2016-0632621C6 CALU Q3 Seg fund policy - charitable gift on death

Principal Issues: A contract holder designates a registered charity as beneficiary of a segregated fund policy. Does paragraph 38(a.1) apply in respect of the property transferred to the qualified donee upon the death of the annuitant?

Position: No.

Reasons: The property transferred to the qualified donee is in the form of a cheque or other negotiable instrument and not a property listed in subparagraph 38(a.1)(i).

Author: Danis, Sylvie
Section: ITA 38(a.1), 118.1(5.2)

CALU Roundtable – May 2016

Question 3 – Segregated Fund Policies and Charitable Gifts on Death

Scenario 1

Assume Mrs. A is the contract holder (owner) and the only life insured (annuitant) under a segregated fund policy with accrued investment gains. She has designated a registered charity as beneficiary of that policy. On February 28, 2016, Mrs. A passes away at which time the segregated fund contract ends. On April 1, 2016, the insurer forwards the proceeds to the registered charity pursuant to the beneficiary designation.

Question

Can the CRA please confirm whether subsection 118.1(5.2) of the Act would deem a gift to be made to a qualified donee in respect of Mrs. A’s death and that paragraph 38(a.1) of the Act would apply in these circumstances to permit a nil taxable capital gain inclusion in the terminal return of Mrs. A in respect of the disposition of the segregated fund policy.

CRA Response

For deaths that occur after 2015, where subsection 118.1(5) of the Act applies to a gift, the gift is generally deemed to be made by the individual's estate at the time the property that is the subject of the gift is transferred to the donee, and deemed not to be made by any other taxpayer or at any other time.

Subsection 118.1(4.1) of the Act makes subsection 118.1(5) of the Act applicable to a gift that is made by the individual under the individual's will or by the individual's estate. It also makes subsection 118.1(5) of the Act applicable to a gift that is deemed by subsection 118.1(5.2) of the Act to have been made in respect of the death of the individual.

Subsection 118.1(5.2) of the Act provides that where a direct distribution of life insurance proceeds is made to a qualified donee pursuant to a beneficiary designation, for the purposes of section 118.1 of the Act this distribution is treated as a gift made in respect of the death of the individual if the conditions in that provision are met.

In the scenario described above, where subsection 118.1(5.2) of the Act applies to the direct distribution of proceeds to a registered charity as beneficiary of the segregated fund policy, the gift will be deemed to be made by Mrs. A’s estate on April 1, 2016 (the time the proceeds are transferred to the donee by the insurer).

Subparagraph 38(a.1)(i) of the Act provides that a taxable capital gain from the gift of certain properties, including an interest in a related segregated fund trust, is nil where the gift is to a qualified donee.

Similarly, subparagraph 38(a.1)(ii) of the Act provides for a nil taxable capital gain if a disposition is deemed by section 70 of the Act to have occurred and the property is:

*     a security described in subparagraph 38(a.1)(i) of the Act, and

*     the subject of a gift to which subsection 118.1(5.1) of the Act applies and that is made by the individual's graduated rate estate to a qualified donee. (For further information on graduated rate estates and estate donations, refer to the CRA webpage http://www.cra-arc.gc.ca/gncy/bdgt/2014/qa14-eng.html.)

Generally, subsection 118.1(5.1) of the Act will apply to a gift made by an individual’s graduated rate estate if the gift is deemed by subsection 118.1(5.2) of the Act to have been made in respect of the death of the individual.

In these circumstances, it is our view that paragraph 38(a.1) of the Act does not permit a nil taxable capital gain inclusion in Mrs. A’s terminal return in respect of the deemed disposition of her interest in the segregated fund policy. Mrs. A’s interest in the segregated fund policy is not the property that is transferred to the qualified donee. Accordingly, any capital gain realized on the deemed disposition of her interest in the segregated fund policy will not meet the condition in subparagraph 38(a.1)(ii) of the Act that there must be a gift of that property.

Scenario 2

Assume the same fact situation as Scenario 1 above with Mrs. A as the contract holder (owner), except that the life insured (annuitant) under the contract is another family member, Mr. B. Further assume that it is the annuitant, Mr. B, who dies on February 28, 2016 (and not Mrs. A) and there is a payout of the proceeds on April 1, 2016 pursuant to the terms of the contract to the registered charity (i.e., as the beneficiary under the contract).

Question

Can the CRA please confirm whether paragraph 38(a.1) of the Act would apply in these circumstances to permit Mrs. A to report a nil taxable capital gain inclusion in respect of the disposition of the segregated fund policy.

CRA Response

As noted above, subparagraph 38(a.1)(ii) of the Act requires that the disposition is of a type of property listed in subparagraph 38(a.1)(i) of the Act. In this case, the property transferred to the registered charity is a cheque or other negotiable instrument and not an interest in a related segregated fund trust. Accordingly, subparagraphs 38(a.1)(i) and (ii) of the Act would not apply since the property transferred is not a type of property listed in subparagraph 38(a.1)(i) of the Act.

Subparagraph 38(a.1)(ii) of the Act would also not apply in these circumstances as section 70 of the Act would not deem a disposition of the interest in the segregated fund policy by Mrs. A (the contract holder of the policy).

Given that the conditions in paragraph 38(a.1) of the Act are not met, Mrs. A is not entitled to report a nil taxable capital gain inclusion in respect of the disposition of her interest in the segregated fund policy.

Prepared by: Sylvie Danis
2016-063262
May 3, 2016

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2016

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2016