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:
Whether income from annuity paid out of US Charitable Remainder Trust to Canadian resident is subject to taxation in Canada.
Position:
Yes, it is subject to tax by virtue of subsection 12.2(1), however, depending on the particular facts, the amount to be included under subsection 12.2(1) in the initial years of the annuity may be nil.
Reasons: Wording of subsection 12.2(1) and regulations 304 to 307
February 4, 2000
WINDSOR TSO HEADQUARTERS
Alison Campbell
Attention: Paul Shurman
1999-000685
Income From a US Charitable Remainder Trust
This is in reply to your request to the Charities Division dated April 21, 1999 concerning whether income received during 1997 from a US Charitable Remainder Trust (the "Trust") is taxable in Canada. We apologize for the delay in responding to your request which was forwarded to us on October 1, 1999.
The information provided to us did not indicate whether the taxpayer was a Canadian resident for income tax purposes at the time in 1997 when the payment from the Trust was received. We have assumed that the taxpayer was resident in Canada in the 1997 taxation year.
Taxation Under the Act
In general, a taxpayer is subject to taxation on their income from worldwide sources while they are resident in Canada. The fact that income is earned from assets located in another country, or is received in a bank account outside of Canada, does not preclude the income from taxation in Canada. Part I of the Act provides for amounts to be included and deducted in computing income subject to taxation in Canada.
An annuity is defined in subsection 248(1) for the purposes of the Act to "include an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise". Based on the information you have provided to us, the payments received from the Trust would be an annuity for the purposes of the Act.
An annuity is generally subject to taxation by virtue of subsection 12.2(1) which requires an amount to be included in the taxpayer's income on an annual basis. There are some annuity contracts, referred to a prescribed annuity contracts ("PAC's"), which are subject to taxation under paragraph 56(1)(d) rather than subsection 12.2(1). PAC's are defined in regulation 304, and upon reviewing the definition, we have determined that the annuity contract owned by the taxpayer in question, is not a PAC. Therefore, subsection 12.2(1) is applicable in this circumstance.
Pursuant to subsection 12.2(1), on the anniversary day of the annuity contract each year, a computation of the excess of the amount of the accumulating fund of the contract over the adjusted cost base of the contract is done. The excess, if any, is included in the income of the taxpayer for the year which includes the anniversary day. The accumulating fund is an amount prescribed in regulation 307 and is essentially the greater of the cash surrender value of the contract, and the present value of all future payouts under the policy net of all future premiums to be paid under the policy. In some situations an annuity may be purchased by making an up-front cash payment, and the age and life expectancy of the annuitant may be such that it is reasonable to conclude that the amount of annuity payments to be received, will be less than the amount paid for the contract. In these cases, the adjusted cost base will generally be more than the accumulating fund on each anniversary date. Essentially, the taxpayer is considered to be only receiving re-payments of capital up until the time that the payments made under the policy exceed the purchase price of the annuity.
Conclusion
Based on the information that has been provided to us, XXXXXXXXXX would have been subject to taxation under subsection 12.2(1) in the 1997 taxation year, however the amount of the income inclusion would have been nil. This is because the accumulating fund (i.e. the present value of the stream of approximately $XXXXXXXXXX per quarter for the XXXXXXXXXX year life expectancy of the taxpayer) is less than the amount paid by the taxpayer to purchase the annuity, which would be the adjusted cost base of the policy in 1997. In fact, it would appear that until at least the 2003 taxation year, the accumulating fund would be less than the adjusted cost base of the contract and the income inclusion under subsection 12.2(1) would be nil. Should XXXXXXXXXX be a resident of Canada in the 2003 taxation year or later, it is possible than a positive amount would result in computing the income inclusion under subsection 12.2(1) and tax would be payable by XXXXXXXXXX on the income at that time.
We trust that our comments will be of assistance to you.
Manager
Financial Industries Division
Income Tax Rulings Directorate
cc: Charities Division
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