19 January 1994 Internal T.I. 9326897 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.

January 19, 1994

Attention:  J. Lohnes

Annuities Purchased from Charitable Organizations

This is in response to your facsimile of September 20, 1993, wherein you requested our views on the procedures involved in setting up an annuity referred to in paragraph 5 of Interpretation Bulletin IT-111R.

This question was posed in a letter received from a client in your district involving a potential donor. In addition, he specifically asked what the Department meant by the words "where the commencement of the payments are delayed". It is his view that these words are a reference to a "deferred gift annuity".

Our Comments:

It appears that the client is requesting guidance in the area of tax planning, which is beyond the authority of the Department to provide and the situation described in the client's letter involves actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Taxation.

However, we can offer the following general comments.

A transfer of property to a registered charity is not a gift for the purposes of section 118.1 of the Income Tax Act (the "Act") if there is consideration of any kind being received in return. The word "gift" has been interpreted by the Department as being a voluntary transfer of property without consideration and without conditions. Furthermore, no right, privilege, benefit or material advantage may accrue to the donor or to a person designated by the donor as a result of making the gift.

This interpretation is set out in paragraph 3 of Interpretation Bulletin IT-110R2. However, In IT-111R the Department does provide some relief from this position in situations where an individual purchases an annuity from a registered charity.

As indicated in paragraph 1 of IT-111R the Department does recognize that certain registered charities solicit individuals to make an irrevocable contribution of capital to the charity in exchange for immediate guaranteed payments to the individual for life at a specified rate depending on life expectancy. Such arrangements are considered to be an annuity contract for purposes of the Act and the annuity payments are included in computing the annuitants income under paragraph 56(1)(d). Paragraph 60(a) provides for the deduction from income of the capital element of the annuity payments as determined by Part III of the Income Tax Regulations.

For the purposes of the administrative position set out in IT-111R, providing a donor makes an irrevocable contribution directly to a registered charity in return for a life annuity, it does not matter what steps the charity may take to fund its liability under the annuity. The charity may issue the annuity in its own name or it may purchase an annuity from a recognized annuity issuer, either in the name of the donor or in its own name with a direction to pay in favour of the donor. The amount of the gift to the registered charity will, in accordance with paragraph 3 of IT-111R, equal the amount, if any, by which the amount of the payment to the charity exceeds the total of the annuity payments expected to be received by the donor pursuant to the life expectancy tables provided in IT-111R. In the circumstances of paragraph 3 of the bulletin, no portion of the annuity payments received by a donor will be subject to tax nor will any amount paid by the donor be deductible in computing income. The amount of the gift as determined above will qualify for the purposes of determining the tax credit under section 118.1.

As IT-111R is an administrative position, only where an individual pays more for the annuity than the total amount expected to be received back as annuity payments does the beneficial aspect of paragraph 3 of IT- 111R apply. Where the amount paid for the annuity is the same as or less than the annuity payments expected to be received back, paragraph 1 of IT-111R applies.

The administrative position of IT-111R was adopted in recognition of the fact that certain charities have issued annuities for many years and that purchasers of such annuities frequently pay much more for the annuity than would be reasonable in an ordinary commercial transaction.

IT-111R does not sanction the issuance of annuities by charities which are prohibited from undertaking such an activity, whether by their own constating documents, by provincial or federal legislation, or by federal or provincial regulatory bodies with jurisdiction in the matter.

As indicated in paragraph 4 of IT-111R the table attached to the IT are for the purpose of determining the total amount expected to be received as annuity payments under immediate life annuities. Paragraph 5 indicates the circumstances in which the table cannot be used.

Included in these types of circumstances are situations where the annuity payments are fixed for a certain period, where the commencement of the payments is delayed, and where there is more than one annuitant.

For example the payments are fixed for a period of 10 years, or the payments do not commence immediately but instead commence at the time the annuitant reaches a certain age such as 110 or older, or in cases involving joint life and last survivor, joint and last survivor or single life contracts. In these types of situations the calculation may be sought from the District Office. It is our understanding that the Enquiries Programs Division of the Client Assistance Directorate have tables that may be used in these circumstances.

It should also be noted as stated in paragraph 2 of IT-111R that while a charitable organization, as defined in paragraph 149.1(1)(b), may enter into such arrangements without jeopardizing its registered status, a charitable foundation, as defined in paragraph 149.1(1)(a), may not do so. The registration of a charitable foundation may be revoked if the foundation has, at any time since June 1 1950, incurred debts other than certain debts described in subsections 149.1(3) and (4). The Department considers an undertaking to make annuity payments to be a debt incurred by a charity which, in the case of a charitable foundation, is cause for the revocation of its registration.

Murray Brake for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch