People buy life insurance policies for a number of reasons. These reasons may include to fund potential business obligations or to protect a young family. In either case, the purpose of the policy may disappear if the individual outlives the need for which they purchased the insurance in the first place. In the case of the previous examples, this may occur in situations where the business is sold or the children are grown while the insurer is still alive. Rather than simply cancelling the policy the owner of the policy may consider donating it to a charity, even though the individual may still wish to fund the premiums. Indeed, for many years this has been a common tax planning tool. Not only does the donation of life insurance policies serve as a convenient way to fund charitable bequests, there are a number of other tax planning strategies that involve the donation of life insurance.
For many years there has been some question about the view of the various insurance acts across the provinces in regards to the donation of life insurance. For example, in the Insurance Act of Ontario there is a provision that prohibits the trafficking of life insurance policies. This is generally understood as the donation of the odd policy here and there to charities, even if solicited, would not constitute trafficking, but there does not seem to be a bright line as to when the line is crossed. And indeed, this understanding formed the basis of charity campaigns to attract the donation of life insurance to them.
Now, however, the Financial Institutions Commission of British Columbia has issued a letter that completely upends the common understanding of the relevant section of the Insurance Act in British Columbia. As section 152 of the British Columbia Insurance Act has analogs across the country this letter (written to a specific charity) has the power to potentially to create a national precedent and for that matter is of extraordinary interest.
The letter, signed by an investigator in the market conduct team, completely forbids the idea that a charity may solicit for life insurance policies or accept any life insurance policies as donations from BC residents. Fundamentally, this means that the term trafficking includes the solicitation of life insurance even if no policies are ever actually donated or if one policy is given to a charity.
The implications of such an opinion by FICOM are disturbing and wide-ranging. Given the size of the potential impact, we are surprised that a letter of this sort would be sent to one specific charity and signed by what we believe is a relatively low-level official. We hope that this letter may simply be the overstepping of authority by an individual not fully versed in the consequences of such a position. Further, we understand that some members of the British Columbia bar have reached out to FICOM in the hopes of eliciting some sort of qualification. We hope that the clarity is forthcoming and will continue to monitor the situation for the benefit of readers.
Adam Aptowitzer is the managing partner at Drache Aptowitzer LLP. He practices in the area of Charity Law and Tax Litigation. He can be reached at aaptowitzer@drache.ca.