28 June 2006 External T.I. 2005-0148641E5 - Buying a Life Annuity with a Refund of Premiums

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.

Principal Issues: Whether the new rules in proposed section 60.011 of the Act that apply for purposes of paragraph 60(l) of the Act allow for a discretionary trust to be the annuitant under a life annuity.

Position: Question of fact

Reasons: The rules that apply for life annuities wherein the annuitant is a trust is different for annuities acquired before 2006 and those acquired after 2005. While the fact that a trust has discretion will not, of itself, determine the issue for pre-2006, there are limits to the amount of discretion that a trust may have for annuities acquired after 2005. However, in either case, it is a question of fact whether an annuity satisfies all of the condition in section 60.011 of the Act.

XXXXXXXXXX  						2005-014864
J. Gibbons, CGA
June 28, 2006

Dear XXXXXXXXXX:

Re: Purchasing a Life Annuity with the Proceeds of a "Refund of Premiums"

We are responding to your letter dated August 23, 2005, and facsimile of January 4, 2006, concerning the deduction under paragraph 60(l) of the Income Tax Act (the "Act"). In particular, you wish to know whether such a deduction would be permitted in respect of an annuity acquired with funds received or deemed to have been received by the taxpayer as a "refund of premiums" where an "absolute discretionary Henson style trust," under which the taxpayer is a beneficiary, is named as the annuitant. Your query is predicated on the enactment of the proposed changes to paragraph 60(l) of the Act, as well as proposed new section 60.011 (hereinafter referred to collectively as the "Proposed Changes"), released by the Department of Finance on July 18, 2005.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular IC 70-6R5. Further, as indicated in paragraph 20 of that Information Circular, we do not issue advance income tax rulings on budget resolutions and proposals that are not yet law, or on draft legislation. Nonetheless, we have provided some general comments below, which we hope will be of some assistance to you. However, as stated in paragraph 22 of the Information Circular, this opinion is not binding on the Canada Revenue Agency in respect of any particular situation.

In our view, there is no specific definition of a "Henson type" trust, as referred to in your letter, thus this term may encompass a wide variety of trust structures. Further, whether or not an annuity under which a particular trust is the annuitant is a qualifying trust annuity under the Proposed Changes is a question of fact.

In general terms, paragraph 60(l) of the Act allows an individual to deduct specified amounts of retirement income if the amounts are used to acquire, among other things, certain annuities. In this regard, under the current legislation, an annuity under which a trust is named as the annuitant may be a qualified acquisition for this purpose but only if the individual is the sole person beneficially interested in amounts payable under the annuity and the annuity is for a term not exceeding 18 years minus the age in whole years of the individual at the time the annuity was acquired.

Proposed new subsection 60.011(3) contains provisions, which allow the taxpayer to deduct the purchase price of an annuity under paragraph 60(l) if the annuity is a "qualifying trust annuity" with respect to the taxpayer. Proposed new paragraphs 60.011(2)(a) through (c) describe three types of qualifying trust annuities with respect to a taxpayer, all of which have, as the annuitant thereunder, a trust under which the taxpayer is a beneficiary.

Under proposed new paragraph 60.011(2)(a), a life annuity acquired by a taxpayer after 2005 is a qualifying life annuity if it has as its annuitant a trust that is, at the time of acquisition, a "lifetime benefit trust" with respect to the taxpayer and the estate of a deceased individual. If the annuity has a guaranteed period or is for a fixed term, it must provide for commutation in the event of the death of the taxpayer during the guaranteed period or fixed term. Proposed new subsection 60.011(1) defines a trust to be, at a particular time, a lifetime benefit trust with respect to a taxpayer and the estate of a deceased individual if the following two conditions are met:

• The taxpayer must be, immediately before the death of the deceased individual, a mentally infirm spouse or common-law partner of the deceased individual, or a mentally infirm child or grandchild of the deceased individual who was dependent on the deceased individual by reason of that infirmity.
• The trust must be, at the particular time, a personal trust under which
• no person other than the taxpayer may, during the taxpayer's lifetime, receive or otherwise obtain the use of any of the income of the trust (determined under subsection 108(3) of the Act) or the capital of the trust;
• the trustees are empowered to pay amounts from the trust to the taxpayer; and
• the trustees are required to consider the needs of the taxpayer (including the comfort, care and maintenance of the taxpayer) in determining whether to pay, or not to pay, an amount to the taxpayer.

Under proposed new paragraph 60.011(2)(c), a life annuity acquired by a taxpayer after 2000 and before 2006 is a qualifying life annuity if the annuitant is a trust and the taxpayer is the sole person beneficially interested in amounts payable under the annuity (determined without regard to any right of a person to receive amounts from the trust only on or after the death of the taxpayer). The taxpayer must be infirm at the time of acquisition, and the annuity must be acquired after 2000 and before 2005 in the case of a physically infirm taxpayer, and before 2006, in the case of a mentally infirm taxpayer.

With regards to the application of proposed paragraph 60.011(2)(c) to an annuity acquired in 2005 under which a discretionary trust is named as the annuitant, the fact that the trustees of the trust may have discretion whether or not to make payments to the beneficiary would not, of itself, prevent the annuity from qualifying under this proposed paragraph. However this discretionary trust would have to abide by the other requirements in this paragraph including the requirement that the taxpayer be the sole person beneficially interested in amounts payable under the annuity (without regard to rights arising after the death of the taxpayer). Whether a trust meets these requirements would be a question of fact..

In regard to annuities acquired after 2005 under which the annuitant is a discretionary trust, there are limits to the amount of discretion, if any, that may be accorded to the trustees under the trust agreement in order for a taxpayer to qualify as a qualifying life annuity. As noted above, for annuities acquired after 2005, the trust must qualify as a lifetime benefit trust under proposed new subsection 60.011(1), and, under this definition, the trustees of the trust are required to consider the needs of the taxpayer (which may include his or her comfort, care and maintenance) in determining whether to pay, or not to pay, an amount to the taxpayer. Whether a trust meets this requirement, as well as the other requirements of a lifetime benefit trust, is a question of fact that can only addressed in an advance income tax ruling request. However, as noted above, a ruling cannot be given in respect of proposed legislation.

We trust that these comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch