11 May 2020
Donations of Life Insurance Policies to Charities
The BCFSA has now clarified that the trafficking rules in the Insurance Act is meant to protect vulnerable British Columbians and that legitimate charitable donation activities are not captured by it. They specifically provided that the three common donation methods outlined in this blog are generally not prohibited when the donation is made directly to bona fide charities. In addition, the solicitation by bona fide charities of donations of life insurance policies or benefits are generally not prohibited.
*POSTED NOVEMBER 27, 2019*
The charitable donation of a life insurance policy in BC is now subject to a new interpretation of law
It has come to our attention that the BC Financial Services Authority (“BCFSA”) recently advised a charity that accepting life insurance policies as donations is trafficking in insurance and that the charity cannot solicit or accept any life insurance policies as donations from BC residents. The BCFSA considers these activities to be in contravention of section 152 of the Insurance Act, which we have reproduced below:
152 - Any person, other than an insurer or its authorized agent, who advertises, or holds himself or herself out, as a purchaser of life insurance policies or of benefits under them, or who traffics or trades in life insurance policies for the purpose of procuring the sale, surrender, transfer, assignment, pledge or hypothecation of them to himself or herself or any person, commits an offence against this Act.
There are three common ways of donating insurance to charity:
Naming a charity as the beneficiary of an existing policy (revocable) and claiming the donation tax credit for the proceeds of the policy upon death.
Purchasing a new policy with and designating the charity as the beneficiary of the life insurance policy, and receiving a tax receipt for all future donations made to pay the premiums on the policy.
Transferring the ownership of an existing policy to a charity and naming it as the beneficiary. The donation tax credit is available at the time of transfer equal to the Fair Market Value (“FMV”) of the policy (generally the cash surrender value less any outstanding policy loans), and in the future, if donations are made to pay the premiums on partially paid policies. The transfer is taxable if the FMV exceeds the adjusted cost base of the policy.
Donation Tax Credit
The Income Tax Act provides that a donation tax credit is available to the deceased/estate where a charity receives proceeds as a beneficiary of a life insurance policy upon the death of the insured (#1 above). We believe that this should not offend the BCFSA where the charity did not seek to be added as a beneficiary of life insurance.
The BCFSA’s comments with respect to trafficking would likely apply to the actual purchase or donation of policies to charities (#2 and #3 above). The donations made to assist charities in funding their premiums should not be a concern unless the funds are being paid directly to the insurer or an agreement is in place to commit the funding.
What Action Should BC Charities Take?
BC charities should, at a minimum, remove information from their websites and other materials that seek donations of life insurance policies. We note that a number of charities such as UBC, St. Paul’s Foundation, and BC Cancer Foundation, have already done so on their websites.
A number of organizations such as the Association of Fundraising Professionals (“AFP”) and Canadian Association of Gift Planners (“CAGP”) are working on a response to the BCFSA, and we will provide updates as we learn more.
It is interesting that this development for the charitable donation of life insurance policy follows BCFSA’s transformation this year from the previous Financial Institutions Commission of British Columbia (“FICOM”), BC’s financial services regulator. After 30 years as FICOM, BCFSA emerged with a new name and transitioned from a core government agency to a Crown corporation with a new CEO.
More changes may be expected as the BCFSA works on its new mandate to improve accountability and oversight and to increase public disclosure. We hope that clarity will become available to charities with respect to a charitable donation of a life insurance policy as the BCFSA develops.
For additional information on this topic see Margaret Mason’s Norton Rose Fulbright article entitled, Prohibition on Gifts of Life Insurance Policies to Charities in British Columbia by BC Residents.
This content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.