Gifts of Life Insurance Premiums
Arthur Drache, September 11, 2007
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| A recent ruling letter from the CRA deals with the situations where a donation of life insurance premiums is made to a charity. While there is no new law or administrative policy, we felt that this opinions would be on interest to readers as it sets out the rules succinctly, particularly in a situation where the ten year rule (now part of the notion of "enduring gifts") comes into play. |
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| "As stated in paragraphs 1 and 2 of Interpretation Bulletin IT-244R3, Gifts of Individuals of Life Insurance Policies as Charitable Donations, where a life insurance policy has been absolutely assigned to a qualified donee and the donee has become the registered beneficiary of the policy, the individual will be entitled to claim a charitable donations tax credit in respect of the value of the policy, if any, at the time it is assigned to the qualified donee. Further, if the individual donates an amount to the qualified donee to enable the donee to pay the premiums of the policy, the amount donated will also qualify as a charitable gift. Where the premiums are paid directly to the insurance company at the request of, or with the concurrence of, the qualified donee, each amount so paid will qualify as a charitable gift. |
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| A gift of a life insurance policy can be made subject to a trust or direction that the gift, or property substituted for the gift (which includes proceeds from the policy, whether on a voluntary disposition or upon the death of the life insured), be held for at least ten years. Such a gift is a gift of "enduring property" as defined in subsection 149.1(1) of the Income Tax Act and is excluded from the requirement that 80% of receipted gifts be included in the charity's disbursement quota for the year immediately following the year of receipt. However, such a gift must be considered for the year in which the charity expends the enduring property or transfers the enduring property to a qualified donee. Generally, 80% of the amount expended or 100% of the amount transferred, as the case may be, must be included in the calculation of the charity's disbursement quota for that year. In addition, enduring property must be considered when determining the value of property for the charity's 3.5% disbursement quota requirement. For this purpose, the value of a life insurance policy, other than an annuity contract, that has not matured is nil pursuant to subparagraph 3702(1)(b)(vi) of the Income Tax Regulations. In the case of proceeds received from a life insurance policy, to the extent that the proceeds are used to acquire investment property, the amount so used will be included in the calculation of the 3.5% disbursement quota requirement. |
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| Pursuant to paragraph 8 of IT-244R3, where a gift of a life insurance policy qualifies as a gift of enduring property, the amount of subsequent premiums donated relative thereto will also qualify as a gift of enduring property. However, since each payment of a premium is itself a gift, each payment must be subject to a direction that it be retained for ten years if that gift is to be considered a gift of enduring property. Paragraph 8 of IT-244R3 suggests that one way of achieving this is for the donor, at the time the policy is given, to require the charity to keep the policy, or property substituted for the policy, for at least ten years after the last premium is paid by the donor. As the life insurance proceeds relate to both the gift of the policy and of the subsequent premiums, such proceeds will have to be held for at least ten years after the last premium payment. (Our emphasis.) |
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| To illustrate the application of paragraph 8 of IT-244R3, assume a charity receives a gift of a life insurance policy that is subject to a ten-year direction. The annual premium on the policy is due on July 1st of each year. The donor makes a gift of cash subject to a ten-year direction in an amount equal to the annual premium for the next two years. Assume further that the life insured dies shortly thereafter. Pursuant to paragraph 8 of IT-244R3, the ten-year period runs from the payment date of the last premium. Accordingly, in this example, the charity must retain the insurance proceeds for at least ten years after July 1st of the third year. |
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| In a situation where a charity uses one or more ten-year gifts to pay the annual premiums on a life insurance policy it has acquired directly from an insurer, the fact that there was no initial gift of a life insurance policy would not generally cause us to consider the situation to fall outside the scope of paragraph 8 of IT-244R3. We note however that the charity must hold the life insurance policy and any proceeds on the policy until such time that the ten-year period has elapsed from the date of the last premium payment." |
| While all this material can be found in the applicable interpretation Bulletins, we felt that this synthesis of the rules would be useful for those dealing with such gifts. |
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