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:
Determining the "amount of the advantage" in respect of an annuity stream to be received by a donor in exchange for a cash gift made to a registered charity.
Position:
Valuation must be reasonable. While obtaining quotations from insurance companies is one method of determining the value of the annuity stream to be received by the donor, other approaches may be taken.
Reasons:
The proposed amendments do not prescribe the manner for determining the "amount of advantage".
XXXXXXXXXX 2003-000919
Alison Campbell
November 18, 2003
Dear XXXXXXXXXX:
Re: Charitable Gift Annuities
This is in reply to your letters dated March 17 and May 26 concerning the calculation of the value of a charitable annuity that will be provided to a donor as the "amount of advantage" (as defined in proposed subsection 248(28) of the Income Tax Act (the "Act")) in respect of a gift of cash to a registered charity.
Your concern is related to the determination of the value of the charitable annuity. We would agree that obtaining quotations as to the cost of the annuity stream from an insurance company is a reasonable basis for determining value. We would also agree that a quotation may be used notwithstanding there is some delay between the date of the quotation and the issuance of the annuity provided there is no significant change in market conditions during the intervening period.
You also indicated that insurance companies do not provide quotations for prescribed annuities where the prospective annuitant is over the age of 90. You indicated that the insurance companies do provide quotes with respect to non-prescribed annuities for persons over 90 years of age and we would agree that it would be reasonable to use such quotations in circumstances where the annuity to be issued by the charity would qualify as a prescribed annuity.
Another area of concern you have is with respect to situations where the annuity stream required by the donor would have a single premium cost of a relatively small amount. You advise that in some instances, it may not be possible to obtain an insurance company quotation for small single premium annuities. Where it is not possible to obtain an insurance company quotation to support the value of the annuity stream required by the donor, due to the small amount of the single annuity premium involved, we would agree that a reasonable approach to valuing the annuity stream would be to scale down a quote for the minimum amount for which a quotation can be obtained. The proposed amendments do not prescribe the manner for determining the "amount of advantage". While obtaining quotations from insurance companies is one method of determining the value of the annuity stream to be received by the donor, other approaches may be taken. In this regard you note that your Association has developed its own actuarial program to mitigate the need to obtain quotations from insurance corporations. As long as the calculations produced by the program are consistent with market calculations we have no objection with this approach.
You also raised a question relating to the annual taxation of annuity amounts received by a donor in circumstances where the purchase price for the stream of the annuity payments exceeds the total amount of the annuity payments expected to be received by the donor. Assuming the annuity is a "prescribed annuity contract" for purposes of the Act, each annuity payment received by the donor will be included in the donor's income pursuant to paragraph 56(1)(d) of the Act and this will generally be fully off-set by a deduction under subsection 60(a) of the Act in respect of the capital element of the annuity payments received by the donor. Accordingly, there will generally not be any taxes payable in respect of the annuity payments received by the donor.
Finally, you have indicated that in some cases the value of the annuity may exceed 80% of the value of the property transferred to the charity by the annuity. In such circumstances the requirements of proposed paragraph 248(32)(a) of the Act will not be satisfied. As explained, we are not prepared to take a position that we will apply proposed subsection 248(32)(b) of the Act in any of these situations. In such cases the donor will be required to make a submission to the Minister of Revenue (sent to the Policy and Communications Division of the Charities Directorate) to have proposed subsection 248(32)(b) of the Act apply. Each situation will be considered on a case by case basis but you should be aware that this provision was intended for exceptional circumstances.
We hope our comments are of assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch
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