All About Estates

Returning a gift after 36 years

What’s a charity to do when a donor asks for a gift to be returned?  As my fellow blogger Derek de Gannes recently reported, CRA provided a technical interpretation in response to a charity inquiry relating to life insurance policy donated in 1981.

The gift was intended for a discontinued program and now the donor wants his policy back. Returning the donation may be “regarded as making a gift to a non-qualified donee or providing an undue benefit, which are a contravention of the Act and could result in sanctions that include revocation of registered status.”  This estate donation scenario raises a number of planning, legal and practical issues for charities and donors.

1.  s.118.1(26).

CRA notes that s.118.1(26), which was introduced in 2011, enables charities to return gifts to donors if the tax receipt is reversed.  There are a few problems in this case.  First, the law was implemented after the donation. Second, the three-year reassessment period is long past.  Third, CRA doesn’t have returns from 36 years ago, or even 15.  For charities, it is useful to remember that s.118.1(26) is likely applicable only within three years of a donation date.

2. Gift to non-qualified donee.

A gift by a charity to a non-qualified donee is prohibited.  Both because it is in contravention of the Act, but also because the charity has an obligation to manage its property for its charitable purposes.  The first restriction is in the Act and the second in trust law.

3. Conflict of Laws.

Charities often face a conflict of laws: Income Tax Act v. trust law.   Although CRA was asked to arbitrate by the charity, perhaps out of fear of its charitable status, the Act actually has no authority over the legal status of the gift.  The donation is irrevocable; it can’t be undone by the administrator of the tax system. CRA helpfully suggests the gift may have a failed condition subsequent – and hence was never completed – but the Agency is entering a legal territory that is beyond its purview. The charity has a practical dilemma.  Should it respect the Act because CRA can deregister it, or does it respect trust law, which has no teeth in this context?

4. Insurance Donations.

In this case, the property donated was an insurance policy. There is no receipt for a donation of a new insurance policy, although subsequent premium payments may be receipted.  CRA didn’t comment on this wrinkle.  It’s possible the donor paid premiums for ten or more years.  If the facts were different, could the policy and the cash surrender value be returned? Or only the premiums? What’s the current fair market value of the policy after 36 years?

5. Changing priorities

Priorities change at charities, but an irrevocable gift designation cannot be altered without a trip to court for cy prés.  A structural weakness of insurance policy donations is time and inflexibility, which can be addressed through good planning.  Charities should ensure policies are documented with a deed of gift with a “right to vary purpose” clause.  Donors should consider using an intermediary charity like Aqueduct Foundation to enable future change of designation or even recipient charities.

I suspect CRA’s non-answer was unhelpful to the charity. I also suspect the charity only asked the question to get out a sticky donor relations issue. Generally, charities should simply inform donors that gifts are irrevocable.  It’s a basic principle worth repeating.

About Malcolm Burrows

Malcolm is a philanthropic advisor with 25+ years of experience. He is head, philanthropic advisory services at Scotia Wealth Management and founder of Aqueduct Foundation. malcolm.burrows@scotiawealth.com

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