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: Whether a life annuity qualifies as a prescribed annuity contract where the terms of the contract provide for a lump sum payment to be made after the death of the holder even if the death occurs after the holder turns 91 years of age.
Reasons: Income Tax Regulations.
CLHIA Roundtable May 17, 2013
Question 4 Annuities with Lump Sum Contractual Provisions
The ongoing low interest rates and resulting lower amount of annuity payments that can be made for a given amount of premium have resulted in an increased interest in cash refund annuities. Customers do not like the fact that they could pay a single premium, receive only a few annuity payments before the death of the measuring life and not have their estate or beneficiaries receive anything thereafter. A method of reducing this risk is to include a guarantee period (5, 10, 20, etc. years) during which annuity payments will be made even if the measuring life dies before the end of the guarantee period. A variation is to pay a lump sum on death equal to the excess, if any, of the premium over the total of the annuity payments made before the death of the measuring life.
Assume that an individual purchases an annuity for a single premium from a life insurance company on the individual's own life and that the annuity will make payments to that individual as long as the individual is alive. There is no specific guarantee period. The annuity contains a contractual provision that, when the individual dies, a lump sum payment equal to the excess of the single premium paid for the annuity over the total of all annuity payments that were made under the contract will be made to the beneficiary named in the annuity contract.
For each question below, assume all the applicable conditions for the annuity to be a prescribed annuity contract ("PAC") in subsection 304(1) of the Income Tax Regulations (the "Regulations") are otherwise met in each situation, subject only to the variation outlined below.
Assume the individual paid a $100,000 single premium for an annuity contract that provides for annual annuity payments of $4,200 starting on the individual's 65th birthday. If the individual dies before 24 [100,000 / 4,200 = 23.81] annual annuity payments have been made, a lump sum will be paid to the beneficiary named in the annuity contract. This means that no lump sum payment will be made upon the death of the individual if the death occurs after the individual attains 88 years of age.
Does the CRA agree that the annuity is a PAC because paragraph 304(2)(b) of the Regulation applies?
Pursuant to paragraph 304(2)(b) of the Regulations, an annuity contract will not fail to be a PAC if the terms and conditions of the contract provide that where the holder of the contract dies at or before the holder attains the age of 91 years, the contract will terminate and an amount will be paid out of the contract not exceeding the amount, if any, by which the total premiums paid under the contract exceeds the total annuity payments made under the contract.
We agree that the annuity contract described in the above situation will not fail to be a PAC provided the terms and conditions of the contract adhere to paragraph 304(2)(b) of the Regulations.
Assume the individual paid a $100,000 single premium for an annuity contract that provides for annual annuity payments of $3,500 starting on his 65th birthday. If the individual dies before 29 [100,000 / 3,500 = 28.57] annual annuity payments have been made, a lump sum will be paid to the beneficiary named in the annuity contract. This means that a lump sum payment could be made after the individual attains the age of 91 years if the death occurs before the individual attains the age of 94 years. Accordingly, the requirement of paragraph 304(2)(b) of the Regulations is not met and the annuity is not a PAC.
Does the CRA agree with that conclusion? Further, does the CRA agree that, in order to be a PAC in this case, the annuity policy would have to provide that no lump sum will be made after the individual attains the age of 91 years?
In our view, the annuity contract described above does not qualify as a PAC. As noted earlier, paragraph 304(2)(b) of the Regulations applies if the terms and conditions of the annuity contract provide for the payment of a lump sum at or before the holder attains the age of 91 years provided the other conditions in that paragraph are met.
Prepared By: Elaine Danilchenko
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