14 March 1989 Income Tax Severed Letter 5-7436 - []

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 A.B. Adler (613)957-8962

March 14, 1989

Dear Sirs:

Re: "Wrap Around" Contracts Deductibility of Interest

Your letter of December 24, 1988 addressed to Mr. Robert Roy, Assistant Deputy Minister, was referred to this office for reply.

In your letter you expressed concern with respect to the records to be kept to support a claim for the deduction of interest in a particular situation. You provided an example where a taxpayer has $10,000 due him in a deferred profit sharing plan (DPSP) and uses $2,000 of such DPSP funds and $8,000 of borrowed money to acquire a 10 year annuity (presumably an annuity contract described in subparagraph 20(1)(c)(iv) of the Income Tax Act). Concurrently, he withdraws the balance of his DPSP funds for personal use. Further, it is your view that specific funds from the DPSP need not be transferred to buy an annuity.

It has been our view for many years that paragraph 147(10)(b) of the Income Tax Act when read together with subparagraph 147(2)(k)(vi) therein contemplates a direct purchase of an annuity by the trustee of a DPSP upon the election of an employee who is a beneficiary under the plan. Accordingly, we do not agree that the employee may use his own funds to acquire an annuity as provided for under subparagraph 147(2)(k)(vi) and he would therefore be taxed on the $10,000 withdrawal pursuant to subsection 147(10) of the Act.

The interest on money borrowed to acquire the 10 year annuity in your example is deductible under paragraph 20(1)(c) of the Income Tax Act to the extent provided therein.

Enclosed, for your information and use, is a copy of our Information Circular No. 78-I0R entitled "Books and Records Retention/Destruction". Paragraphs 3 to 8 therein, in particular, are relevant to a trust company or any other person carrying on business in Canada. In paragraph 6 therein this Department outlines what we recognize as books and records of account for the purposes of section 230 of the Income Tax Act, among others. These requirements also apply to the taxpayer in your example who has acquired an annuity contract primarily with borrowed money and wants to deduct interest in computing his income for income tax purposes.

We regret the delay in providing you with our reply.

Yours truly,

for Director Financial Industries Division Rulings Directorate