15 December 2004 External T.I. 2004-0094921E5 - Demutualization Benefit and Pension Plan

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.

Principal Issues: Tax treatment of a lump sum payment received by an annuitant which may have been a demutualization benefit.

Position: Provided general comments on the tax implications of demutualization benefits.

Reasons: Insufficient information to make a determination.

XXXXXXXXXX 						2004-009492

December 15, 2004

Dear XXXXXXXXXX:

Re: Demutualization Benefit and Pension Plan

This is in reply to your enquiry that was forwarded to us by the Toronto Centre TSO on September 9, 2004, and is further to our recent telephone conversations (XXXXXXXXXX/Leigh).

As we understand the situation, you are a retired member of a registered money purchase pension plan and your contributions were used to acquire an annuity from an insurer on or after your retirement. In XXXXXXXXXX, you received a cheque for $XXXXXXXXXX from the insurer. You later received a T4A slip from the insurer reporting a "lump sum payment" of $XXXXXXXXXX and income tax deducted of $XXXXXXXXXX. You were informed by the insurer that the payment represented a demutualization benefit. You think that the payment should not be taxed as a "lump sum payment" and would like clarification from us as to its proper tax treatment.

As discussed, we are not in a position to advise you how the payment you received from the insurer should be taxed since we do not have sufficient information. For example, it is not clear to us whether the holder of the annuity contract in the circumstances described is your former employer, a registered pension plan trust or yourself. Generally, you would need to confirm such details with your former employer and/or the insurer. Accordingly, if you have specific questions or require further clarification with respect to your annuity arrangement and the circumstances giving rise to the lump sum payment, we suggest that you contact your former employer or the insurer. However, we can provide the following general comments which may or may not be relevant to your specific situation.

Where a stakeholder receives a demutualization benefit in the form of cash, and it is not in respect of a life insurance policy held by a trust governed by a RRSP, RRIF, DPSP or superannuation or pension fund or plan such that subsection 139.1(14) of the Income Tax Act (the "Act") would apply, then subparagraph 139.1(4)(f)(ii) of the Act will deem the stakeholder to have received a dividend in the amount received from the insurer.

Subsection 139.1(16) of the Act provides a flow-through of the tax effects relating to the distribution of a demutualization benefit by a stakeholder to certain individuals if specified conditions are met. In very general terms, if an employer receives a demutualization benefit from an insurer and elects in writing filed with the Minister to have the rules in subsection 139.1(16) of the Act apply, the employer will be deemed not to have received the payment from the insurer, and instead the employee or former employee who received the payment from the employer will be deemed to have received the payment directly from the insurer as a taxable dividend. We note that the employer will also be responsible for the preparation of a T5 return, and the issuance of T5 slips to each employee that received a payment, reporting the amount of the dividends deemed to have been paid to the employee.

If, however, the demutualization benefit conferred by the insurer relates to a policy held by a trust governed by a RRSP, RRIF, DPSP or superannuation or pension fund or plan, subsection 139.1(14) of the Act will deem such benefit to be received under the fund or plan, as the case may be, if the benefit is received by any person other than the trust. In the case of a trust governed by a superannuation or pension plan, the recipient will be considered to be in receipt of a "superannuation or pension benefit" as that term is defined under subsection 248(1) of the Act. Superannuation and pension benefits received are included in computing the recipient's income in accordance with paragraph 56(1)(a) of the Act and are reported on a T4A slip.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Agency in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch