2 June 1986 Income Tax Severed Letter 5-1367 - []

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.

XXXX G. Kauppinen (613) 995-0051

June 2, 1986

Dear Sirs:

This is in reply to your letter dated March 25, 1986 concerning sub- paragraph 146(3)(b)(iii.l) of the Income Tax Act ("Act").

The above-mentioned subparagraph states that a registered retirement savings plan ("RRSP") may be accepted for registration notwithstanding that the plan provides for any annual or more frequent periodic amount payable to any person by way of an annuity under a contract that provides for the increase or reduction of the annuity in accordance only with a change in the interest rate on which the annuity is based, if the interest rate, as increased or reduced, equals or approximates a generally avail- able Canadian market interest rate.

In developing these variable rate annuities, you have asked our opinion as to whether an interest rate on guaranteed investment certificates ("GIC's "), term deposits or mortgages offered by a credit union to its members or by a trust company, XXXX, would qualify as a "generally available Canadian market interest rate". In our opinion, the interest rates on the above-noted instruments, if determined by a competitive market (i.e. similar to those rates offered by other financial institutions in Canada), would qualify as "generally available Canadian market interest rates" within the meaning of subparagraph 146(3)(b)(iii.1) of the Act.

Your second question concerns the flexibility with which the interest could be varied on a variable rate annuity within the meaning of sub- paragraph 146(3)(b)(iii.l) of the Act. In our opinion, the interest rate offered under a variable retirement annuity contract could vary as frequently as desired by the annuitant (e.g. semi-annually, annually, every five years, etc.). However, once the annuitant has chosen the frequency wherein the interest rate on the annuity would be changed, then this frequency could not be changed at a later date.

You have also asked our opinion as to whether an annuitant could, at a date an interest rate is to be changed on his variable rate annuity, base the interest rate on a rate offered by a different instrument than the instrument on which the interest rate on the annuity was originally based. In our opinion, the interest rate on the variable rate annuity could initially be based on any Canadian instrument generally available (e.g. term deposits, mortgages, 1 year GIC's, 5 year GIC's, etc.). However, once the interest rate on the variable rate annuity has been tied to the interest rate on a particular instrument then the subsequent changes to the variable rate annuity interest rate must be tied to the change in the interest rate of the instrument originally chosen. The annuitant would not be free to base the change in interest rate on the variable rate annuity on the change in interest rates on different instruments throughout the term of the variable rate annuity. For example, a variable rate annuity could be tied to the interest rates on 5 year GIC's and changed annually. After one year the amount of change of the interest rate on the variable rate annuity would be based on the interest rate then offered by 5 year GIC's.

We trust the foregoing is of assistance.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch