29 June 1989 Internal T.I. 73949 F - Annuities Purchased from Charitable Organizations

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.

Subject:  Annuities Purchased from Charitable Organizations - IT111R

This is in reply to your memorandum of May 25, 1989, concerning the calculation of the total amount expected to be received under a single life annuity having a fixed term where the table in IT-111R is not adequate.

The examples you provided by way of correspondence form 19(1) may be summarized as follows:

EXAMPLE "A"

1.     The annuitants age at the time he/she enters into the annuity contract is 60.

2.     You would like an example for both a male and female contributor.

3.     The annuity contract would be for a fixed period of ten years during which time the charity will pay the donor $100 annually for each $1000 donated.

EXAMPLE "B"

We previously indicated to you that a determination of the amount of the donation made by the annuitant would not be possible where the annuity is calculated on a variable rate of interest 19(1) has asked whether this means that such arrangements are not acceptable to the Department and what would be the taxation treatment should an organization enter into such an arrangement.

Our Comments

With respect to the situations in Example A, we have provided two examples to illustrate the income tax treatment of amounts paid to charities for the purchase of annuities and our comments follow a summary of each of the examples.

1.     A male age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Income Tax Act (the Act)) an irrevocable capital contribution of $10,000 in exchange for immediate guaranteed payments of $1,000 per year to the individual for ten years.

     In our view, the individual in this example has not made a "gift" for the purpose of section 118.1 of the Act as the amount of the capital contributed is equal to the amount expected to be received as annuity payments under a guaranteed term annuity of ten years.  As a result, it is our opinion that paragraph 1 of IT-111R would be applicable in the income tax treatment of the annuity payments received by the annuitant.  As well, no charitable donation receipt could be issued as no "gift" has been made for the purposes of section 118.1 of the Act.  The above comments would also apply to female contributor in the same situation.

2.     A female age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Act) an irrevocable capital contribution of $10,000 in exchange for immediate guaranteed payments of $1,000 per year to the individual for five years.

     The individual would receive a current deduction (subject to the rules governing charitable donations in section 118.1 of the of the Act) of $5,000 and all future $1,000 annuity payments would not be taxable. 

Concerning our comments with respect to example "B", if an individual donor and charity enter into an annuity arrangement where the charity will pay the donor annually an amount equal to 2% less than the simple interest rate issued for any part of the donor's contribution.  In this instance the taxation treatment of the annuity payments received would be that outlined included in computing the individual's income under paragraph 56(1)(d) of the Act.  Paragraph 60 (a) of the Act would allow for the deduction from income of the capital element of the annuity payments based on the capital cost as determined by Part III of the Income tax Regulations.

We trust our comments will be helpful in enabling you to advise 19(1) accordingly.

for Director Small Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch

c.c.     Mr. R. RoyADM, Policy and Systems Branch

c.c.      Charities Division