7 March 2014 External T.I. 2012-0458781E5 - Annuity in respect of pension obligation

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: Can an employer purchase an annuity in the individual employee's name after the termination of the registered pension plan with funds from the employer?

Position: Where an individual receives an annuity contract otherwise than in accordance with subsection 147.4(1), the individual is considered to have received a pension benefit and is required to include the FMV of the annuity contract in income under paragraph 56(1)(a) in the year of receipt. If the employer acquires ownership of the annuity it would be considered an RCA.

Reasons: Given the facts provided, the funds used to purchase the annuity were not from the RPP therefore 147.4(1) does not apply. Where the employer acquires ownership of the annuity contract, the annuity would be considered an RCA and therefore subject to those rules.

XXXXXXXXXX
2012-045878
W. Doiron

March 7, 2014

Dear XXXXXXXXXX:

Re: Annuity acquired subsequent to the registered pension plan termination

This is in response to your correspondence in which you inquire whether there will be an inclusion in the individual's income for the taxation year where that individual's employer acquires an annuity in the individual employee's name.

The facts in your scenario are:

• The employer has wound up their registered pension plan ("RPP"). All funds were disbursed from the RPP and its registration was terminated.
• At the time that the RPP was wound up, employees were offered the choice of a lump-sum commuted value and/or a deferred annuity. Where employees chose to accept some portion as a deferred annuity, the RPP administrator purchased annuities that provides a stated monthly pension when the member turns age 65.
• The plan administrator failed to acquire an annuity for one individual and the employer is looking to acquire an annuity for the individual in the current year in order to provide the stated monthly pension when the individual turns age 65.

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Our comments

Pursuant to section 147.4 of the Income Tax Act (the "Act"), a set of rules are provided that deal primarily with individuals acquiring ownership of annuity contracts in satisfaction of their entitlement to benefits under an RPP. Where the conditions under subsection 147.4(1) of the Act are met, the individual is deemed not to have received an amount from the RPP as a result of acquiring the annuity and any amounts received under the contract are deemed to be amounts received under the RPP. As a consequence, there is no immediate taxation on acquisition of the annuity contract and any payments under the contract are included in the recipient's income in the year in which they are received.

However, in the scenario noted above, the purchase of the annuity contract was not made with funds from the RPP and therefore the conditions under subsection 147.4(1) of the Act have not been met. Consequently, the individual would be considered to have received a pension benefit and would be required to include the fair market value of the annuity contract in their taxable income in the year of purchase of the annuity under subparagraph 56(1)(a)(i) of the Act.

If the employer was to acquire an interest in an annuity contract in its own name, as a means of funding the unregistered arrangement, the arrangement would in our view be a retirement compensation arrangement ("RCA") as defined under subsection 248(1) of the Act. Any amounts received by an employee out of an RCA must be included in the employee's income in the year of receipt pursuant to paragraph 56(1)(x) of the Act.

Detailed explanations concerning the tax treatment of an RCA can be found in Guide T4041, Retirement Compensation Arrangements, including any withholding, remitting and reporting requirements.

We trust these comments will be of some assistance.

Yours truly,

Mary Pat Baldwin CPA, CA
Manager
Deferred Income Plans Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch