22 September 1999 External T.I. 9913645 - REPORTING REQUIREMENTS, RCA OR SDA

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: How are payments to an employee by an insurance company under an annuity contract acquired by the employee's employer to be reported for purposes of the Act?

Position: Depends on the facts; could be an SDA or an RCA.

Reasons: In order to comment on the reporting requirements, we would have to review all of the facts to determine what the arrangement would be for purposes of the Act.

Xxxxxxxxxx 991364
M. P. Sarazin
Attention: xxxxxxxxxx

September 22, 1999

Dear Sir\Madam:

Re: Taxation of Annuity Payments

This is in reply to your facsimile dated May 18, 1999, wherein you requested a ruling in respect of the reporting of the annuity payments that are being made under an annuity contract acquired by XXXXXXXXXX. (the "Company") for the benefit of an individual from XXXXXXXXXX (the "Issuer") in XXXXXXXXXX.

Under the terms of the annuity contract, an individual was named as the annuitant and the Company was the applicant. In exchange for a single payment of $XXXXXXXXXX by the Company, the Issuer agreed to make XXXXXXXXXX annual "term certain guaranteed" payments of $XXXXXXXXXX. The first payment was made to the annuitant on XXXXXXXXXX. The Company and the Issuer would like to know how to report the annuity payments.

Comments

We would have to review all of the relevant facts in order to determine how an amount should be reported for purposes of the Income Tax Act (the "Act"). In the above situation, we understand that the annuitant is a former employee of the Company and we assume the acquisition of the annuity contract related to the services provided by the employee. If this is in fact the case, then the acquisition of the annuity by the Company may constitute either a salary deferral arrangement or a retirement compensation arrangement for purposes of the Act. An arrangement could constitute employee benefit plan for purposes of the Act. Since this is not likely the case in your situation, we will refer you to Interpretation Bulletin IT-500 for the Department's general views regarding employee benefit plans. The expressions "salary deferral arrangement", "retirement compensation arrangement" and "employee benefit plan" have the meaning assigned by subsection 248(1) of the Act.

Salary Deferral Arrangement

A salary deferral arrangement is defined to include a plan or arrangement, whether funded or not, under which any person has a right in a taxation year to receive an amount after the year where it is reasonable to consider that one of the main purposes for the creation or existence of the right is to postpone tax payable under the Act by the taxpayer in respect of an amount that is, or is on account or in lieu of salary or wages of the taxpayer for services rendered by the taxpayer in the year or a preceding taxation year other than certain excluded arrangements.

Where the facts support a conclusion that the arrangement constitutes a salary deferral arrangement for purposes of the Act, an amount equal to the deferred amount is deemed, pursuant to subsection 6(11) of the Act, to have been received by the taxpayer as a benefit in the year. Consequently, in XXXXXXXXXX, the employee would have had an income inclusion for the deferred amount and the Company would have been able to claim a deduction for such amount. The benefit deemed to have been received under subsection 6(11) of the Act would have been reported on the employee's T4 in XXXXXXXXXX.

Retirement Compensation Arrangement

A retirement compensation arrangement ("RCA") is defined to include a plan or arrangement under which contributions are made by an employer or former employer of a taxpayer to another person (referred to as a custodian) in connection with benefits that are to be or may be received or enjoyed by any person on, after or in contemplation of any substantial change in the services rendered by the taxpayer, the retirement of the taxpayer or the loss of an office or employment of the taxpayer other than certain excluded arrangements (including SDAs ).

Generally, contributions to an RCA, and earnings in the plan, are subject to a special 50% refundable tax. The tax may be refunded as a consequence of distributions being made out of the RCA. The enclosed Retirement Compensation Arrangement guide will provide you with general information regarding the rules relating to RCAs, including any withholding, remitting and reporting requirements. Page 6 of the guide discusses life insurance policies, including annuities, qualifying as an RCA.

In order to facilitate the reporting of annuity payments, the Company has asked the Issuer to pay the annuity payments to the Company instead of the Annuitant and the Company would, in turn, pay the amount received to the Annuitant. We are uncertain as to whether the terms of the annuity contract would allow this change. Consequently, you should review the terms of the contract with the Issuer. In addition, you would still have to determine whether a SDA, RCA or employee benefit plan was originally created under the arrangement.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and Interpretations Directorate