William John Speerstra v. Minister of National Revenue, [1973] CTC 179, 73 DTC 5162

Sheppard, DJ:—The issue raises the right of the appellant to deduct as capital from the payments of annuity made in the taxation years 1966 and 1967, by reason of the instalment refund guarantee clause in the policies in question under which the annuities were paid or under paragraph 300(2)(d) of the Regulations under the Income Tax Act.

The facts are:

Margaret Elizabeth Whittaker, then aged 78, entered into a policy with the Canada Life Assurance Company bearing date August 2, 1963 whereby for a single payment of $31,110 on October 1, 1963 by her to the assurance company, the company agreed to pay her $300 per month for her life, commencing August 15, 1963, and thereafter under an instalment refund guarantee clause. Also, Mrs Whittaker when aged 79, entered into a further policy with the Canada Life Assurance Company bearing date March 18, 1964, whereby for a single payment of $9,857.60 made by her to the assurance company the company agreed to pay her $100 per month for life commencing April 11, 1964, and thereafter under a like instalment refund guarantee clause.

The instalment refund guarantee clause in each policy read as follows:

If, at the death of the ******* annuitant, the total amount of the annuity payments which have fallen due is less than the single stipulated payment to the Company, the annuity shall continue until the total amount of all annuity payments which have fallen due equals the said single stipulated payment, the final annuity payment being reduced if necessary. Such payments shall be paid, as they respectively fall due, to WILLIAM JOHN SPEERSTRA, the annuitant’s son, if living, otherwise to the estate of the last decedent of the annuitant and the annuitant’s said son.

Mrs Whittaker died on July 2, 1964, and the appellant, her son, received in each of the taxation years 1966 and 1967 the sum of $3,600 under the first policy and $1,200 under the second policy pursuant to the instalment refund guarantee clause. These payments were within the meaning of paragraph 6(1)(aa) of the Income Tax Act to be included in the appellant’s income in the years in which they were received, subject to the deduction under paragraph 11(1)(k) of the capital element of the annuity payments which capital element is to be determined under section 300 of the Regulations. The Minister assessed the appellant’s income for the said years by deducting as capital a portion of the payments expected during the life of Mrs Whittaker as determined by paragraphs 30Ù(1)(b) and 300(2)(a) of the Regulations. (See paragraphs 3 to 6 inclusive of the agreed facts.)

The appellant contends that the payments received by him for the taxation years 1966 and 1967 were capital (a) being under the instalment refund guarantee clause of the said policies or (b) by virtue of paragraph 300(2)(d) of the Regulations.

The appellant contends that Mrs Whittaker had received during her life, under the first policy, about eleven payments or $3,300 and under the second policy about three payments or $300; therefore considerably less than the capital she had paid, and under the instalment refund guarantee clause the moneys paid to him (the appellant) during the taxation years being less than the amount paid by Mrs Whittaker for the policies, were therefore capital. That does not follow. The amount paid by Mrs Whittaker being the consideration for the policies has become the property of the assurance company and in return for that consideration the assurance company has promised to pay annuity payments to Mrs Whittaker for her life, then to the appellant under the instalment refund guarantee clause but such annuity payments to the appellant are limited to the amount paid as consideration for the policies. However, that is a limitation of the annuity payments but does not make the annuity payments capital.

In O’Connor v M/VR,'[1943] Ex CR 168; [1943] CTC 255; 2 DTC 637, Thorson, P stated at page 176 [264]:

As Best J said in Winter v Mouseley (1819), 2 B & Aid 802 at p 806: “I have, however, always understood the meaning of an annuity to be where the principal is gone forever, and it is satisfied by periodical payments.”.

And at page 183 [271]:

. Paragraph (b), dealing with contractual annuities, reads: “(b) annuities or other annual payments received under the provisions of any contract, except as in this Act otherwise provided.”

_,. . In a contractual annuity the person who put up the capital and transferred it to the person or company that is charged with the obligation to pay the annuity is ordinarily himself the recipient of the annuity when it becomes payable. His capital has gone but his right to receive the annual payments takes its place. The annuity. under a contract is in a sense the result of an inseparable blending of capital and interest. If it is truly an annuity, it is all taxable within the meaning of section 3(b) notwithstanding the fact that it was made possible by the expenditure of capital and in that sense includes a return of it. If the capital is not clearly distinguishable by reason of the fact that it has disappeared and ceased to exist as such, the whole annuity is dealt with as subject to tax under section 3(b), whatever its original source may have been.

In Sothern-Smith v Clancy, [1941] 1 All ER 111, Sir Wilfrid Greene, MR stated at page 117:

. . . I feel bound to regard the purchase of an annuity of the kind to which I have referred as the purchase of an income, and the whole of the income so purchased as a profit or gain, notwithstanding the way in which the payments are calculated. The sum paid for the annuity has ceased to have any existence, and the fact that, at the end of the annuity period, the recipient will have received an amount equal at least to what he paid I feel bound to treat as irrelevant.

And at page 118:

. . . The sum paid by Sothern has gone once and for all. . . . Sothern purchased an income, and the capital amount which he paid comes into the matter only for the purpose of defining the period during which that income was to be paid. . . . It seems to me that the capital sum did cease to exist once it was paid, and that the so-called guarantee was an undertaking not to refund a capital sum or any part of a capital sum, but to continue annual payments for an ascertainable period.

It follows that the amount paid as consideration for the said policies does not determine what is capital in the hands of the annuitant.

The amounts received by the appellant under each policy during the taxation years as annuity payments would be income within paragraph 6(1)(aa) of the Income Tax Act, which reads as follows:

6. (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year

(aa) amounts received in the year as annuity payments;

Paragraph 11(1)(k) of the Income Tax Act only permits a deduction of capital as determined “in prescribed manner” — and that is pursuant to paragraph 117(1 )(a) determined by Regulation 300.

Further, it appears that paragraph 300(2)(d) of the Regulations is not a determination of the capital sum as required by paragraph 11 (1)(k). Where it applies, paragraph 300(2)(d) of the Regulations only fixes the minimum term during which there is a continuance of the payments under the said policies. There is nothing in paragraph 300(2)(d) of the Regulations which determines any portion of the payments to be capital and therefore this section does not assist the appellant.

The onus is on the appellant. R W S Johnston v MNR, [1948] SCR 486; [1948] CTC 195; 3 DTC 1182, per Rand, J at page 488 [202] and Kellock, J at page 492 [205]. Dezura v MNR, [1947] CTC 375 (Exch); 3 DTC 1101; [1948] SCR 10. Therefore the appellant has not established any error in the assessment by the Minister and the appeal is dismissed. The costs have not been requested.