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: Taxation of indexed annuity contract
Position: Depends upon the particular annuity contract
Reasons:
XXXXXXXXXX 2001 - 007235
April 12, 2001
Dear XXXXXXXXXX:
Re. Indexed Annuity Contracts
This is in reply to your letter dated February 14, 2001 wherein you requested our views as to the taxation of certain indexed annuity contracts.
The particular circumstances described in your letter appear to be a factual situation involving specific taxpayers and specific annuity contracts. As explained in Information Circular 70-6R4 dated January 29, 2001 (a copy of which is attached), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an income tax ruling. Further, the determination of the tax consequences of an annuity contract can only be made after detailed consideration of the contract itself and the surrounding circumstances. Under the Income Tax Act Regulations, the issuer of the annuity contract is required to report on an information return the amount an individual must include in income for a taxation year in respect of the contract. The calculation of this amount requires information that is available only from the accounts of the issuer and, as such, you should obtain the specific details about the taxability of amounts related to annuity contracts from the issuer of the contracts. According to paragraph 15(g) of the Information Circular it is not the Directorate's practice to review tax-related calculations including determining the taxable portion of annuity payments. However, we can offer the following general comments that may be of assistance.
The tax consequences of a particular annuity contract are dependent upon a number of circumstances including whether the contract was last acquired before 1990 or whether it may be considered a prescribed annuity contract ("PAC") within the meaning of section 304 of the Income Tax Act Regulations. It would seem from your description of the annuity contracts you are considering that neither of these situations apply: you have yet to acquire the annuity contract and because it is indexed the payments will not be equal as required by subparagraph 304(1)(iv)(A) of the Regulations.
Assuming that an annuity contract is newly acquired and it is not a PAC, it is subject to the accrual rules in subsections 12.2(1), 12.2(3), and 12.2(4) of the Income Tax Act, which are detailed in Interpretation Bulletin IT-87R2 (February 15, 1996), a copy of which is enclosed.
Pursuant to subsection 12.2(1) of the Act, each year, on the anniversary day of the annuity contract, 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. The accumulating fund is an amount prescribed in section 307 of the Regulations 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. Usually, the accrued income during the payout period is highest in the earliest years and decreases in later years resulting in variations in the amount related to the annuity contract that is taxable.
We hope that our comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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