7 October 1996 External T.I. 9627005 - TRANSFER OF OWNERSHIP OF A "PAC"

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:

Transfer of rights under an "prescribed annuity contract" before death of the original holder to a spouse. Is there a disposition and how does taxation of annuity occur? Can attribution rules apply?

Position:

Such a transfer would result in there being a disposition of the annuity contract. Attribution rules could apply. However, the particular annuity would not have qualified as a PAC in the first place due to clause 304(1)(c)(iv)(D) of the Regulations.

Reasons:

The law.

XXXXXXXXXX							962700

Attention: XXXXXXXXXX

October 7, 1996

Dear Sirs:

Re: Transfer of Ownership of a Prescribed Annuity Contract

This is in reply to your letter dated July 30, 1996, concerning the income tax consequences under the Income Tax Act (the "Act") where the ownership of an annuity contract that your describe as a "prescribed annuity contract" ("PAC") is transferred to the original owner's spouse during the owner's lifetime. You ask whether such a transfer results in the disposition of the PAC and whether the income attribution rules could apply.

The definition of PAC is found in section 304 of the Regulations to the Act. One of the conditions which must be met for an annuity contract to qualify as a PAC is found in clause 304(1)(c)(iv)(D) of the Regulations. That condition requires that a holder's rights in the annuity contract not be disposed of otherwise than on the holder's death. Accordingly, by virtue of this requirement, your assumption that a "PAC" can be disposed of in the manner set out in your letter is not correct since that particular annuity contract would not have qualified as a PAC in the first place.

Where an annuity contract is disposed of subsection 148(1) of the Act provides for the inclusion in the holder's income of the excess of the proceeds of disposition over the adjusted cost base of the annuity contract. Where a non-PAC annuity contract is last acquired after 1989, subsection 12.2(1) of the Act requires that an annual income accrual must be included in the holder's income for the taxation year. This annual income accrual in respect of an annuity contract is the amount, if any, by which the "accumulating fund", as determined in prescribed manner pursuant to section 307 of the Regulations, on any "anniversary day", as defined in subsection 12.2(11) of the Act, exceeds the "adjusted cost basis", as defined in subsection 148(9) of the Act.

It is also our view that income from any annuity contract is income from property, therefore, depending on the particular facts and circumstances, the various "income attribution rules" set out in the Act, such as section 74.1 of the Act, could have application.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch