8 February 2001 Internal T.I. 2000-0048887 - Annuities - Beneficiary Designations

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Where an individual designates a charity as the beneficiary of the individual's annuity, would the payout by the issuer on the death of the individual constitute a gift for income tax purposes?

Position:

No, under the current income tax legislation. Possibly, under draft subsections 118.1(5.1) and (5.2).

Reasons:

Since the amount is paid to fulfill a legal obligation of the issuer, the payment is not a gift by either the deceased or the estate for income tax purposes. However, if the conditions set out in draft subsection 118.1(5.1) are met, draft subsection 118.1(5.2) will apply to deem the payment to be a gift made by the deceased immediately before death.

			February 8, 2001

	Charities Directorate	Income Tax Rulings
	Carl Juneau	  Directorate
	Director 	J. Leigh
	Policy and Communications Division	952-1505
			2000-004888

Annuities - Direct Beneficiary Designations

This is in response to your memorandum of September 26, 2000 requesting our views on whether an amount transferred to a charity named as the beneficiary of an annuity is a gift for income tax purposes.

You have described a situation where an individual transferred $XXXXXXXXXX to a registered charity in XXXXXXXXXX and required the charity to purchase from a licensed life insurance company an annuity for the life of the individual. The annuity contract provided for monthly payments of $XXXXXXXXXX guaranteed for a period of ten years. The charity was designated as the beneficiary of the annuity in the event of the individual's death during the ten-year period. The individual died in XXXXXXXXXX and the charity received a payout of $XXXXXXXXXX.

Any amount paid by an issuer of an annuity to a charity as a consequence of a direct beneficiary designation would not be considered a gift to the charity for income tax purposes by either the deceased or the estate. Rather, the amount paid in these circumstances is the fulfillment of a legal obligation on the part of the issuer of the annuity.

As you are aware, the February 28, 2000 Federal Budget included a proposal to extend the charitable donations tax credit to transfers of RRSP, RRIF and insurance proceeds that are made as a consequence of direct beneficiary designations. In the draft legislation released on December 21, 2000, draft subsection 118.1(5.1) of the Act sets out all the conditions that must be satisfied in respect of a transfer of proceeds under a life insurance policy. To the extent that these conditions are satisfied, draft paragraph 118.1(5.2)(a) of the Act will apply to deem the transfer of money to a qualified donee to be a gift made by the individual immediately before the individual's death to the qualified donee for the purposes of section 118.1 of the Act. Draft paragraph 118.1(5.2)(b) of the Act will deem the fair market value of that gift to be the fair market value, at the time of the individual's death, of the right to the transfer (determined without reference to any risk of default with regard to obligations of the insurer). If these draft amendments are enacted as proposed, they will apply to deaths that occur after 1998.

Since the term "life insurance policy" is defined in subsections 248(1) and 138(12) of the Act to include an annuity contract, draft subsections 118.1(5.1) and (5.2) of the Act will also apply to transfers made as a consequence of direct beneficiary designations made in annuity contracts.

In the present situation, we understand that the individual was the policyholder of the annuity contract. If the annuity contract was a "life insurance policy in Canada" as defined in subsections 248(1) and 138(12) of the Act, all the conditions set out in draft subsection 118.1(5.1) of the Act would appear to have been met. Accordingly, it is our view that draft subsection 118.1(5.2) of the Act would apply to permit a charitable donations tax credit to be claimed on the individual's terminal return in respect of the payout to the registered charity.

At this time we are not aware as to whether the draft legislation will be enacted as proposed.

We hope that our comments are of assistance.

F. Lee Workman
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate