May 31, 2013

CRA letter in French on charitable remainder trusts

Here is a letter from CRA in French on charitable remainder trusts.  According to the summary the letter discusses “1) Whether the gift of an interest in a trust will give rise to a tax credit pursuant to subsection 118.1(3)? 2) Whether the capital interest is non-qualified security?”  The letter refers to the requirements in IT226R “Gift to a charity of a residual interest in real property or an equitable interest in a trust”.

Here is the CRA publication IT226R “Gift to a charity of a residual interest in real property or an equitable interest in a trust”
http://www.cra-arc.gc.ca/E/pub/tp/it226r/

March 10, 2013

AFP Greater Toronto Chapter Fundraising Day 2013 - Planned Giving Institute - June 5, 2013

On June 5, 2013, Trevor Clark and myself will be delivering the “Planned Giving Institute” for AFP Toronto’s Fundraising Day. 

Here is a brief description of the 3 hour presentation:

Planned Giving Institute: Program and Development

Wednesday, June 5, 2013 8:30 am -12:00 pm
________________________________________
Mark Blumberg, LL.M., TEP , Trevor Clark, CFRE
The Planned Giving Institute will help you to introduce current practices in establishing a strong gift planning program in your organization. Whether you are a sole practitioner in a small office or a development staff member in a larger team, you will learn how to lay the groundwork for a successful planned giving program, integrated it with your organization’s current programs, and engaging key internal and external advocates and learning from others who have overseen the creation of a dynamic planned giving program from the ground up. Using lecture, panel and case presentations, Trevor Clark and Mark Blumberg will discuss bequests and planned giving.
Learning Outcomes
• Learn what you need to know about planned giving to begin a new program or kick start an existing one
• Understand how to become successful without being a gift planning expert
• Take away practical tools and techniques for integrating gift planning into your organization’s development activities, sustaining the program and measuring its success.

For further information on Fundraising Day 2013 at the Metro Toronto Convention Centre and registration see: http://afptorontoevents.info/fundraising-day/

September 03, 2012

CRA letter on tax implications of donation of newly acquired life insurance policy to charity

The CRA recently sent a letter discussing the tax implications of a donor making a gift of a newly acquired life insurance policy to a registered charity. 

Here is a copy of the text in PDF of the CRA letter on What are the tax implications of a donor making a gift of a newly acquired life insurance policy to a registered charity?

“Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
PRINCIPAL ISSUES: What are the tax implications of a donor making a gift of a newly acquired life insurance policy to a registered charity?
POSITION: Provided general comments.
REASONS: 118.1; 248(35); 148(1); 148(7); 148(9)
XXXXXXXXXX
2012-043260
Sylvie Danis
(613) 957-3496
August 13, 2012
Dear XXXXXXXXXX:
Re: Transfer of Ownership of a New Policy to a Charity
This is in response to your letter dated January 3, 2012, wherein you requested our comments with respect to the tax implications of a donor making a gift of a newly acquired life insurance policy to a registered charity.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we can offer the following general comments that may be of assistance.
Section 118.1 of the Income Tax Act (the “Act”) provides that individual taxpayers may claim a credit against taxes payable, within specified limits, for an eligible amount of a gift made to a qualified donee, if supported by an official receipt. Pursuant to proposed subsection 248(31) of the Act, the eligible amount of a gift is the excess of the fair market value (“FMV”) of the property transferred to a qualified donee over the amount of the advantage provided.
The FMV of an interest in a life insurance policy gifted to a qualified donee has been the subject of previous comments by the Canada Revenue Agency (“CRA”). At the 2008 CALU - Conference for Advanced Life Underwriting, the CRA confirmed that to establish the FMV of an interest in a life insurance policy for the purpose of proposed subsection 248(31) of the Act, paragraphs 40 and 41 of Information Circular 89-3, Policy Statement on Business Equity Valuations, must be taken into account. Factors to be considered in the determination of FMV 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, Gifts by individuals of life insurance policies as charitable donations, must be read taking into account this new position.
Proposed subsections 248(35) to (37) of the Act set out special rules for determining the FMV of a property that is the subject of a charitable gift for purposes of determining the eligible amount of a gift under proposed subsection 248(31) of the Act. Generally, where a taxpayer acquired the property that is the subject of the gift less than three years before the day the gift is made, proposed subsection 248(35) of the Act provides that 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 a life insurance policy in respect of which the taxpayer is a policyholder, its adjusted cost basis (“ACB”) immediately before the gift is made.
The ACB to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9) of the Act. In general terms, the ACB will be the amount by which the premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the interest in the policy that has previously been reported for tax purposes, exceeds the net cost of pure insurance (“NCPI”) under the policy. Section 308 of the Income Tax Regulations to the Act sets out the rules for calculating the NCPI of a taxpayer’s interest in a life insurance policy. The NCPI represents the cost the policyholder has paid to be covered by insurance during the time that he or she has held the policy and as such reduces the amount that can be returned to the policyholder on a tax-free basis on disposition of the interest in the policy.
When an interest in a life insurance policy is gifted to a qualified donee, subsection 148(1) of the Act will apply to require the policyholder to report a gain for tax purposes to the extent that the proceeds of disposition of the interest in the policy exceed the ACB of the policy at the time of disposition. Pursuant to subsection 148(7) of the Act, the proceeds of disposition from a gift of an interest in a life insurance policy are generally equal to the cash surrender value of the policy at the time of disposition.
We trust the above comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.
Yours truly,
Jenie Leigh
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch”

August 13, 2012

CRA letter on dates and value to be used on official donation receipt for bequest under will

Here is a CRA letter which discusses the dates and value to be used on official donation receipts for a bequest under will. 

Here is the CRA letter:

“PRINCIPAL ISSUES: Clarification regarding the dates and value to be used on official donation receipts for gifts by will.
POSITION: General comments provided.
REASONS: Previous opinions issued.

XXXXXXXXXX
2011-043013
T. Elsey

June 14, 2012

Dear XXXXXXXXXX:

Re: Subsection 118.1(5) – Gift by Will

We are writing in response to your email dated December 5, 2011, wherein you pose several questions concerning the application of subsection 118.1(5) of the Income Tax Act (the “Act”).  Specifically, you ask for confirmation that the only date that can be used as the date of the gift and for determining the fair market value (“FMV”) of a gift by will is the date of the individual’s death. 

Further, you describe a hypothetical situation wherein an individual dies and leaves a bequest provision for a specific percentage of the residue of the individual’s estate to be donated to a Canadian registered charity.  However, the charity does not receive the donated property until two years after the individual’s death.  Between the time of death and the time the property is delivered to the charity, the value of the property decreases.  In such circumstances, you ask what the date of the gift is, what the issue date of the receipt is, what the correct method of fulfilling the deceased’s bequest is, and whether there are any other special considerations that the charity must consider when completing the official donation receipt for the gift by will. 

Your last question concerns a gift by will of privately held securities. Where, pursuant to an estate freeze agreement, the redemption value is stated to be the FMV of the shares and the shares are redeemed immediately following a gift of the shares to a qualified donee, you ask whether reliance can be placed on the estate freeze agreement as a reasonable basis for a FMV assessment of the gift.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002.  We are, however, prepared to offer the following general comments, which may be of assistance.

Our Comments

Generally, subsection 118.1(5) of the Act provides that where an individual, by the individual’s will makes a gift, for the purpose of section 118.1 of the Act, the gift is deemed to have been made by the individual immediately before the individual died.  For the purposes of this subsection, a gift is considered to have been made “by the individual’s will” where the executor of the estate is required to transfer a specific property or amount to a recipient that is a qualified donee.  An amount is certain, in this regard, if there is no discretion given to the executor as to whether the gift can be made or as to the amount of the gift (e.g., a specific bequest, a gift of residue, or a specified portion of the residue can be a gift by will).  A gift, the occurrence or quantum of which is subject to the discretion of an executor, is not a gift by will.

Under the proposed split-receipting legislation, it is the eligible amount of a gift as determined under proposed subsection 248(31) of the Act that is used in determining the charitable donations tax credit under subsection 118.1(3) of the Act.  Generally, the eligible amount of a gift is the amount by which the FMV of the property that is the subject of the gift exceeds the amount of the advantage, if any, in respect of the gift.  While subsection 118.1(5) of the Act establishes the timing of the gift, it does not expressly establish the value of the gift.  In our view, it is reasonable to interpret subsection 118.1(5) of the Act such that the value that is to be used to determine the eligible amount of the gift is the FMV of the transferred property immediately before the individual’s death.  The date of issue of the official donation receipt would be the actual date on which the receipt was prepared by the qualified donee.
The completion of a gift should occur within a reasonable time period after the date of death.  If the gift to the qualified donee is not completed until after the assessment of the deceased’s final T1 return, a request to adjust the tax return, subject to the time limitations in the Act for reassessments, should be sent to the appropriate tax centre along with the official donation receipt.  As indicated in Rulings document E2010-0363131C6 and Guide T4011, Preparing Returns for Deceased Persons 2011, for gifts that will be received later, the CRA is prepared to accept as support a copy of the will, a letter from the estate to the registered charity or other qualified donee that will receive the gift advising of the gift and its value, and a letter from the qualified donee stating that it will accept the gift.  Please note that this administrative practice is based on the understanding that an official donation receipt will be provided by the qualified donee when the property is received by the qualified donee.

With regard to your question on the correct method of fulfilling the deceased’s bequest in the situation described, a review of the specific terms of the deceased’s will is required.  We have noted in the past that the fact that the terms of the will permit the executor to distribute the residue in cash or in specie would not necessarily preclude the gift from qualifying as a gift by will as long as the actions taken by executor are reasonable and in accordance with the terms of the will.

Finally, we note that it is the responsibility of the charity to support that the amount reported on the donation receipt reflects the FMV of the property donated.  The determination of FMV is a question of fact.  As a matter of practice, the Income Tax Rulings Directorate does not review nor provide advice with respect to the determination of FMV of a particular property at any particular point in time.  Specific questions concerning valuation for tax purposes should be directed to the valuation section of the appropriate Tax Services Office.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Section Manager
for Division Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch”

July 09, 2012

“Where do I start when leaving a legacy to a charity?” - presentation with Lois Fleming

I am looking forward to giving a presentation with Lois Fleming of The Salvation Army on “Where do I start when leaving a legacy to a charity?”.  This presentation is part of the CAGP Toronto Leave a Legacy Community Outreach Committee

This 3rd annual Information Series is being held at the Toronto Reference Library, 789 Yonge Street. All lectures are free and open to your donors and the general public.  The third session will be taking place on July 9th from 1:30 pm - 3:00 pm. The session is entitled “Where do I start when leaving a legacy to a charity?”

June 22, 2011

Terrorism and use of intermediaries to carry out charitable activities?

It is pretty obvious that Canadian charities, whether operating in Canada or outside of Canada, cannot directly or indirectly support terrorism.  Canada has anti-terrorism legislation and charities should due due diligence before transfering assets to non-profits and other entities both in Canada and abroad.

In CRA’s Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” it notes:

“2.1. What do charities need to know about Canada’s anti-terrorism legislation?
Charities must remember their obligations under Canada’s anti-terrorism legislation. As with all individuals and organizations in Canada, charities are responsible for making sure that they do not operate in association with individuals or groups that are engaged in terrorist activities or that support terrorist activities.

The CRA has produced a checklist to help Canadian charities identify vulnerabilities to terrorist abuse.

Under the Charities Registration (Security Information) Act and the Income Tax Act, a charity’s status may be revoked if it operates in such a way as to make its resources available, either directly or indirectly, to an entity that is a listed entity as defined in subsection 83.01(1) of the Criminal Code; or to any other entity (person, group, trust, partnership, or fund, or an unincorporated association or organization) that engages in terrorist activities or activities in support of them.

There are other prohibitions on funding or otherwise facilitating terrorism. For more information, see the Criminal Code, the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism, and the United Nations Al-Qaeda and Taliban Regulations, as well as the Charities Directorate’s Web page Charities in the International Context.”

For more information on the CRA Guidance “Using an Intermediary to Carry out a Charity’s Activities within Canada” (Reference number CG-004) see:
http://www.canadiancharitylaw.ca/index.php/blog/category/using_intermediaries_in_canada/ or
http://www.cra-arc.gc.ca/chrts-gvng/chrts/plcy/cgd/ntrmdry-eng.html

December 13, 2010

CRA letter on Canadian charities and alter ego trusts

Here is a recent CRA letter dealing with “If, as a consequence of a gift, a charity holds a beneficial interest in an alter ego trust, will the restriction in subsection 118.1(13) apply in respect of the gift?”

LANGIND E
DOCNUM 2010-0369261E5
AUTHOR Duval, Kimberly
DESCKEY 25
RATEKEY 2
REFDATE 101122
SUBJECT alter ego trust and charity
SECTION 118.1(13), 118.1(18)
SECTION
SECTION
SECTION
$$$$

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.

Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.

 
PRINCIPAL ISSUES:    If, as a consequence of a gift, a charity holds a beneficial interest in an alter ego trust, will the restriction in subsection 118.1(13) apply in respect of the gift?

POSITION:      Question of fact.  It depends on whether the property held by the donor was a non-qualifying security of the donor within the meaning of subsection 118.1(18).

REASONS:    The restriction in subsection 118.1(13) applies in respect of a gift of a non-qualifying security of the donor.

 
XXXXXXXXXX

                                                                        2010-036926

                                                                        Kimberly Duval

                                                                        (613) 957-8585

November 22, 2010

Dear XXXXXXXXXX :

Re:  An interest in an alter ego trust and a non-qualifying security

This is in response to your e-mail correspondence of May 17, 2010 requesting some further commentary from us in regards to our recent response to Question 7 at the 2010 CALU conference.  Specifically, you have asked that we consider whether subsection 118.1(13) of the Income Tax Act (the “Act”) would apply to limit an individual’s claim for a donation tax credit under subsection 118.1(3) of the Act if a registered charity holds a beneficial interest in a trust (e.g., an alter ego trust) that is, immediately after the time of the gift, affiliated with the individual who made the gift.

Our Comments

The “non-qualifying security rules” in subsection 118.1(13) were originally introduced to defer the opportunity for certain donors (individuals not dealing at arm’s length with their corporations) to receive a tax benefit by making gifts to a qualified donee of securities in those corporations. Under these rules, the tax benefit associated with the making of a charitable gift is generally restricted unless and until the donee disposes of the security or the security ceases to be a non-qualifying security.

Until March of 2007, subsection 118.1(18) of the Act defined a non-qualifying security of an individual at any time to be an obligation of the individual or a non-arm’s length person, a share issued by a corporation with which the individual does not immediately after that time deal at arm’s length or any other security issued by the individual or a non-arm’s length person (subject to certain exceptions). The definition was then extended to include paragraph (b.1) which refers to a beneficial interest in a trust that is immediately after that time affiliated with the individual or the individual’s estate, or a beneficial interest in a trust if the trust immediately after that time holds a non-qualifying security of the individual or estate (or held, at or before that time, a share that is such a non-qualifying security, and that is, after that time, held by the charity). 

Where an individual makes a gift of property to a charity that is a non-qualifying security of the individual (and the gift is not an excepted gift), the gift is deemed not to have been made at that time, pursuant to subsection 118.1(13).  As such, in our view, it is the nature of the property to the donor that determines whether the restriction in subsection 118.1(13) will apply in respect of a particular gift.

For purposes of the gifting rules, Interpretation Bulletin IT-226R addresses how subsection 118.1(3) applies in certain arrangements where the property of the donor (for example, property transferred to a trust having a charity as a capital beneficiary) is not the same property as that received by the charity at that time, which is the equitable interest in the trust.  However, it is our view that the potential application of subsection 118.1(13) to such arrangements would be dependent upon whether the property of the donor would be considered a non-qualifying security of the donor at the time of the gift, within the meaning set out in subsection 118.1(18). 

As such, it would ultimately be a question of fact whether the restriction in subsection 118.1(13) would apply in a situation where an individual settles an alter ego trust having a registered charity as the capital beneficiary, based on the nature of the property so transferred on settlement of the trust.  By way of example, subsection 118.1(13) would apply where a donor transferred to such an alter ego trust a share of a corporation that was immediately after that time a corporation with whom the donor was not dealing at arm’s length.  Similarly, if a donor transferred a beneficial interest of the donor in a trust that was, immediately after that time, affiliated with the donor, subsection 118.1(13) would also apply. 

This position is consistent with the views expressed by officials of the Department of Finance at the 2009 APFF. 

We trust our comments will be of assistance to you.

Yours truly,

 

 

Robin Maley

for Division Director

Business and Partnership Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch

November 12, 2010

Determining the “Cost” of Life Insurance Policies as a Charitable Gift when transfer to charity

Here is a letter from CRA in response to a question about valuing a life insurance policy when it is transferred from a non-arm’s length person to a donor and subsequently gifted to a qualified donee.  It deals with the deemed fair market value rules.  Determining_the_Cost_of_Life_Insurance_Policies_as_a_Charitable_Gift.pdf

LANGIND E
DOCNUM 2010-0363091C6
AUTHOR Danis, Sylvie
DESCKEY 20
RATEKEY 2
REFDATE 100608
SUBJECT Gift of an interest in a life insurance policy
SECTION 248(35), 248(36), 148(9) and 148(7)
SECTION
SECTION
SECTION
$$$$
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.
PRINCIPAL ISSUES: An interest in a life insurance policy is transferred from a non-arm’s length person to a donor and subsequently gifted to a qualified donee. Where the gift is subject to proposed subparagraph 248(35)(b)(i) or (ii) and proposed subsection 248(36), what is the deemed FMV of the gift?
POSITION: The deemed FMV of the gift will be determined based on the lesser of the cost of the interest in the life insurance policy to the donor and the cost of the interest in the policy to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.  It is the CRA’s view that the ACB of an interest in a life insurance policy is generally a reasonable proxy for the “cost” of an interest in a policy.  Where subsection 148(7) has applied to deem the cost of an interest in a policy to be the value of the interest in the policy, this adjustment will be relevant in the determination of the ACB of the interest in the policy and the fair market value of a gift pursuant to proposed subparagraph 248(35)(b)(i) or (ii).
REASONS: Legislation

STEP CRA Roundtable - 2010
Question 4:
Determining the “Cost” of Life Insurance Policies as a Charitable Gift
Proposed subsections 248(35) to (37) set out special rules for determining the FMV of a property that is subject to a charitable gift for purposes of determining the eligible amount of a gift under subsection 248(31).  Proposed paragraph 248(35)(b) provides that 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 (“ACB”) immediately before the gift is made, if one of two conditions are met:
(i) 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), or
(ii) 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 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.
Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35).  However, a gift of an interest in a life insurance policy is not excluded from the proposed application of subsection 248(35).
During the CLHIA Roundtable in May 2009, the CRA confirmed that proposed subsection 248(35) could apply to the gift of an interest in a life insurance policy such that the amount that may be receipted would be the lesser of policy’s “cost” and its FMV.
Could the CRA provide further guidance as to what factors it would consider in determining the cost of an interest in a life insurance policy for purposes of proposed subsection 248(35)?  For example, could the CRA comment on the transfer of an interest in a life insurance policy that is personally owned to a wholly-owned corporation, where the policy has a FMV of $300,000, and no cash surrender value (“CSV”).  The deeming rule in subsection 148(7) provides that such a transfer between non-arm’s length parties is deemed to occur at CSV or zero in this case.  Therefore, where the deemed cost of the interest in the policy to the corporation is zero, but its FMV is $300,000 and subsection 248(35) applies, would the CRA allow the gift which occurs immediately after the transfer to take place at $300,000?
The FMV of an interest in a life insurance policy otherwise determined and the cost of that interest must be considered in applying proposed subsection 248(35) to a gift of an interest in a life insurance policy to a qualified donee.
As stated by the CRA at the CLHIA Roundtable in May 2009, we recognize that the Income Tax Act (the “Act”) does not specifically define the cost of an interest in a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration.
The “adjusted cost basis” to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9).  In general terms, the adjusted cost basis to the original policyholder will be the amount by which the cash premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the interest in the policy that has previously been reported for tax purposes, exceeds the “net cost of pure insurance” under the policy.
It is our view that the adjusted cost basis of an interest in a life insurance policy, as defined in subsection 148(9), would generally be a reasonable proxy for the “cost” of an interest in a life insurance policy for purposes of the deemed FMV of a policy under proposed subsections 248(35) and 248(36).
Where subparagraph 248(35)(b)(i) or (ii) applies to the gift of an interest in a life insurance policy, the FMV of the interest in the policy to the donor is deemed to be the lesser of its FMV otherwise determined and its cost, and where a person dealing non-arm’s length with the donor had acquired the same property within the relevant time, subsection 248(36) will apply to deem the cost of the interest in the life insurance policy for purposes of subsection 248(35) to be the lesser of the cost to the donor at the time of the gift or the cost to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.
Where subsection 148(7) applies to deem the cost of the interest in the policy held by the donor to be the CSV and the CSV of that policy is NIL, the deemed FMV of the interest gifted will be deemed to be the lowest of its cost to the donor at the time of the gift, which is NIL, or the cost to the non-arm’s length person immediately before the interest in the policy was disposed of by that person.  In the example provided, since the cost of the interest in the policy to the donor is deemed to be NIL, the deemed FMV of the gift of the interest in the life insurance policy will also be NIL.
[Note:  On July 16, 2010, the Department of Finance released draft legislative proposals to implement outstanding income tax technical measures.  Included in the proposals is an amendment to proposed subsection 248(35) to refer to the adjusted cost basis of a life insurance policy.]

Sylvie Danis
2010-036309
June 8, 2010

July 12, 2010

What is “cost” of life insurance when donating to registered charity?

In this letter CRA discusses “Whether the adjusted cost basis is a reasonable proxy for “cost” of an interest in a life insurance policy in applying the deeming provisions of 248(35) with respect to a gift to a qualified donee in certain circumstances.”

LANGIND E
DOCNUM 2010-0359391C6
AUTHOR Danis, Sylvie
DESCKEY 20
RATEKEY 2
REFDATE 100504
SUBJECT Cost of interest life insurance policy 248(35)
SECTION 248(35)
SECTION
SECTION
SECTION
$$$$

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu’exact au moment émis, peut ne pas représenter la position actuelle de l’ARC.

PRINCIPAL ISSUES: Whether the adjusted cost basis is a reasonable proxy for “cost” of an interest in a life insurance policy in applying the deeming provisions of 248(35) with respect to a gift to a qualified donee in certain circumstances.
POSITION:  Yes, generally.
REASONS:  There is no definition of “cost” for interests in life insurance policies in the Act. 

CALU CRA Roundtable - 2010

Question 6: Determining the “Cost” of Life Insurance Policies as a Charitable Gift

Proposed subsections 248(35) to (37) of the Act set out special rules for determining the fair market value (FMV) of a property that is subject to a charitable gift for purposes of determining the eligible amount of a gift under subsection 248(31).  Proposed paragraph 248(35)(b) provides that 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, if one of two conditions are met:

(i)  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), or

(ii)  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 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.

Proposed subsection 248(37) excludes several types of gifts from the application of subsection 248(35).  However, gifts of interests in life insurance policies are not excluded from the proposed application of subsection 248(35). 

During the CLHIA Roundtable in May 2009, the CRA confirmed that proposed subsection 248(35) could apply to the gift of an interest in a life insurance policy such that the amount that can be receipted would be the lesser of the policy’s “cost” and “fair market value”.

In the commentary provided by the CRA it was stated:

“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 consideration.”

Where proposed subsection 248(35) is applicable, the draft legislation indicates the fair market value of a property in certain situations is deemed to be the lesser of the fair market value of the property otherwise determined and the cost.  However, in the case of capital property, the fair market value is deemed to be the lesser of the fair market value otherwise determined and the adjusted cost base of the property immediately before the gift is made.  Similarly, it would appear that the “adjusted cost basis” of an interest in an insurance policy is a much better proxy for the “cost” of an interest in an insurance policy as it reflects a number of transactions with respect to the policy including the payment of premiums. 

While this legislation has yet to be enacted it is stated to be effective in respect of gifts made after 6:00 pm (EST), December 5, 2003, and most donors and charities have been operating as if this draft legislation is in effect.  Therefore, it is important to have greater certainty in determining the “cost” of an interest in a insurance policy for purposes of subsection 248(35).

Question:

Could the CRA provide further guidance as to what factors it would consider in determining the “cost” of an interest in an insurance policy for purposes of proposed subsection 248(35). 

CRA’s Response

The fair market value of an interest in a life insurance policy otherwise determined and the cost of the interest in the policy must be considered in applying proposed subsection 248(35) of the Act to a gift of an interest in a life insurance policy to a qualified donee. 

As stated by the CRA at the CLHIA Roundtable in May 2009, we recognize that the Act does not specifically define the cost of an interest in a life insurance policy and we have brought this to the attention of the Department of Finance for their consideration. 

The “adjusted cost basis” (“ACB”) to a policyholder of an interest in a life insurance policy is determined by a formula under subsection 148(9) of the Act.  In general terms, the ACB to the original policyholder will be the amount by which the cash premiums paid by the policyholder (excluding premiums for accidental death benefits), and any income in respect of the policy that has previously been reported for tax purposes, exceeds the “net cost of pure insurance” (“NCPI”) under the policy. 

It is our view that the adjusted cost basis of an interest in a life insurance policy as defined in subsection 148(9) would generally be a reasonable proxy for the “cost” of an interest in a life insurance policy for purposes of the deemed fair market value of an interest in a policy under proposed subsection 248(35) of the Act. 

Sylvie Danis
2010-035939
May 4, 2010

June 03, 2010

Bequest giving in Canada - article by FLA Group on importance of bequest fundraising

Here is an article by FLA Group entitled “Legacy Marketing Overview March 2010”  The article has some interesting statistics and thoughts on the importance of encouraging bequest giving. I agree that Canadian charities do not spend enough time doing this type of planned gift and we are far behind places like the UK.  Hopefully this article will encourage some to put more time and resources into this area. 

http://www.theflagroup.com/articles/FLA-Legacy-Marketing-Overview-Mar-2010.pdf