7 September 1993 Income Tax Severed Letter 9318906 - Annuity Acquired with RPP Funds

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                       September 7, 1993

     Registered Plans Division         Financial Industries
     S. M. Kotlar                        Division
     Director                          D.S. Delorey
                                       957-8953

  Attention:  H.H. Sorensen
                                       7-931890 

Status of Paid-up Annuities Arising from Registered Pension Plan ("RPP") Provisions

This is in reply to your memorandum of June 26, 1993 concerning the following two types of paid-up annuity contracts ("PUAC") acquired to fund benefits payable under an RPP:

(a) A PUAC acquired on an annual basis to fund the pension benefits for the year, either through a group PUAC or individual PUACs. These PUACs are often held in the name of the RPP.

(b) A PUAC acquired when the RPP is wound up, or when the member retires, terminates employment or dies. These PUACs are usually acquired in the name of, and held by, the member or a beneficiary.

Your particular concern is whether or not the provisions of the Act and the Income Tax Regulations (the "Regulations") pertaining to RPPs apply to the PUACs. In this regard, you ask if

(c) the PUAC will be subject to the regulations governing pension plans (the "Pension Regulations"),

(d) a transfer under section 147.3 of the Act or paragraph 8503(k) of the Regulations is possible where the PUAC is cancelled, and

(e) if additional contributions can be made to fund a member's benefit once the PUAC has been purchased.

Where the PUAC is held in the name of an individual, you state that the insurance companies consider the individual to no longer be a member of the RPP even where payments under the PUAC are deferred until some future date.

It has been your understanding that section 254 of the Act means that a PUAC replaces the RPP provision pursuant to which the PUAC was acquired. However, you are now wondering if you are reading too much into that section since the intent appears to be restricted to the taxability of the PUAC payments.

Our Comments

Whether or not section 254 applies in a particular situation will normally depend upon who owns the PUAC. This is a question of fact and a PUAC could be owned by the RPP even where the PUAC states that payments thereunder are to go to a named individual. Where such is the case, the issuer of the PUAC would be acting as agent for the RPP in making the payments to the individual.

Where ownership of the PUAC remains with the RPP, the PUAC is an investment of the RPP and any payments under the PUAC would be payments under the RPP. The acquisition of the PUAC by the RPP will not of itself cause the answers to (c), (d) or (e) above to be any different than they would be had the RPP acquired a different property. However, as indicated below, those answers could differ depending upon whether or not the individual remains a member of the RPP after the PUAC is acquired. This is a question of fact to be determined from the terms of the RPP.

Section 254 of the Act relates to situations where ownership of the PUAC passes to the individual. As you indicate, this will usually occur in situations referred to in (b) above. Where a PUAC acquired by an RPP is held by an individual, paragraph 254(a) of the Act will normally apply. Relevant to the issues you raise, paragraph 254(a) can be read as follows:

"For greater certainty it is hereby declared that.......

any payment under the PUAC is a payment under the RPP.......... and

the individual shall be deemed not to have received, by the issuance of the document or entering into the contract, an amount out of or under the superannuation or pension fund or plan......"

Paragraph 254(a) of the Act thus ensures that payments under the PUAC are characterized as superannuation or pension benefits out of the related RPP. It is thus our view that where paragraph 254(a) applies, the answer to (c) above is yes to the extent that the Pension Regulations relate to payments out of an RPP. However, with respect to the other Pension Regulations relating to situations where the individual is a member of an RPP, and with respect to (d) and (e) above, the answer would be "yes" only where the individual remains a member of the RPP after the PUAC is acquired. For example, a direct transfer to an RPP under section 147.3 of the Act is possible only where the individual is a member of the RPP or, for the purposes of subsection 147.3(5), was a member of the RPP at the time of his death.

Paragraph 254(a) does not deem the individual to continue to be a member of the RPP. As indicated above, this is a question of fact that has to be determined from the terms of the RPP. In this regard, where the administrators of an RPP consider the individual to no longer be a member of the RPP once a PUAC is acquired in his name, we would expect that they would be acting in accordance with the terms of the RPP.

for Director Financial Industries Division Rulings Directorate

HAA 7265-1