Gifts of life insurance

25 août 2020 | Susan M. Manwaring, Sarah Fitzpatrick

( Disponible en anglais seulement )

Gifts of life insurance have long been one of the recognized ways in which donors can make gifts to charities. Recent communications from the BC Financial Services Authority (“BCFSA”) brought into question the validity of these types of gifts. Much to the sector’s surprise, the BCFSA appeared to take the position that donations of insurance policies constituted trading or trafficking in policies by charities and was offside the anti-trafficking provisions of the BC Insurance Act. In response to concerns raised by the sector, the BCFSA released an information bulletin, INS-20-003, Charitable Donation of Life Insurance Policies in British Columbia (the “Bulletin”), setting out its position on donations of life insurance policies.

This article provides an overview of BCFSA’s position.

Background

Donors can use life insurance to facilitate charitable giving in several ways. Donors can give a policy, designate a charity as a beneficiary of an existing policy, pay premium payments on a policy with a charitable beneficiary, or make an immediate charitable gift and obtain a life insurance policy to replace the gift in their estate.

Provincial legislation, such as the BC Insurance Act, regulates insurance within the province. The BCFSA is appointed as the regulator within BC. This regulation includes the content of insurance contracts, assignment of policies and the conduct of insurance advisors and brokers. Most provincial legislation prohibits any person who is not an insurer or authorized agent of an insurer from trading or trafficking in insurance policies. The reason is to protect policyholders, particularly vulnerable individuals, from being exploited by harmful practices.

The anti-trafficking provision in section 152 of the BC Insurance Act states:

Any person, other than an insurer or its authorized agent, who advertises, or holds himself or herself out, as a purchaser of life insurance policies or of benefits under them, or who traffics or trades in life insurance policies for the purpose of procuring the sale, surrender, transfer, assignment, pledge or hypothecation of them to himself or herself or any person, commits an offence against this Act.

The BC Information Bulletin

In the Bulletin, the BCFSA attempts to clarify its position on the application of the anti-trafficking provision to donations of life insurance policies to charities.

The Bulletin states that the BCFSA “is of the view that the solicitation by bona fide charities of donations of life insurance policies or benefits is generally not prohibited.” The BCFSA further states that the anti-trafficking provision does not prohibit the following types of donations made by an insured directly to a bona fide charitable organization:

i. takes out a new policy in the name of a charity and receives a tax receipt for the premiums the donor pays;

ii. names the charity as the beneficiary of an existing policy, the charity receives the benefits at time of death, and the estate receives a tax receipt; and

iii. transfers ownership of an existing policy to the charity and receive a tax receipt for the cash value of the policy.

The Bulletin confirms that typical charitable gifts of insurance are permitted. However, it has raised a number of additional questions, including:

  1. Bona Fide: The BCFSA appears to require that a charity must be a “bona fide charity” in order to not contravene the BC Insurance Act. There is no definition of bona fide recognized at law. In Latin, the term “bona fide” means “made in good faith,” “without fraud or deceit,” “sincere” or “genuine.” It is our view that, as the purpose of the anti-trafficking provisions is to provide consumer protection, BCFSA’s position is that a “bona fide charity” is one that seeks and accepts donations for the purpose of furthering its charitable objects and for no other reason.
  2. Donation Made by Insured Directly: The Bulletin also states that a donation must be made by an insured directly to the bona fide charity. This also raises unanswered questions. Presumably, the BCFSA does not mean to restrict the person who can make a charitable donation to the person who makes a contract with an insurer (“the insured”), but will also allow the policy owner to donate a policy where the insured and the policy owner are different persons. It is not clear what is meant by “directly” either. We believe that this may mean, in light of recent guidance from the Insurance Council of BC, that insurance advisors can only be involved if they are acting as the authorized agent of the insurer or as an advisor to the donor, rather than as a middleman on behalf of the charity.
  3. Charitable Donation Receipts: The Bulletin suggests that the receipt should be issued for the cash surrender value of the policy.  This is not consistent with the Canada Revenue Agency guidance on how to issue donation receipts under the Income Tax Act (Canada), and we recommend that charities continue to follow the CRA guidance when determining the eligible amount of the gift for receipting purposes.
  4. Opened Ended Interpretation: The Bulletin states that BCFSA will review and investigate any practices that may involve vulnerable individuals or are otherwise suggestive of practices harmful to the public. There is no direction in the Bulletin about when a donor may be vulnerable or what practices are harmful. In response to requests for clarification from the sector, BCFSA advised that an example of a harmful practice is one where artificial charities exploit vulnerable donors, leaving the donor uninsured and at risk of being denied insurance in the future.

While the BCFSA has confirmed that typical gifts of life insurance are acceptable, it has left open how broadly it can interpret the anti-trafficking provisions. We expect that BCFSA is providing itself with a tool that it can use where charities have relationships with insurance advisors where they stand to gain, engage in aggressive donation practices or are merely conduits for persons who are looking to profit from charitable donations.

Where does this leave us?  Generally, we conclude that with the Bulletin, BCFSA is signaling that traditional gifts of life insurance policies continue to be okay.  That said, the BCFSA is clearly indicating that if it sees trading in policies or activities that appear to put vulnerable persons at risk, it will rely on the provisions to step in.  Nationally, the other provinces and territories have similar anti-trafficking provisions in their insurance legislation. At this time, we are not aware of any of the insurance regulators in the other jurisdictions taking a similar position to BCFSA; but, given that this legislation is seen to be consumer protection legislation, charities in other provinces should anticipate a similar approach from their regulator if the regulators are of the view that a particular practice is exposing vulnerable persons to risk.

We recommend that charities consider how they solicit gifts of life insurance policies and avoid solicitation practices that are aggressive or exploitative, as it is possible that the other provinces will use similar enforcement regimes.

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