DATE March 21, 1991
TO CHARITIES DIVISION
FROM Business and General
Division
C. Tremblay
(613) 952-1361Attention: Jocelyne Beller
SUBJECT: Gifts of Life Insurance Policies to a Charity
This is in response to your memorandum dated January 28, 1992, requesting information concerning the questions posed by the XXXX.
Questions #1
According to Interpretation Bulletin IT-244R2 the premium paid on the policy will qualify as charitable donations if the policy is owned or absolutely assigned to the charity (donee) and the donee is the registered beneficiary of the policy. The taxpayer (donor) would be the life insured. This would require that any/all tax slips to be issued to the charity.
Would the policy still qualify if the taxpayer was the owner and life insured and the charity was an IRREVOCABLE beneficiary? This would require that any/all tax slips be issued to the taxpayer even if the charity, as irrevocable beneficiary agreed to any contract dispositions.
Our Comments
Is it our view that provided the life insurance policy has been absolutely assigned to the donee and that donee has become the registered beneficiary of the policy, a gift of a life insurance policy will qualify as a charitable donation pursuant to subsection 118.1(1) of the Income Tax Act. It does not apper to us that merely making an IRREVOCABLE designation of a charity as a beneficiary of a life insurance policy would meet these provisos. Please note that when a donor assigns a life insurance policy in accordance with the terms of IT-244R2 he or she will be considered to have disposed of that policy pursuant to section 148 of the Act.
Question #2
A taxpayer has a net income of $100,000 and is eligible to make the maximum charitable donation of 20%. He decides to purchase a whole life, life insurance contract for a sum insured which could be purchased with the $20,000 as a single, one time premium. This would result in a paid up contract on which no more premiums would be paid. However, the contract cash surrender value would continue to increase annually.
Because the contract was purchased with a single premium, the contract now fails to pass the exempt test as the accumulating fund exceeds the Maximum Tax Actuarial Reserve (MTAR). This would result in a T-5 being issued to the owner, annually, for any contract accrual. If the owner must be the charity, would this income be reportable by the organization and would this contract still qualify as a charitable donation?
In this situation, if the taxpayer gave direction to the donee that this property was to be held by them for a period of not less than 10 years (as per paragraph # 6 of the IT-244R2 ) would the contract proceeds whether on voluntary surrender or upon death of the life insured be excluded from the income of the charity? What would be required to support this direction, if anything? If this direction were not given, what would the tax consequences be if the life insured passed away prior to the tenth year? After the tenth year?
Our Comments
In our opinion, a gift of a whole life insurance policy purchased by way of a single one time premium sum would still qualify as a charitable donation provided the donor absolutely assigns the life insurance policy in the manner described in IT-244R2 . The T-5 would be issued to the Charity and the amount would be included in its disbursement quota as set out in paragraph 149.1(1)(e) of the Act.
Where policy premiums are paid in advance, the 10 year rule runs from the payment date of those prepaid premiums. This would require the life insurance proceeds, if they came available during this time, to be held until the end of that 10 year period also. Any life insurance proceeds received during such 10 year period must be retained for at least 10 years after the date of the last premium.
On the death of the donor, a charity may not spend any of the proceeds of the policy before the expiry of the 10 year term following the date of the last premium payment if the charity wishes to avoid having the proceeds included in the calculation of its disbursement quota. Paragraph 8 of IT-244R2 further explains the 10 year rule for gifts of life insurance premiums.
Question #3
A taxpayer purchases a whole life policy on his own life and after the policy has been in force for ten years, he decides to absolutely assign it to a charity. The cash surrender value exceeds the ACB, therefore there is a taxable gain.
a) Would a T-5 be issued for the gain to the taxpayer?
b) Would the full cash value of the contract at the time of assignment be receipted by the charity as a donation by the taxpayer?
Our Comments
a) In our view, a taxable gain would result to the taxpayer and the Insurance company should issue an information return pursuant to Section 217 of the Income Tax Regulations to reflect this. The T-5 is the prescribed form for this purpose.
b) Assuming there are no policy loans outstanding, the full cash surrender value of the contract at the time of the assignment can be receipted by the charity as a donation to the taxpayer. Paragraph 3 of IT-244R2 provides further details.
We trust these comments will be of assistance.
for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch