Mr X dies owning the shares of Opco. Opco receives a large payout under a life policy it held on X’s life. X’s Will provides for a gift to a charity. How does the estate make the gift using the life insurance proceeds so that the resulting donation tax credit can be claimed in X’s terminal return?
Opco can’t simply pay a capital dividend to X’s estate that it then uses to make the gift. The allocation to the terminal return can only be made in respect of gifts made using property the estate acquired “as a consequence of death” or “property that was substituted for that property” (Income Tax Act (Canada) subsection 118.1(5)). The author suggests the following planning solutions:
- Track the capital dividend in a separate account and use other funds of the estate to make the gift.
- The estate redeems its shares of Opco, and an election is made to treat the resulting deemed dividend as a capital dividend. The CRA accepts that the share redemption proceeds are substituted property.
- The estate undertakes a pipeline. The note is repaid using the insurance proceeds. The corporation’s capital dividend account (CDA) is preserved. The pipeline note and the insurance proceeds used to repay it “are presumably substituted properties under subsections 118.1(5) and 248(5).”
- The estate gifts the Opco shares to the charity, and Opco redeems the shares using the insurance proceeds. No election is made in respect of the resulting deemed dividend. The Opco CDA is preserved.
Steven McLeod “Post Mortem Charitable Giving with Corporate-Owned Life Insurance” Tax for the Owner-Manager 21:2 (April 2021)
