4 January 1993 Income Tax Severed Letter 9232447 F - Pension Tax Credit on Surrender of Annuity Contract

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.

January 4, 1993

WINDSOR DISTRICT OFFICE Personal and General Enquiries and Office Examination Section

Attention:  D. Yutes

923244 XXXXXXXXXX

XXXXXXXXXX Pension Tax Credit

We are replying directly to you concerning the issue of whether XXXXXXXXXX is entitled to a pension tax credit in respect of the income earned from XXXXXXXXXX

We are unable to provide the "ruling" requested by XXXXXXXXXX representative since advance income tax rulings are only issued in respect of proposed transactions, as explained in Information Circular 70-6R2 "Advance Income Tax Rulings" dated September 28, 1990 and special release thereto dated September 30, 1992. However, we would like to provide you with our comments on the issues raised by his representative.

Our understanding of the facts is as follows:

XXXXXXXXXX

Income which is eligible for the pension tax credit is described in subsection 118(7) of the Act and, for individuals who are at least 65 year old in a taxation year, includes the taxable portion of an annuity payment and any amount which is included in income by reason of section 12.2 or paragraph 56(1)(d.1) of the Act. It is a question of fact as to whether the $XXXXXXXXXX received by XXXXXXXXXX was part of an annuity payment or on account of interest taxable under the provisions so mentioned. Such facts can only be determined upon review of the annuity contract itself and an examination of the terms and conditions surrounding the surrender or cancellation of the annuity contract.

In general however, a payment, above and beyond the required annuity payments, in satisfaction of the individual's rights under the annuity contract will be treated as proceeds of disposition of that contract. Since a life insurance policy is defined in subsection 248(1) and more specifically in paragraph 138(12)(f) of the Act to include an annuity contract, such proceeds will be included in income to the extent required by section 148 of the Act. To the extent that the lump sum payment in question represents proceeds of disposition as defined in paragraph 148(9)(e.2) of the Act, the resulting income inclusion required by subsection 148(1) of the Act would not qualify for the pension tax credit.

However, the characterization of the ordinary annuity payments under a fixed term annuity contract would not be altered by reason of an individual's failure to renew said contract. For example, if a fixed term annuity contract provided for annuity payments of $10,000 per year for 5 years with a refund of all or part of the capital upon termination of the contract, the interest portion of the $10,000 payments received in each of the 5 years would be taxable under paragraph 56(1)(d), (d.1) or section 12.2 of the Act (depending on whether the contract was a prescribed annuity contract and when the contract was issued); any refund of the capital at the end of the 5 years would be treated as proceeds of disposition of a life insurance policy and the individual would be required by subsection 148(1) of the Act to include in income such proceeds less the adjusted cost base of the annuity contract.

If you require further assistance after you have reviewed the annuity contract and details of the surrender of the contract, please submit this additional information and we would be pleased to offer you further comments.

We trust our comments will be of assistance to you. XXXXXXXXXX tax return is enclosed.

J.A. Szeszycki for Section Chief Personal and General SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch