On May 27, 2022, Alberta’s Superintendent of Insurance (“ASI”) published an Interpretation Bulletin on Charitable Donations of Life Insurance (PDF) (the “ASI Bulletin”). The purpose of the ASI Bulletin is to outline how a life insurance policy can be donated in Alberta to a Canadian charity without contravening the anti-trafficking provisions of the Insurance Act (Alberta).
This article outlines the details of ASI’s position, provides some commentary on the context in which the ASI Bulletin was released and discusses its possible implications.
ASI Bulletin
“Trafficking” within the context of the Insurance Act refers to a situation in which a policyholder sells or transfers a life insurance policy in exchange for consideration. Typically, the consideration exchanged is discounted below the face value of the policy.
The ASI Bulletin indicates that the prohibition against trafficking or trading life insurance policies (s. 784 of the Insurance Act) has been in place for many years to protect vulnerable individuals from being taken advantage of by third parties.
The ASI Bulletin outlines three acceptable methods for donating life insurance to a charity that will not constitute trafficking under the Act. These are:
- Where a life insured takes out a new policy in the name of a bona fide charity and receives a tax receipt for premiums paid;
- Where a life insured names a bona fide charity as the beneficiary of an existing policy, the charity receives the benefits at the time of death, and the estate receives a tax receipt; and
- Where a life insured transfers ownership of an existing policy to a bona fide charity and receives a tax receipt for the cash value of the property.
Context
The BC Financial Services Authority (“BCFSA”) issued a substantively similar information bulletin to this ASI Bulletin in May 2020 (the “BCFSA Bulletin (PDF)”). BCFSA was the first provincial insurance regulator to take a position on this issue. The BCFSA Bulletin was issued in response to pushback from the charitable sector after it issued a letter to a registered charity in November 2019 indicating that accepting life insurance policies as donations would be considered trafficking in insurance.
While the BCFSA Bulletin clarified that typical gifts of life insurance are acceptable, it resulted in a number of questions, which were discussed in a previous newsletter article, including:
- What is meant by the term “bona fide” charity; and
- Whether a charitable tax receipt should only be issued for the “cash surrender value” of a life insurance policy transferred to a charity, as opposed to for its fair market value.
Unlike the BCFSA Bulletin, the ASI Bulletin explicitly states that a “bona fide” charity must fall within the definition of “charity” under section 149.1 of the Income Tax Act (Canada).
In March 2021, the Canadian Association of Gift Planners (“CAGP”) released best practice guidance in response to increasing concerns from insurance regulators that certain businesses could use another entity’s charitable status in an attempt to bypass life insurance trafficking prohibitions. These best practices are intended to apply to give guidance on gifts of life insurance across Canada.
Regarding the transfer of ownership of a life insurance policy from a donor to a charity, the CAGP guidance indicates that the value of a tax receipt may be equal to the Cash Surrender Value (“CSV”) of the policy at the time of donation, OR, under certain conditions, it may be equal to the Fair Market Value (“FMV”) of the policy (which is an amount that must be calculated by a qualified actuary). This is consistent with guidance from the Canada Revenue Agency (“CRA”). Both the BCFSA Bulletin and the ASI Bulletin make no mention of tax receipts for FMV being an option. When the BCFSA Bulletin was released, some commentators suggested that the failure to indicate that tax receipts might be issued for FMV was an oversight on the part of BCFSA.
The fact that the ASI Bulletin was released after possible issues with the BCFSA bulletin were raised, and after the CAGP issued its best practices, suggests that leaving out the possibility of FMV tax receipts may have been an intentional omission. Regardless, provincial insurance regulators have no authority over the ability of a registered charity to issue donation tax receipts, so charities and their advisors should continue to follow the guidance of the CRA on this issue.
The CAGP guidance cautions donors to make sure they are dealing directly with a Canadian charity, and are not simply relying on an insurance advisor or a third party acting on their behalf. It also advises donors to be wary of situations in which they feel pressured to make a gift of their life insurance policy.
Implications
Generally, the ASI Bulletin clarifies that methods of donating life insurance policies that will be considered acceptable. Any donation that strays from these acceptable methods may be subject to scrutiny from ASI, particularly if vulnerable Albertans are involved.
All Charities, donors, insurers and advisors in Canada should familiarize themselves with the CAGP Guidelines. While other provincial insurance regulators have not yet released official positions on this issue, they may follow the lead taken by the BC and Alberta regulators.
Please reach out to a member of Miller Thomson’s Social Impact Group if you have any questions.
