2024-1007061C6 2024 CALU Q4 - Shared Ownership & Charitable Gift

Principal Issues: Can the CRA provide an update on its views with respect to shared-ownership arrangements in the context of charitable giving?

Position: Our position remains unchanged.

Reasons: The determination is a mixed question of fact and law.

Author: Szilagyi, Steven
Section: 118.1, 148, 248

CALU Roundtable - May 2024

Question 4 – Shared Ownership Arrangements and Charitable Gifting

Background

There are circumstances where two parties may wish to jointly own and benefit from a life insurance policy. For example, one individual may require $1 million of life insurance coverage and another related individual may require $500,000 of life insurance coverage. They agree to jointly own a life insurance policy, fund the premiums based on their percentage interest in the death benefit, and ensure the life insurance proceeds are payable in the appropriate proportions to their respective designated beneficiaries. There may be other arrangements where one co-owner is entitled to the cash value of the life insurance policy (and a portion of the death benefit equivalent to the policy’s cash value immediately before the death of the life insured) and the other party is entitled to the remainder of the death benefit. In this case the premiums would be split on a reasonable basis in relation to their respective interests in the policy. These arrangements are often referred to as “split dollar” or “shared ownership” arrangements.  

The CRA has previously been asked to consider the use of a shared ownership arrangement involving a donor and a charity. In document 2003-0004315 (dated June 6, 2003) the CRA was asked to provide guidelines in determining whether an arrangement under which the life insurance benefits are shared between the charity and the donor will qualify as a charitable gift and how the value of the gift should be determined. The CRA provided the following comments:

With regard to “split-dollar” or other shared ownership arrangements, it is possible that there may be arrangements that could result in a charitable gift for purposes of section 118.1 but such a determination can only be made on a case-by-case basis and we would need to review the particulars of a specific arrangement including all the relevant agreements and the life insurance policy. Since we have not had the opportunity to review specific shared ownership arrangements between donors and charities, it would be premature for us to attempt to provide general guidelines at this time or to comment on the impact, if any, of the draft gifting legislation released by the Department of Finance on December 20, 2002 on such arrangements. Possibly, following the review of a number of shared ownership arrangements, we may be in a position to provide some general comments on whether a portion of the premiums paid on the policy would qualify as a charitable gift for tax purposes. However, such gifting arrangements would appear to fit within the spirit of the proposed legislation on split receipting. [bolding added]

At the 2021 Roundtable for L’Association de planification fiscale et financière (“APFF”) (document 2021-0895981C6) the CRA was asked to consider two situations where the donor would dispose of a portion of his or her interest in a life insurance policy to a registered charity and either share the insurance coverage and cash surrender value of the policy equally or share only the coverage with the charity. While not specifically asked in the question, the CRA noted that “it seems reasonable to believe that the transactions described are contemplated in the context where it is the intention of the individual that the disposition of a portion of his or her interest in a life insurance policy be recognized as a charitable donation.” [As translated by external commentary.]

The CRA then went on to make the following two comments in relation to claiming a charitable donation tax credit on the transfer of an interest in a life insurance policy to a charity:

In order for an individual’s gift of a life insurance policy to a registered charity to qualify for a donation tax credit, the policy must generally have been fully assigned to the donee and the donee must have been listed as the beneficiary of the policy.

In this context, the donor will want to ensure that a new policy is not created and that the portion of the policy he or she wishes to donate has been fully assigned in order to qualify for the donation tax credit. He will also want to ensure that the value of any advantage he receives in connection with the gift can be verified so that an amount can be recognized as an eligible amount of a gift. [bolding added].

It is our view that the second paragraph suggests that a donor can gift a partial interest in a life insurance policy to a charity. In other words, the full assignment of the policy to the charity is not required to be able to claim a charitable tax credit.

Question

Can the CRA confirm that only the portion of the policy that a donor wishes to donate must be fully assigned to the charity, with the charity being designed as beneficiary of its respective interest in the policy, in order for the donor to be able to claim a charitable donation tax credit arising from the gift of that portion of the policy?

Can the CRA provide an update on their views regarding shared ownership arrangements involving life insurance policies in the context of charitable gifting.

CRA Response

As set out in Interpretation Bulletin IT-244R3, Gifts by Individuals of Life Insurance Policies as Charitable Donation, we remain of the view that a gift by an individual of a life insurance policy to a qualified donee, such as a registered charity, is considered to be a gift within the context of section 118.1 of the Income Tax Act (Act), provided that the policy has been absolutely assigned to the donee and the donee has become the registered beneficiary of the policy.

With regards to “split-dollar” or other shared ownership arrangements, such arrangements are beyond the scope of the CRA's position in IT-244R3. In document 2003-0004315 we opined that there may be arrangements that could result in a charitable gift for purposes of section 118.1 of the Act within the spirit of the split-receipting rules but such a determination can only be made on a case-by-case basis and we would need to review the particulars of a specific arrangement including all the relevant agreements and the life insurance policy. This view was reconfirmed in document 2021-0895981C6.

Accordingly, given the broad variations of insurance policies and products, the tax consequences regarding “split-dollar” or other shared ownership arrangements is a mixed question of fact and law that can only be determined on a case-by-case basis following a full review of all relevant legal documents and facts regarding each arrangement.

Steven Szilagyi
2024-100706
May 7, 2024

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