the Agency's position on the tax consequences arising from the donation of a life insurance policy for the purposes of calculating the charitable donations tax credit under section 118.1 of the Income Tax Act.
Generally speaking, when an individual absolutely assigns a life insurance policy in its entirety to a registered charity and makes the charity the registered beneficiary of the policy so that no right, privilege, benefit or advantage can accrue to the donor as a result of the gift, the individual qualifies, at the time the policy is so assigned, for the tax relief applicable to charitable gifts in respect of such a donation. The amount of the charitable gift is equal to the value of the policy and any accumulated dividends and interest which are also assigned at that time. The value of a life insurance policy is equal to the amount by which the cash surrender value of the policy at the time of the absolute assignment exceeds any policy loan outstanding. If the policy has no cash surrender value or if the policy cannot be fully assigned, there is no charitable gift when it is transferred.
A life insurance contract is one in which the insurer, in return for a premium or contribution, undertakes to pay to the policyholder or a third party a benefit on the death of the insured. Consequently, we are of the view that the present value of the insured sum payable to a charitable organization as beneficiary of a life insurance policy does not constitute a charitable donation. In fact, the payment of the sum insured is an obligation for the insurer and cannot be considered a gift from the person who paid the premiums. We are of the view that the proceeds of the life insurance policy never formed part of the deceased's patrimony and, consequently, we cannot consider that there was a gift on his part of an amount equal to the present value of the insured sum.
In accordance with the current rules, donations made by means of a testamentary disposition are eligible for the tax credit for charitable donations at the time of death. However, donations made through a designation in a life insurance policy do not qualify for this credit. In the February 28, 2000 budget, it was proposed that the proceeds of a life insurance policy donated through a beneficiary designation be eligible for the charitable donations tax credit. This measure, if passed by Parliament, will apply to deaths occurring after 1998. The budget proposal also applies to registered retirement savings plans (RRSPs) and registered retirement savings funds. The text of the measure reads as follows:
That the charitable donations tax credit be extended to apply in respect of amounts that are paid directly to a qualified donee as a beneficiary, as a consequence of an individual’s death that occurs after 1998, under
(a) a life insurance policy under which the individual was the policyholder and the individual’s life was insured,
(b) the individual’s coverage under a group life insurance policy under which the individual’s life was insured, or
(c) a registered retirement savings plan or registered retirement income fund under which the individual was the annuitant.
Access to Information
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope you find these comments of assistance.
Acting Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch