The Value of a Donated Life Insurance Policy
Arthur Drache, April 04, 2010
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| The value for receipting purposes of a life insurance policy donated to a charity is often less than fair market value under the complex anti-avoidance rules of the Income Tax Act even though many of those rules have not been enacted into law years after they had initially been proposed. On a number of occasions the CRA has set out its guidelines but given that hope springs eternal, the Agency continues to be queried on its position.which unfortunately has not changed. |
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| At a 2007 conference the CRA indicated that the factors listed in Information Circular 89-3 must be taken into account in establishing the fair market value of a life insurance policy gifted to a qualified donee and that paragraph 3 of Interpretation Bulletin IT-244R3 must be read taking into account the position taken by CRA.. Proposed subsections 248(35) to (37) of the ITA set out special rules for determining the FMV of a property that is the subject of a gift. |
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| Proposed subsection 248(35) stipulates that if one of the following statements is true, the FMV of the gifted property is deemed to be the lesser of its FMV otherwise determined and its cost, or in the case of capital property its adjusted cost base immediately before the gift is made: |
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| . The taxpayer acquired the property that is the subject of the gift under a gifting arrangement that is a tax shelter within the meaning assigned by section 237.1(1) of the ITA. |
| . The taxpayer acquired the property that is the subject of the gift less than three years before the day that the gift is made (except if the gift is made as a consequence of death). |
| . The taxpayer acquired the property that is the subject of the gift less than ten years before the day that the gift is made (except if the gift is made as a consequence of the taxpayer's death) and it is reasonable to conclude that, at the time the taxpayer acquired the gifted property, one of the main reasons for its acquisition was to make the gift. |
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| Proposed subsection 248(37) excludes several types of gifts from application of subsection 248(35), including the following: |
| . gifts of inventory |
| . gifts of real property situated in Canada |
| . gifts of cultural property |
| . gifts of certain shares. |
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| Gifts of life insurance policies are not excluded from the application of proposed subsection 248(35) and the CRA has remained consistent in its views. |
| "In applying proposed subsection 248(35) of the ITA to a gift of a life insurance policy, the fair market value of the policy otherwise determined and the cost of the policy must be considered. |
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| The FMV of a life insurance policy gifted to a charity has been the subject of previous comments by the CRA, most recently at the 2008 CALU - Conference for Advanced Life Underwriting conference, where the CRA confirmed that to establish the FMV of a life insurance policy for the purpose of proposed subsection 248(31), paragraphs 40 and 41 of Information Circular 89-3 must be taken into account. Factors to be considered in the determination of fair market value include, (a) cash surrender value, (b) the policy's loan value, (c) face value, (d) the state of health of the insured and his/her life expectancy, (e) conversion privileges, (f) other policy terms, such as term riders, double indemnity provisions, and (g) replacement value. Furthermore, paragraph 3 of IT-244R3 must be read taking into account this new position. |
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| The cost of a life insurance policy is a factual determination. While premiums paid to acquire and maintain a life insurance policy may reflect the cost, this may not always be the case. We recognize that the Act does not specifically define the cost of a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration." |
| The upshot is that the valuation of a donated policy, once simply set at the Fair Market value, is now considerably more complicated. Charities which have offers of such policies have to do their homework before issuing a receipt, even though the legislation has not been enacted. Donors who own such policies may want to consider leaving the death benefit to the charity rather than the policy itself, foregoing a receipt while alive but possibly producing a much larger receipt at death. |
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