29 June 1995 External T.I. 9505535 - VALUE OF A GIFT OF INSURANCE - TERMINATION DIVIDENDS

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.

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

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE

CORRESPONDENCE SUMMARY

Principal Issues:

Whether special maturity or termination dividends ("SMD"), with respect to a life insurance policy, are to be taken into account for the purpose of determining the FMV of a gift of that policy to a charitable organization. SMDs' were originally offered by insurance companies to induce policyholders to hold their policies for a pre-determined length of time, however the funds originate from free or unappropriated surplus, a fund whose balance fluctuates with the performance of the specific company. No part of the maximum potential dividend is vested, accumulated or otherwise guaranteed until board of director approval.

Position TAKEN:

Generally no but final determination depends upon the specific terms and conditions of the policy. That portion of the dividend that has irrevocably accumulated to the account of the policyholder/donor would be added to the amount of the gift for purposes of paragraph 110.1(1)(a) and subsection 118.1(3).

Reasons FOR POSITION TAKEN:

	Valuation principles require that the value of a life 	insurance policy, for this purpose, reflect, in terms of 	money, what the policy would bring were it to mature or 	to be surrendered on the day of absolute assignment to 	the charity. Departmental position as expressed in IT-	244R3 is that only those dividends that have accumulated 	to the account of the donor at the time of the gift 	would qualify. There must not be any restrictions on the 	dividends and the amounts must be ascertainable.

		950553
XXXXXXXXXX                      	G. Donell

Attention: XXXXXXXXXX

June 29, 1995

Dear Sir:

Re: Charitable Donation of a life insurance policy - SMD

This is in reply to your letter of January 13, 1995 in which you have asked us whether a special maturity or termination dividend ("SMD") is to be taken into account for purposes of determining the fair market value of a gift of that policy to a charitable organization. We apologize for the delay of our response. We offer the following general comments with regard to the issues raised in your letter which we hope will be of assistance to you.

In the situation you describe a taxpayer who owns a paid-up life insurance policy issued April 19, 1947. The policy's cash surrender value ("CSV") and accumulated dividends are approximately $8,300 and $6,351 respectively. The policy also allows for a maximum potential SMD in the amount of $6,886. The donor taxpayer plans to (1) borrow, from the insurance company, an amount equal to the CSV and (2) to withdraw an amount equal to the accumulated dividends prior to the donation of that policy.

The SMD provides for an increase in the benefit payable on the death of the life insured, or on surrender of the policy, if the policy is in force more than ten years. No part of the SMD however is vested, accumulated or otherwise guaranteed. It is our understanding that the amount must be approved by the board of directors of the company and is at their discretion. They are otherwise under no obligation.

The department's position with respect to donations of life insurance policies is outlined in Interpretation Bulletin IT244-R3 titled, "Gifts by individuals of Life Insurance Policies as Charitable Donations", (September 6, 1991). The comments in that bulletin are equally applicable to corporate donors. As explained in that bulletin a transfer of an insurance policy to a charitable foundation or organization registered with the Minister of National Revenue could qualify as a charitable donation where there has been an absolute assignment of the policy to the charity and where no right, privilege, benefit or advantage can accrue to the donor as a result of the gift.

The Department's position as indicated in IT-244R3 is that generally the fair market value of an insurance policy at a particular time is the amount the recipient would receive if the policy was surrendered at that time. Paragraph 3 of IT-244R3 explains that the amount of the gift at the time of the absolute assignment is equal to the total of (1) CSV less the amount of policy loans outstanding, (2) assigned accumulated dividends and (3) assigned accumulated interest. Policy loans repaid subsequent to the assignment would also qualify as a donation at the time of repayment. In our view only that part of the SMD that could be considered to have accumulated to the account of the policyholder at the time of the absolute assignment would be included in the amount of the donation. In other words, to qualify, the amount must be ascertainable at the time of the gift and there must be no restrictions as to the withdrawal.

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch