14 January 1991 Income Tax Severed Letter 9015405 F - Disposition of a Life Insurance Policy

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.

5-901540

Dear Sirs:

This is in reply to your letter of July 6, 1990.  We apologize for the delay in replying which was due to a complete review of the matter.

Your particular concern is with respect to annuity income taxed under paragraphs 56(1)(d) to (d.2) of the Income Tax Act (the "Act") and income from the disposition of a life insurance policy taxed under paragraph 56(1)(j) of the Act.  Because such income is taxed under Subdivision d of Division B of the Act which is entitled "Other Sources of Income", rather than under Subdivision b of Division B which is entitled "Income or loss from a business or property", you suggest that such income would not be "income from property" for the purposes of various provisions of the Act such as sections 74.1, 110.6 and 207.5.

Our comments

We have considered this matter in depth and it is our opinion that for the purposes of the Act other than subdivision b of Division B thereof, the expression "income from property" should be given its ordinary meaning.  With this in mind and having regard to the wide scope of the definition of "property" in subsection 248(1) of the Act, it is our opinion that the expression "income from property" would, for the purposes of sections 74.1, 110.6 and 207.5 of the Act, include annuity income taxed under paragraphs 56(1)(d),(d.1) and (d.2) of the Act and income taxed under paragraph 56(1)(j) of the Act.  In forming our opinion, we gave consideration to the following points:

1.     The expression "income from property" is not defined in the Act.

2.     Given the wide scope of its definition in subsection 248(1) of the Act, "property" would include various rights such as rights under annuity contracts and life insurance policies, and income from such contracts and policies would ordinarily be regarded as being income from such properties.

3.     There is nothing in the Act stating that income from property is limited to amounts taxed under Subdivision b of Division B of the Act.

4.     Case law indicates that the Courts have consistently held that, to the extent that annuity payments contain any income, such income is income from property.

5.     Historically, in 1945 the Act was amended to include in income only the "interest or other income portion" of an annuity payment.  Such income was considered as income from property in its ordinary sense, with the annuity contract being regarded as the property the source of the income.  There was no Subdivision b of Division B at that time and we could find nothing to suggest that the subsequent restructuring of the Act had any intent of changing the character of the income.

6.     We are not aware of anything in law, statute or otherwise, dictating that the source or character of a particular type of income should be determined solely by the heading or title of a part of the Act under which the provision dealing with the income is located.  In fact, the Courts have pointed out that unless a particular provision of the Act is found obscure or ambiguous, or in conflict with other provisions thereof, resort should not be had to the structure, headings and titles for guidance in interpreting that provision.  For example, in A.G. Canada v. Jackson (1946 S.C.R. 489 at pages 495-6), the Court refused to limit the scope or ambit of a section merely because it was included in a group of sections under a heading.

7.     The following provisions of the Act reflect an intent that the expression "income from property" includes amounts taxed under Subdivision d of Division B of the Act:

(a)       Paragraph 20(1)(c) of the Act specifically excludes interest on borrowed money used to acquire an interest in a "life insurance policy".  This exclusion would not be required in the first place if income from a life insurance policy was not "income from property", given that paragraph 20(1)(c) allows a deduction only when computing income from a business or property.  Prior to 1978, the above exclusion in paragraph 20(1)(c) did not apply to annuity contracts, presumably on the basis that in general a life insurance policy does not include an annuity contract.  In 1978, the preamble to subsection 138(12) of the Act was amended to refer to various other sections of the Act, one of which is section 20.  As indicated in paragraph 1 of Interpretation Bulletin IT-355R, this had the effect, by virtue of the exclusion in paragraph 20(1)(c), of disallowing interest on borrowed money used to acquire an annuity contract.

(b)       As indicated in paragraph 2 of Interpretation Bulletin IT-124R5, it is generally accepted that interest on borrowed money used to acquire an interest in a registered retirement savings plan ("RRSP"), other than a spousal RRSP, would be deductible under paragraph 20(1)(c) of the Act; hence, the reason for paragraph 18(11)(b) of the Act.  As noted in (a) above, paragraph 20(1)(c) allows a deduction only in computing income from a business or property, yet income from an RRSP is taxed under paragraph 56(1)(h) of the Act.

(c)       Subsection 74.1(1) of the Act contains the following exclusion from amounts otherwise attributable under that subsection:

     "otherwise than by an assignment of any portion of a retirement pension pursuant to section 64.1 of the Canada Pension Plan or a comparable provision of a provincial pension plan as defined in ....)".

     Such pension income would be taxed under section 56 of the Act (i.e., subparagraph 56(1)(a)(i)).  Thus, if the attribution rules did not apply to amounts included in income under section 56, the above exclusion would not be necessary .

(d)       Similar to (c) above, the exclusion in paragraph 74.5(12)(a) of the Act would not be necessary if the attribution rules did not apply to RRSP income; i.e., income taxed under paragraph 56(1)(h) of the Act.

We trust that our comments are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate