The Tax Benefits of Donating Life Insurance Policies and Annuities | FBC, Canada's Farm & Small Business Tax Specialist

The Tax Benefits of Donating Life Insurance Policies and Annuities

 The Tax Benefits of Donating Life Insurance Policies and Annuities

The Tax Benefits of Donating Life Insurance Policies and Annuities

There are over 86,000 registered charities in Canada so there are many opportunities for you to give back and benefit from tax relief at the same time.

The donation of life insurance policies and annuities to registered charities is a great way to benefit a favourite charity and for the donor to receive a taxable benefit from insurance coverage that is no longer needed.

One caution, however, the federal government and CRA have become ever more vigilant in recent years in removing the registered status from organizations that they feel are merely posing as charities and not fulfilling the requirements of registration.

Confirm if a Canadian charity is registered to help guide your donation decisions

The donation of a life insurance policy provides relief in the form of a non-refundable tax credit.

To qualify for such relief, the life insurance policy must be absolutely assigned to the registered charity by making the charity the registered beneficiary of the policy. The donor cannot have any continuing advantage from the policy except for the allowed tax advantage.

The amount of the gift is determined by calculating the Fair Market Value (FMV) of the policy considering cash surrender value, policy loans, and the state of health and life expectancy of the donor.

Any accumulated dividends and interest that are also assigned to the charity add to the value of the donation.

If loans against the policy are repaid by the donor after assignment these will also provide a tax credit, as will any premiums on the policy should the donor continue to pay them.

The tax treatment of charitable annuities in this very simplistic example is illustrated below.

For example, a $100,000 donation to a charity that provides the donor with annuity payments of $10,000 per year for 8 years (assuming the donor lives for 8 years) would be treated as follows:

The annuity payments amount to $80,000 ($10,000 per year x 8 years = $80,000) and the cost of such an annuity would be $50,000.

The tax treatment gives the donor a tax receipt of $50,000 for the year of the donation.

As the income is generated through the use of a prescribed annuity, the tax treatment of the annuity payments is a blend of principal and interest, a portion of which would be taxable in the hands of the donor over 8 years.

We recommend that you take the time to consult with your financial or tax advisor on the best path for you before making a decision to donate to ensure you and the charity receive the most benefit.

"Wealth is not his that has it, but his that enjoys it." — Benjamin Franklin