Recent Tax Developments

Interpretation Bulletin IT-244R3, Gifts by Individuals of Life Insurance Policies as Charitable Donations, dated September 6, 1991 was issued to cancel and replace IT-244R2, dated March 3, 1986. The Bulletin discusses the income tax implications of the donation by an individual of a life insurance policy to a registered charitable organization or a charitable foundation, and the tax consequences of the life insured continuing to pay the premiums on the policy. The Bulletin has been amended to reflect changes to the Income Tax Act for 1988 and subsequent taxation years which provide that donations made by an individual to a charity qualify for a tax credit instead of a deduction for the purpose of computing taxable income.

Ballard Estate v. Ballard Estate

A recent case of interest is not a tax case, but is noteworthy because it deals with the relatively obscure Charitable Gifts Act of Ontario. In Ballard Estate v. Ballard Estate (1991), 3 O.R.(3d) 65, one of the issues before the Court concerned an option granted to a company in which one of the trustees was a principal. The company was to be given an option to purchase shares of Harold E. Ballard Ltd. owned by the Estate of Harold E. Ballard. The estate ultimately vested in a charitable foundation. Sections 2 and 3 of the Charitable Gifts Act provide, in effect, that where an interest in a business that is carried on for gain or profit is given to, or vested in, a person in any capacity for charitable purposes pursuant to a will, such person must dispose of the amount of the business interest within seven years after the death of the testator. Section 5 of the Charitable Gifts Act requires a court to approve the sale of such an interest to a trustee where the interest is held by an estate.

One of the trustees in the Ballard case alleged that the option should be characterized as a disposition of trust property under Section 5 of the Charitable Gifts Act. The question was whether the disposition took place when the option was given to the company or when the option was exercised. The Court noted that the purpose of the Charitable Gifts Act was to prevent charitable corporations and trusts from holding more than a 10 per cent interest in a business. The will provided that the shares of the company did not vest in a charitable foundation until the “division date” defined as 21 years after the death of the testator. The Court found that the mere giving of the option did not constitute a present disposition of the shares within the meaning of Section 2 of the Charitable Gifts Act and, therefore, Section 5 of the Act did not apply and the approval of a judge was not required. The result is that the application of the Charitable Gifts Act in this particular case could be deferred for up to 21 years after the death of the testator.

O’Brien v. M.N.R.

In O’Brien v. M.N.R. Tax Court of Canada (91 DTC 1349), dated October 10, 1991 (Court File No. 89-558(IT)) a taxpayer died on August 4, 1983 leaving a will providing a life interest for his nephew followed by a residuary disposition on the nephew’s death to a registered charity. The will did not contain a power to encroach on capital during the nephew’s lifetime. The terminal tax return filed in respect of the deceased claimed charitable donations of $18,000 in respect of his terminal period and $24,184 in respect of the taxation year prior to the deceased’s death, relying on subsection 110(2.1) and (1.2), respectively, of the Income Tax Act. The Minister disallowed both of the deductions but, on appeal, the Tax Court of Canada allowed the appeal and allowed the deductions. The absence of a receipt from the registered charity was not allowed to defeat the legislative intention behind subsections 110(2.1) and (1.2) of the Act. The Court held it was unrealistic to expect the registered charity to produce a receipt for amounts not received and deductions were allowed even though the Act specifically required the production of receipts. For once, it is heartening to see a commonsense approach to the treatment of gifts to charity where a specific requirement that would have allowed the gift to be deductible could not technically have been met.

 

MARY LOUISE DICKSON

Dickson, Sachs, Appell & Beaman, Barristers and Solicitors, Toronto

LAURENCE C. MURRAY

Peat Marwick Thorne, Chartered Accountants, Toronto

Donations of Life Insurance Policies