On July 20, 2016, Canada Revenue Agency (“CRA”) released document 2016-063262, which clarifies comments made by CRA with regard to two scenarios presented at the Conference for Advanced Life Underwriting (“CALU”) roundtable on May 3, 2016. Both scenarios dealt with the situation where “[a] contract holder designates a registered charity as beneficiary of a segregated fund policy” and whether the Income Tax Act’s (“ITA”) capital gains provisions “apply in respect of the property transferred to the qualified donee upon the death of the annuitant.” More specifically, in looking at these scenarios, it was reviewed whether the capital gains provisions consider a donor’s taxable capital gain for a transfer of certain types of property to a qualified donee to be zero.
In each scenario, CRA was asked whether the proceeds of a disposition by gift to a registered charity of an interest in a segregated fund policy results in a zero taxable capital gain for the contract holder when the annuitant dies in 2016. In the first scenario, the contract holder, who is also the annuitant, passed away and the insurer forwarded the proceeds to the charity as per the beneficiary designation in the policy. In the second scenario, the person insured under the contract, i.e. the annuitant, is a family member of the contract holder. In this scenario, the annuitant dies and the proceeds are also paid out to the charity as beneficiary.
In both scenarios, CRA concluded that the ITA’s capital gains provision which deems a capital gain to be zero upon the disposition of certain property did not apply. This was because the cheque to the charity of the proceeds of the policy in question did not constitute the type of property for which the ITA’s capital gains provision would apply. While it was recognized that an interest in a segregated fund policy is one of the types of property eligible for this capital gains provision, CRA took the position that, in these scenarios, the interest in the fund was not, in fact, the property being transferred, but rather the charity was being given the proceeds of the policy. In the second scenario, CRA further pointed out that the proceeds of the policy were not disposed of due to the contract holder’s death.
Based on CRA’s comments in this document, if a charity is aware that one of the goals of the donor in naming the charity as a beneficiary of a segregated fund policy is to realise a nil capital gain, then the charity should caution them that the nil capital gains provisions will not apply for the proceeds of such policy and that they, as always, should obtain independent tax advice.