Charities and Life Insurance


In this Tax Topic we will look at the basic rules relating to charitable giving through life insurance.

Note: these tax topics are distributed on the understanding that neither nor Manulife Financial is engaged in rendering legal and accounting advice.

Last updated March 2012

Donating Insurance Policies: Basic Rules

In this section we shall look at the basic rules relating to the donation of life insurance policies to charities. Anybody who wishes to deal with life insurance and charities should become familiar with Canada Revenue Agency (CRA) Interpretation Bulletin IT-244R3, dated September 6, 1991, which canvasses the key tax issues.

In the normal situation, the donor will either gift ownership of an existing policy to a charity or the charity will take out a policy on the donor’s life. In each case the charity becomes the owner of the policy.

If an existing policy is donated, the cash surrender value of the policy minus any policy loans outstanding plus any accumulated dividends or interest is treated as the fair market value of the policy and this is the amount for which a tax receipt can be issued. Please note that all provincial rules relating to the assignment to the charity must be followed.

If an insurance policy with a cash surrender value is donated, remember that some income may be added to the donor’s income under subsection 148(1) of the Income Tax Act as the policy is disposed of.

Payment of the premiums due on the policy by the donor, owned by the charity, are considered charitable donations and the charity can issue a tax receipt annually in respect of the premiums paid. This is true whether the premiums are paid by the donor directly to the insurer or whether funds are paid to the charity with instructions that they be used to pay the premiums.

Points to note

Where insurance premiums are paid by a charity, or by a donor on behalf of a charity, the payment is not considered to be a charitable expense of the charity and will not count towards meeting its disbursement quota. A policy may be donated pursuant to the ten year rule in order to exclude it from the charity’s disbursement quota. (See Tax Topic entitled “Charities and Charitable Donations” for a discussion of the ten year rule.) Each premium must be separately designated under this rule. Alternatively this could be done by stipulating that the ten year rule applies for ten years following the last premium payment. Paragraphs 6 to 8 of Interpretation Bulletin IT-244R3 should be consulted. See the direction that contemplates the ten year rule.

It should be observed that investment income (from whatever source) is not counted as part of income for disbursement quota purposes and thus becomes very valuable to a charity. This 2 provision allows the charity to be indifferent to owning a non-exempt life insurance contract, which pursuant to subsection 12.2(1) of the Act generates income annually to the extent the accumulated value exceeds the adjusted cost basis of the policy.

The death benefit payable under a policy is not counted in income when the charity calculates its disbursement quota. (This view was confirmed by CRA in an interpretation letter #2002-0133545, dated Jan. 16, 2003). For direct gifts by way of a beneficiary designation of life insurance proceeds amendments as a result of the 2004 Federal Budget also confirmed this treatment, treating such amounts as “enduring property” like bequests or inheritances are treated for purposes of the disbursement quota rules.

An Overview of Options

There are many ways in which life insurance can be used to fund a charity. Depending on the method chosen, you get very different tax results.

As discussed above if a donor donates a life insurance policy to a charity or a charity takes out a policy on the donor’s life, the premiums paid by the donor will be considered a charitable donation eligible for a charitable tax credit or deduction. Note that CRA has confirmed in a technical interpretation (#2002 – 0172875, dated Dec. 24, 2002) that the beneficiary designation need not be irrevocable in order to obtain this treatment. The donor may also get a credit or deduction for the value of the policy if the policy was donated. However, upon death, no further tax benefits accrue to the donor or his / her estate.

If a donor takes out a policy and names his/her estate as beneficiary the donor can then direct the death benefits to go to one or more charities. If this procedure is followed there is no current tax relief for premiums paid but the individual will be eligible for a charitable donation tax credit on the proceeds distributed to the charity on their terminal return. It is important to note that there is no “carry-forward” for gifts made (or deemed to be made) in the year of death. If the full amount of the credit cannot be used, however, there is a provision available to carryback any unused donation one year. The donation limit for gifts in the year of death and the preceding year is 100% of net income.

If a donor takes out a policy and names the charity as the beneficiary he/she will not qualify for a charitable donation tax credit for premiums paid. However, the individual may claim a charitable donation tax credit on their terminal return for the death benefit paid to the charity. As noted above, there is no "carry-foward" for gifts made in the year of death, but any unused donation may be carried back one year, and the donation limit for gifts in the year of death and the preceding year is 100% of net income. This measure applies in respect of an individual's death that occurs after 1998.

At the 2003 Conference for Advanced Life Underwriters (CALU) Tax Policy Round Table (#2003- 0004315) CRA commented on irrevocable beneficiary designations in favour of a charity where the owner continues to own the policy. They stated that in their view where a policyholder makes an irrevocable designation of a qualified donee as the beneficiary of a life insurance policy, the premiums paid by the donor will not qualify as a charitable gift. In other words, an irrevocable beneficiary designation cannot be used as an alternative to actually donating the policy by transferring ownership of it to the charity. In addition CRA indicated that if an irrevocable beneficiary designation is made in favour of a charity, the death benefit it received by the donee will not be deemed to be a charitable gift for purposes of the charitable tax credit under section 118.1. The reason given was that the requirement under 118.1(5.1) that immediately before the individual’s death the individual’s consent would have been required to change the recipient of the death benefit would not be met.

Since that time, the CRA has reserved their position on this latter point (#2004-0065451C6). It is now the Agency’s view that such a designation would allow the proceeds to qualify for the charitable donation tax credit in the year of death.


In this Tax Topic we have canvassed the basic issues relating to charities and insurance policies. It is important to understand these rules to ensure appropriate benefit is derived from life insurance gifts.

* Please note:

  • the source material for these topics are various Manulife Financial articles, courtesy of Manulife Financial.
  • will strive to keep these articles updated and current.
  • these tax topics are distributed on the understanding that neither nor Manulife Financial is engaged in rendering legal and accounting advice.

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