Charitable Donation of Life Insurance Policies (Canada)

Purpose

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This document provides a concise overview for registered Canadian charities on the proper methods and tax treatment of life insurance donations. It summarizes Canada Revenue Agency (CRA) guidelines and highlights practical considerations for compliance and recordkeeping.

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1. Methods of Donation

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(1) Transfer of Policy Ownership

    •    The donor assigns ownership of the life insurance policy to the charity and may also designate it as the beneficiary.

    •    The charity may issue a charitable donation receipt based on the policy’s Fair Market Value (FMV) at the time of transfer (supported by an insurer or actuary valuation).

    •    The donor relinquishes all rights and control over the policy.

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(2) Irrevocable Beneficiary Designation

    •    The donor retains ownership but names the charity as an irrevocable beneficiary.

    •    A tax receipt may be issued either when the designation is made or when the charity receives proceeds, depending on CRA interpretation and the policy terms.

    •    The donor maintains limited control over non-beneficiary aspects of the policy.

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(3) Revocable Beneficiary Designation

    •    The charity receives the death benefit only upon the donor’s passing.

    •    A charitable receipt is issued at that time, typically through the donor’s estate.

    •    The donor retains full control during their lifetime.

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2. Tax Overview

    •    Donation receipt amount: Fair Market Value (FMV) of the policy at transfer.

    •    Adjusted Cost Basis (ACB): Donor’s total paid premiums minus applicable adjustments.

    •    Capital gain: FMV – ACB (50% inclusion rate for taxable income).

    •    Donation credit: Eligible for tax deduction in the current year or carried forward up to five years (Income Tax Act s.118.1).

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3. Charity Practice Guidelines

    •    Adopt clear written policies for accepting insurance donations.

    •    Obtain a current FMV valuation from the insurer or a qualified actuary.

    •    Issue receipts only when CRA conditions are met.

    •    Confirm who will pay ongoing premiums and monitor policy status.

    •    Keep all documentation and correspondence for CRA audit purposes.

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4. Key CRA References

    •    IT-244R3 – Gifts of Life Insurance Policies as Charitable Donations

    •    Income Tax Folio S7-F1-C1 – Split Receipting and Deemed Fair Market Value

    •    Income Tax Act s.118.1 – Donation Credits and Five-Year Carry Forward

    •    CRA Guidance CG-013 – Donor and Charity Responsibilities

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5. Disclaimer

This summary is provided for internal information and tax planning purposes only. It does not constitute legal or tax advice. Charities and donors should seek professional legal or tax counsel and refer to CRA’s official publications for confirmation of applicable rules.