What happens to any policy donated to a charity regarding tax implications?

When a life insurance policy is donated to a charity, it has specific tax implications that must be considered. If the fair market value (FMV) of the policy exceeds the adjusted cost base (ACB), the donor is liable for capital gains tax on the difference. This is because the Canadian tax system considers the donation of a policy as the disposition of an asset, which can trigger capital gains tax.

In this scenario, the donor typically receives a tax credit equivalent to the FMV of the policy at the time of the donation. However, if the FMV is greater than the ACB, it indicates that the policy has appreciated in value, and thus, the donor has realized a capital gain that needs to be taxed.

This response emphasizes the importance of understanding how the different aspects of tax law apply to charitable donations of life insurance policies, incorporating both the potential benefits of a tax credit and the obligations that arise regarding capital gains.