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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Tax implications of charitable gift annuities issued after December 20, 2002.
Position:
Provided general comments on the taxation of annuity contracts and the application of the draft gifting legislation in determining the eligible amount of the gift.
Reasons: Legislation and draft legislation.
XXXXXXXXXX 2003-000819
R. Maley
October 27, 2003
Dear XXXXXXXXXX:
Re: Charitable Gift Annuities
This is in reply to your facsimile of March 13, 2003 in which you requested our views on the tax implications where an individual purchases an annuity contract from a registered charitable organization ("charity") after December 20, 2002. You have provided specific examples for us to consider in this regard.
An 80-year male donor contributes $100,000 to a charity and the charity agrees to make annual annuity payments of $7,700 to the donor for as long as the donor lives with no guarantee period. In the first example, the charity funds its obligation to make the annuity payments by purchasing an annuity on the donor's life from a commercial annuity provider. The commercial annuity contains essentially the same terms as the charitable annuity, but for a 10-year guarantee period. The cost of the commercial annuity to the charity is $69,875. The cost of a commercial annuity with no guarantee period providing annual payments of $7,700 to the same donor would be $52,300. You ask whether the issuer of the commercial annuity that is purchased by the charity would be required to report income in respect of the annuity to the charity, whether the annuity would be subject to annual accrual pursuant to subsection 12.2(1) of the Income Tax Act ("the Act") and, if so, whether the income would be reported on a "T5" reporting slip.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
The Canada Customs and Revenue Agency (CCRA) announced the withdrawal of the administrative position in Interpretation Bulletin IT-111R2, "Annuities Purchased From Charitable Organizations", in Income Tax Technical News No. 26, effective for annuities issued after December 20, 2002. As a result, the taxation of annuities issued by charities after that date is governed by the Act based on the nature of the arrangement between the donor and the charity.
Where an individual enters into a contract with a charity under which the individual pays a specified amount to the charity in order to receive annuity payments from the charity for life or for a guarantee period, such a contract would constitute an annuity contract. Similarly, where a charity enters into a contract with a commercial annuity issuer under which the charity pays a specified amount to the issuer so that the issuer will make annuity payments to the charity (or to a person specified by the charity), for a life or for a guarantee period, such a contract would constitute an annuity contract.
Subsection 12.2(1) of the Act ("the accrual rules") requires persons holding interests in certain annuity contracts to include on an annual basis, in computing their income for the year, the amount by which the accumulating fund in respect of their interest exceeds the adjusted cost basis to the person of that interest. The accrual rules to not apply to annuity contracts that are prescribed annuity contracts ("PACs").
The term PAC is defined in subsection 304(1) of the Income Tax Regulations ("the Regulations"), and is limited to annuity contracts each holder of which is an individual, other than a trust that is neither a testamentary trust nor a trust described in paragraph 104(4)(a) of the Act. The commercial annuity described in your example does not appear to be a PAC and hence would be subject to the accrual rules. The income accrued pursuant to subsection 12.2(1) should be reported to the charity in prescribed form, pursuant to subsection 201(5) of the Regulations. The form prescribed in this respect is the T5.
In the second example, the charity purchases, for $52,300, a commercial annuity with no guarantee period providing annual payments of $7,700 per year for the life of the donor. The charity purchases the annuity on behalf of the donor i.e., it is the donor's agent. Accordingly, the charity instructs the issuer of the annuity to make payments directly to the donor. You confirm, in this respect, that the charity would not be obligated to make annuity payments to the donor as a result of this arrangement e.g., it does not guarantee the commercial annuity provider's performance. In these circumstances, you wish to know the following:
1. Is the charity entitled to issue a donation receipt to the donor in the amount of $47,700?
2. Is the commercial annuity a prescribed annuity contract (PAC)?
3. Is the taxable portion of the annuity $1,162.50?
4. Should the issuer of the commercial annuity report income to the donor on a "T4A" reporting slip?
The implications to the donor and to the charity in this type of situation will depend upon the terms of the relationship between the charity and donor. If there is clearly a principal and agent relationship between the donor and the charity, the donor would be viewed as having purchased a commercial annuity directly from the commercial annuity provider. The annuity would be a PAC if it otherwise satisfies the conditions in subsection 304(1) of the Regulations. While the amount that the charity may receipt to the donor would depend upon the nature of the responsibilities assumed and services performed by the charity on behalf of the donor under the agency arrangement, if the cost to the donor of purchasing the annuity directly from the commercial annuities provider would be $52,300, in our opinion the charity would be entitled to issue a receipt to the donor in the amount of $47,700. The tax implications would otherwise be similar to those discussed in rulings opinion E2003-000060 i.e., if the commercial annuity is a PAC, the taxable portion of each annuity payment would be $1,162.50 and the commercial annuities provider would report this amount to the donor on form T4A.
In the third example, the charity purchases the commercial annuity on its own behalf and arranges for the commercial annuity issuer to make payments and report income directly to the donor (i.e., the commercial issuer makes payments to the donor in satisfaction of the charity's obligations to the donor). You ask us to address the same questions as those posed in respect of the second example, above.
In our view, the tax implications to the donor and the charity would depend upon the terms of the donor's arrangement with the charity, the charity's arrangement with the commercial annuities provider and, if relevant, the donor's arrangement with the commercial annuities provider. If the terms of the arrangement between the charity and the commercial annuities provider are identical to those discussed in the first example (but for the charity directing the commercial annuities provider to make payments directly to the donor and the lack of a 10-year guarantee period), the tax implications would be the same as those in the first example i.e., the annuity would not be a PAC and the commercial annuities provider would report the income accrued pursuant to subsection 12.2(1) of the Act to the charity on an annual basis on form T5. Similarly, if the terms of the arrangement between the charity and the donor are otherwise the same as those discussed in rulings opinion E2003-000060, the charity would report income to the donor as discussed in that opinion.
We trust that these comments will be helpful. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently is not binding on the CCRA in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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