back and used to reduce taxes payable in again in Bill C- 10 in November, 2007, 3. Life Insurance the prior year. The credit is available to after Bill C- 33 died when Parliament A charity can benefit from gifts of offset 100% of net income for the year of prorogued. Bill C- 10 also died on the 3
insurance policies in several ways. From
death and the prior year. This credit is of
order paper. The proposed changes have
the donor’s point of view, a gift of an
particular benefit in calculating tax
not been enacted as at April 30, 2009.
insurance policy allows a large donation,
otherwise payable in the year of death,
Nevertheless, CRA is administering the at a relatively small cost to the donor.
since the deceased is deemed to have
law as if these changes were in place, CRA’s administrative position on
disposed of all capital assets immediately
since they will be retroactive. One major donations of life insurance policies is set
before death (subject to certain
change deals with the measurement of a out in IT-244R3 entitled “Gifts by
exceptions, such as for spousal rollovers)
gift where the donor receives some Individuals of Insurance Policies as
at fair market value, thereby realizing
advantage in exchange, to deal with
Charitable Donations”.
capital gains in the year of death.
“split-receipting”. CRA has changed its
A charity can purchase a life insurance
2administrative policy dealing with
2. Annuities policy on the donor’s life on the
annuities and no longer applies the understanding that the donor will pay
Prior to December 20, 2002 a donor administrative policy set out in IT-111R2 the premiums directly to the insurance
could transfer cash to a charity which
for annuities issued after December 20,
company. This is often supported by a
undertook to pay an annuity for life to
2002. CRA has acknowledged that its
pledge to pay the premiums. The charity
the donor, or perhaps to the donor and a
earlier administrative position has no
can issue a tax receipt to the donor for
spouse, as long as one of them was alive.
basis in law and cannot be continued in
the premiums paid. On the death of the
The annuity payment received by the
the face of the proposed changes in the
donor, the charity will receive the death
donor would be a blend of interest and
ITA. Under the proposed changes, the
benefit, but it will not be a gift by the
capital, and only the interest portion
value of property received from a charity
donor. The major drawback from the
would normally be taxable. If the donor
in exchange for a gift must be determined
transferred cash to the charity in excess
charity’s point of view is that there is no
and that value will become the cost of
of the amount expected to be received
way to ensure that the donor will pay the
that property to the charity. As a result,
over the term of the annuity, the excess
premiums. However, if the donor fails to
where an amount is transferred to a
was considered under CRA’s administrative
pay, the charity can surrender the policy
charity by a donor and the advantage
policy to be a gift and the charity could
or pay the premiums out of its own
received by the donor is a stream of
issue a tax receipt for the excess. CRA’s
funds.
policy as stated in IT-111R2 entitled
annuity payments, the amount of the gift
Alternatively, the donor can transfer
“Annuities Purchased from Charitable an existing policy to the charity and
will be equal to the excess of the amount
Organizations” was not to tax any portion undertake to pay future premiums. The
transferred by the donor to the charity
of an annuity payment received by a charity can issue a receipt for the fair
over the amount that would be required
donor in such circumstances.
to purchase an annuity that would
market value of the gift, which is usually
provide the same payments.
If the donor died earlier than
the cash surrender value of the policy
expected, the charity would keep the
(normally only whole life or universal life
CRA has stated that despite the
remaining funds. If the donor lived
policies will have a value) less any
withdrawal of its administrative position,
beyond the life expectancy, the charity
outstanding policy loans. The charity
it expects charitable annuities to continue
had to meet its commitments and might
can issue a tax receipt for the premiums
as a means of fundraising which could be
need to use other funds to do so.
paid. There may be an inclusion in
more advantageous to the donor than in
income of the donor on a gift of a policy
Only charitable organizations can
the past. In an example mentioned by
if the fair market value of the policy
issue annuities without adverse tax
CRA, for a donor with a life expectancy
exceeds its tax cost. CRA has
consequences. Foundations can be
of eight years, who actually lives for eight
acknowledged that the cash surrender
deregistered if they incur ineligible debt
years and makes a cash payment of
value may not necessarily be the fair
obligations. Furthermore, a charity must
$100,000, in exchange for annuity
market value of the policy. In particular,
ensure that it has authority to issue
payments of $10,000 for each of those
CRA has stated that, consistent with
annuities pursuant to provincial laws
eight years, the cost of the annuity that
standard valuation principles applicable
dealing with insurance or other relevant
will pay $80,000 over eight years is
to other types of property, the fair market
laws. In many cases, the charity will
$50,000. Under the former administrative
value of a policy should be determined
purchase an annuity from a financial
practice, the donor would be entitled to a
based on all of the relevant factors. As a
institution rather than issuing it itself, to
reduce its risk of loss.
tax receipt for $20,000 in the year of the
result, if a qualified valuator determines
payment and would receive a total of
that the fair market value of the policy
The Department of Finance $80,000 as annuity payments tax-free.
exceeds its cash surrender value (less any
announced a number of proposed Under the proposed changes, the donor
outstanding policy loans) that higher
changes on December 20, 2002. These will receive a tax receipt for $50,000 in
amount can be shown as the eligible
proposals weremodified on December5, the year of the gift, and will receive
amount in a receipt issued by the charity.
2003, in response to so-called “art flip” $80,000 in annuity payments, of which
CRA has also confirmed that in
transactions, and eventually introduced $30,000 will be included in income over
determining the income that must be
in Bill C- 33 in November, 2006 and the eightyears, asblended payments.
reported by the donor on a gift of a policy
