If we rely on Saskatchewan Bill 177, we can state that nowhere in this Act, you have a direct reference to the charitable donation of life insurance. To the best of my knowledge this would apply to each Insurance Act of the different provinces. As a result, we can state that none of the Insurance Act directly legislate the use of life insurance for charitable purposes. Does this mean that the Insurance Act cannot restrict such transaction? We have to answer by the negative but prior doing this let’s look at federal law.
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Charitable donation of life insurance and federal legislation
The charitable donation of life insurance is in fact federally legislated under the Income Tax Act. However the purpose of the Income Tax Act is not to restrict the ownership and enjoyment of life insurance as an asset or property by Canadians. The purpose of the Income Tax Act is to ensure that the government receives tax revenues out of the enjoyment of the property owned by Canadians. As a result, the ITA does not prevent policy holders, in any way, from donating their life insurance. It does however establish the tax consequences and benefits of such charitable transaction.
Can the Insurance Act indirectly restrict the charitable donation of life insurance?
This is where this gets interesting. A charitable donation is a transaction involving the use of an ownership right defined under a life policy contract. Since I have never seen in a life contract; a provision prohibiting a charitable donation, a policy owner would have an unrestricted right to use his policy as part of a charitable donation. Note that there are insurers that offer a life contract with a provision that changes of ownership have to be accepted by the insurer. Under such provision, an insurer could refuse the right of a policy owner to donate his life policy. However this would be the equivalent of a business suicide for an insurer to disagree with a charitable donation. As a result, we take the position that an insurer would never contest the right of a policy owner to donate his life policy.
Since the charitable donation of a life insurance policy is an exercise of a right of ownership which entails a transfer of ownership, is there a provision in Bill 177 that would indirectly limit such transfer of ownership? Yes, there is such a provision. It is called the provision prohibiting the trafficking of life insurance policies.
First we have to be clear one thing. The trafficking provision does not prevent, directly or indirectly, a policy owner from donating his insurance policy to a charity or selling his policy to any third party. The provision prohibits the organized purchase or trade of life insurance by anyone except an insurer. This means the trafficking provision as currently written in Bill 177 would prohibit and make it illegal for a charity to solicit the donation of life insurance policies. In fact the provision is quite clear:
7-16(1) Subject to sections 3-41, 8-129 and 8-187, no person, other than a life company shall:
(a) advertise or hold himself, herself or itself out as a purchaser of life insurance policies or of benefits under life insurance policies; or
The key word here is purchaser. By soliciting for the donation of life insurance through the issuance of a tax credit, is the charity purchasing the life insurance policy with the tax credit being the consideration for this purchase? It is difficult to say but there is a probability that the donation could be considered a form of purchase and therefore prohibited under the Act.
However it is sub section (b) that matters the most. This sub section states;
(b) traffic or trade in life insurance policies for the purpose of procuring the sale, surrender, transfer, assignment, pledge or hypothecation of life insurance policies to himself or herself or any other person.
There are 2 parts to the provision. The first part is simple. When a charity solicits for the donation of a life policy, its purpose would be to procure the transfer of the life policy to itself. As a result, this part of the provision applies. The other part of the provision is whether the donation qualifies as a form of trade. Since the word trade is not defined under the Insurance Act, we have to look at the legal definition of this term. The definition is “to exchange one thing for another, which includes money for goods, goods for goods, and favors for goods or money”. Since the donation of a life policy is an exchange whereby the charity receives the ownership of the life policy in exchange for a tax receipt; with the value of the tax receipt often greater than the cash value of the policy, this would constitute trading in life insurance policies. The fact that most donations would not take place without the issuance of the tax receipt only reinforces that this donation of life insurance is a trade; a commercial exchange.
Therefore as far as I am concerned, as it is currently written, the trafficking provision does make the solicitation by charities of a life policy donation illegal under this provision as stated in sub section (b)
The trafficking provision and the regulators
Regulators have been able and willing to not apply the law and certainly not apply this provision in regards to charities. Their justification is that this provision is outdated and prohibiting the donation of life insurance was not the intent of the legislator. As a result, the regulators have used a lot of flexibility in their interpretation and application of the law by selectively applying it. Bill 177 will change this. This provision written is the 1920s cannot be considered to be outdated since it is added to the Insurance Act of Saskatchewan. From a legal point of view, it is like this provision was written in 2015. Since the inclusion of this provision in Bill 177 is the result of a trilateral agreement, it would also make this provision current in the Insurance Act of British Columbia and Alberta. Therefore after Bill 177 is passed, the regulators will have no choice but to apply the law as it is written.
It is still possible that regulators would choose continue to selectively apply the law and this provision since they have done this for 40 years. Who would complain? Well someone could in fact complain and the legal consequences would be disastrous for the charity which would have no other choices to recover its damages by suing the government for being derelict in its duty to apply the law.
The trafficking provision and civil lawsuit
This is where this trafficking provision could have the most impact making the donation of life insurance, resulting from a solicitation from a charity, reversible. Imagine this situation. John Smith is approached by FavoriteCharity for a charitable donation and is informed that he could donate his life insurance policy. At the time John Smith is less than happy with his children and decides that his life policy would be better used as a charitable donation. The donation takes place and a change of ownership is made in favor of FavoriteCharity without the knowledge of the children. One month later John Smith dies and the children are left with a barren estate. They decide to attack the donation by suing the charity. Looking at the Insurance Act they become aware of the trafficking provision and therefore ask the justice court to render this donation illegal since the charity was trading in life insurance which is a prohibited practice. What would the judge decide? If the judge was to decide in favor of the estate, FavoriteCharity would have no other choices to sue the government. In fact the estate of John Smith would probably have included the government as a defendant since this charitable transaction happened out of the unwillingness of the regulator to apply the law.
The question is: do we this to happen possibly jeopardizing the financial plans and donations of many Canadians or should Saskatchewan update this provision written in the 1920s prior passing Bill 177? In the end, laws should never be voted on the assumption that they will be selectively applied? This is not how our legal system works. However it seems most people in the insurance industry and government have simply forgotten this fact.
I’ve also wondered why charities are the exception to the trafficking provisions and who would win if there was a battle. I came down on the side of charities with the conclusion that if the scenario you present were to occur, the existing provision with revenue Canada that specifically allows life policies as charitable gifts would prevail as an exception over the trafficking provisions.
Of course we’d need to see how this would play out with the lawyers but the primary reason I think it would go in favour of charities is that the trafficking provisions appear to be primarily intended to prevent the conversion of existing life policy benefits into tax free investments for the benefit of 3rd parties who are outside of the original insurance contracts. And all that that entails.
Put another way, ‘trafficking’ in life policies creates problems for the CRA and provincial revenue ministries whereas gifts of life policies to charities (within the confines of strict gifting rules) does not.
Gifting life insurance policies is also a really tax-smart way for individuals and the private sector to help finance the social sector by leveraging small investments into gifts which can become massive which in turn helps to alleviate other political financial pressures but that’s a discussion for another day.
Jack you are sadly wrong. The constitutional authority for the federal income tax act is found in section 91 paragraph 3 of the Constitution Act, 1867, which assigns to the federal Parliament only the power over the raising of Money by taxing income. The Income Tax Act has absolutely no power over property law which is in fact an area of provincial jurisdiction. The ITA defines the taxable consequences and benefits of a charitable donation and also legislate Charities’ right to issue tax receipt.Please note again any owner can donate a policy or sell a policy to a third party. If the transaction is initiated by the policy owner this cannot be considered trafficking as their are no restrictions as to their right to enjoy the property of their life insurance in any provinces. However if any third party other than insurers solicits the transfer of a policy, this falls under the trafficking provision including charities. And again in provinces such as Ontario where this provision always existed, i don’t consider this an issue because customs can be a source of law and therefore customs indicate that charities are excluded from the application of this prohibition. However such customs never existed in Saskatchewan and the law would have to apply verbatim…
Donations of life policies to charities aren’t about to threaten our tax collector’s base of revenue so it’s unfortunate that Saskatchewan doesn’t have the custom of allowing charities to solicit for life insurance as is the case in other provinces such as here in Ontario. Particularly given that as a province Saskatchewan is so well known for it’s generousity. This sounds like it could trouble in the making as you suggest and should be addressed even if it’s a remote possibility. Perhaps a quick email to your local MPP is in order?
As you mention, life policies themselves aren’t federal jurisdiction however, the tax treatment of dividends and other income within policies, rules on what is defined as tax-exempt, not tax-exempt etc. and of course such things as the deductibility of the cost of loans taken out to pay premiums etc. are very much in the CRA’s wheelhouse and are subject to scrutiny and change. I’m suggesting that it’s these areas that raise red flags for both the CRA and provincial ministries of revenue when trafficking in policies and that these areas are non-issues when insurance policies are made charitable gifts under the current rules.
Jack, i don’t understand why you would think that CRA has any interest in the trading or selling of life insurance policies. Have you ever seen a communication of CRA warning Canadians against viatical settlements for example? I would be surprised because this is not the responsibility of CRA. Their only responsibility is to collect taxes. As for Saskatchewan, as I stated they never had the trafficking provision in their Insurance Act. So they could not develop the custom of ignoring a provision which did not exist… and don’t worry I am in touch with Saskatchewan MLA and there is now a lot of opposition to Bill 177. Finally the risk is not that life insurance donation be prohibited. The risk is to have a member of a family impoverished from a donation suing for the cancellation of the donation on the basis that the charity was engaged in trafficking when it procured the change of ownership of the life insurance policy for itself..
I agree. As I mentioned, the CRA is unlikely to have an interest in the trading or selling of insurance policies. In fact, their interest simply lies with the taxable results of a select few of these and other related transactions that are now considered to be rogue in nature. To that end I’m sure you’ve also seen or heard that some of these schemes have been deemed as avoiding taxation and as such been unceremoniously wound down.
It’s also good to hear that you’re personally engaged in challenging the oversight of this proposed bill. The owner of a gifted life policy shouldn’t need to be concerned about his or her charitable wishes being challenged. Hopefully you have a wise MLA! Good Luck.
I am just reading this Blog for the first time (as far as I can remember) so here are some updates.
Firstly the following appeared in March 2016
Thanks for talking to me about your experiences with life insurance donations. The resulting story is here: http://www.advisor.ca/news/industry-news/advisor-ca-exclusive-investigation-reveals-donation-grey-area-202292
Your quotes appear in the section about the challenges of transferring life insurance ownership: http://www.advisor.ca/news/industry-news/advisor-ca-exclusive-investigation-reveals-donation-grey-area-202292/2
Appreciate your participation.
Then in November 2016 Melissa updated her article which I then forwarded to the SK Regulator for their Comments
You may be interested in this follow-up article last week from Melissa Shin in
http://www.advisor.ca/news/industry-news/investigated-charity-receives-fsco-warning-letter-plans-to-relocate-to-saskatchewan-221099 and we would be interested whether at this stage you would have any concerns?
This is their contact person and I don’t think there was any intention of preventing LifePoint Canada or any other Charities from soliciting for “unwanted” life policies in SK when they “modernized” their Insurance Act.
We will find out in 2017 when they introduce their Regulations to make the new Act operative.
Janette L. Seibel
Financial and Consumer Affairs Authority
Phone: (306) 787-2953
Fax: (306) 798-4425