Following the 2024 Conference for Advanced Life Underwriting (CALU) Roundtable, the Canada Revenue Agency (the "CRA") released Document 2024-1007081C6 (the "Document"), dated May 7, 2024, addressing transfers of life insurance policies. The Document explores how policy gains under subsection 148(1) of the Income Tax Act ("ITA") are determined on the transfer of a life insurance policy, as well as how the eligible amount of a subsequent charitable gift is to be determined in certain circumstances.
As a matter of background, the Document states that charities can issue official donation receipts for the eligible amount of the gift of an interest in a life insurance policy. In these circumstances, the eligible amount is generally computed as "the [fair market value (FMV)] of the interest in the policy less any advantage received by the donor in respect of the gift."
Where the FMV of the policy is greater than its cash surrender value, additional factors will need to be considered when determining FMV for the eligible amount of the gift. Conversely, FMV of the policy may be reduced where the policy was acquired less than three years before the gift was made, or less than 10 years before the gift was made provided that one of the main reasons the donor acquired the policy was to gift it to a qualified donee. Other rules apply where the policy was previously acquired by a person or partnership that is not at arm's length from the donor.
In exploring the matter, the Document sets out four scenarios involving gifts of life insurance policies. In the first scenario, the CRA explores distribution of policies from partnerships and subsequent gifts to charities. It states that the period during which a partnership holds a life insurance policy is not included in determining the period a partner owns the policy for the purposes of the deemed fair market rules under subsection 248(35) of the ITA. When the policy is donated to a registered charity, the FMV for calculating the eligible donation amount is deemed to be the lesser of its adjusted cost base ("ACB") and FMV. This results in a reduced eligible donation amount if the policy was recently transferred to the donor.
In the second scenario, the CRA discusses the tax implications of an individual shareholder transferring a policy to a corporation (Part A), followed by the corporation subsequently donating the policy to a charity (Part B). Broadly speaking, the document states that the individual would be deemed to be entitled to proceeds of the disposition equal to nil on the transfer of the interest in the policy to the corporation; that the corporation would be deemed to acquire the interest in the policy at no cost. Subsection 148(7) of the ITA dealing with dispositions at non-arm's length would then apply to the gift of the interest in the policy by corporation to the registered charity.
The third scenario involves a parent with a life insurance policy on their child's life while the child was 8 years old, pays the premium, and subsequently transfers the policy to the now 21 year old child, who later donates the policy to a registered charity within three years. The CRA explains that subsection 148(7) of the ITA applies to the gift from the child to the registered charity of the interest in the Policy by Child B to the charity, resulting in a policy gain under subsection 148(1) of the Act. As well, subsection 248(35) applies to determining the child's eligible amount of the gift of the interest in the policy. The policy gain is calculated based on the difference between the cash surrender value and adjusted cost base, and subsection 248(36) does not apply because the policy was originally acquired more than ten years before the gift.
In the fourth scenario, the CRA addresses situations where a life insurance policy is transferred from one spouse to another and is subsequently donated to a charity. Depending on whether the policy was acquired more than ten years before the donation, subsection 248(35) or 248(36) may apply, affecting the eligible donation amount. The policy gain upon donation is attributed to the original owner under the spousal attribution rules in subsection 74.1(1) of the ITA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.