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CRA Interpretations: Universal Life Insurance and Charitable Donations - March 2010

By Jocelyne Gagnon, Adm.A., AVA, M. Fisc.,
Pl. Fin., PPI Financial Group

The followcing is a summary of a recent technical interpretation (TI) letter from the Canada Revenue Agency (CRA) (CRA document #2009-0312021E5 dated Nov. 19, 2009) dealing with the donation of a universal life (U/L) policy that contained a return of premium (ROP) rider.

The taxpayer outlined two scenarios involving a U/L policy with a ROP rider at death. An additional premium was paid in order to obtain the right to the additional benefit at death equal to all the premiums paid.

In the first scenario, a registered charity (the "Charity") is the owner of the life insurance policy on the life of Mr. A. Mr. A pays the total annual premium directly to the insurance company. The Charity is the beneficiary of the base death benefit, and Mr. A's estate is the beneficiary of a death benefit equal to the total premiums paid during his lifetime the ROP death benefit).

The CRA indicated that the determination of fair market value of a gift is a question of fact and they could not confirm the eligible amount of the gift without having all the relevant details.

However, it went on to add that based on paragraph 2 of IT 244R3, when the premiums on an insurance policy are paid directly to the insurance company at the request of, or with the concurrence of, the donee, this action is considered to be constructive payment of the donation to the donee and therefore a charitable gift. However, it indicated that the premium paid for the ROP benefit will not qualify as a donation if the beneficiary is not a qualified donee.

Regarding the ROP benefit payable on Mr. A's death to his estate, the CRA referred to subsection 148(1) of the Income Tax Act (the Act) which states:

"There shall be included in computing the income for a taxation year of a policyholder in respect of the disposition of an interest in a life insurance policy ... the amount if any, by which the proceeds of disposition of the policyholder's interest in the policy that the policyholder, beneficiary or assignee became entitled to receive in the year, exceeds the
adjusted cost basis to the policyholder of that interest immediately before the disposition."

In general the beneficiary of a life insurance policy (who is not the owner of the policy) does not have to include in income any amount received on the insured's death. Furthermore, the definition of disposition at subsection 148(9) of the Act stipulates the following:

"disposition" in relation to an interest in a life insurance policy, includes (number of payments are enumerated) with the following exclusion:

j) a payment under a life insurance policy (other than an annuity contract) that ... is an exempt policy, in consequence of the death of any person whose life was insured under the policy.

In the second scenario provided to the CRA, Mr. A is the owner of the life insurance policy on his life, and he pays the total annual premium. The Charity is the beneficiary of the death benefit, and Mr. A's estate will receive a benefit equal to the total premiums paid to the insurance company during his lifetime (the ROP benefit). In this situation, the Charity will receive the death benefit directly from the insurance company on Mr. A's death. If subsection 118.1(5.2) of the Act applies, the payment by the
insurance company to the Charity on Mr. A's death will be deemed to be a gift made, immediately before Mr. A's death. The fair market value of the gift is deemed to be the fair market value, at the time of Mr. A's death, of the right to that transfer (presumably the value of the base death benefit). Subsection 118.1 (5.1) gives the conditions to be met in order to have 118.1(5.2) applicable.

The CRA also added the following commentary:

Proposed subsections 248(35) to (37) of the Act stipulates that the fair market value of a property that is the subject of a gift made by a taxpayer to a qualified donee is deemed to be the lesser of the fair market value of the property otherwise determined and the cost, or in the case of capital property, the adjusted cost base, of the property to the taxpayer immediately before the gift is made if:

a) the taxpayer acquired the property under a gifting arrangement that is a tax shelter as defined in subsection 237.1(1) of the Act,

b) the taxpayer acquired the property less than three years before the day that the gift is made (except where the gift is made as a consequence of a taxpayer's death),

c) the taxpayer acquired the property less than 10 years before the day that the gift is made (except where the gift is made as a consequence of a taxpayer's death) and
 it is reasonable to conclude that, at the time the taxpayer acquired the property, one of the main reasons for the acquisition was to make a gift of the property to a qualified donee.

Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35) but does not exclude the gift of a life insurance policy.

CALU Comment: While the CRA does not provide a definitive response to the taxpayer's questions, the TI appears to support the view that in the first scenario the donor can receive a charitable donation credit for that portion of the premium relating to the base death benefit, but not for the premium attributable to the ROP benefit. In the second scenario, the charity will be able to provide a receipt for the full amount of the base death benefit received by it, while the taxpayer's estate can receive the ROP benefit tax free. The references to subsections 248(35) to (37) of the ITA correctly state the scope of these provisions and that it applies to life insurance "except where the gift is made as a consequence of the taxpayer's death." Since the gift in scenario two would result from the taxpayer's death, these sections should have no application to that fact situation.

About the Author
CALU wishes to thank CALU member Jocelyn Gagnon of PPI Financial in Quebec for translating the original document and authoring this article.

Copyright the Conference for Advanced Life Underwriting, March 2010

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