24 May 1994 External T.I. 9330005 - ANNUITIES PAID BY CHARITY

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.

Principal Issues:

Whether payments made to XXXXXXXXXX by a charity constitute "annuity payments" within the meaning of paragraph 56(1)(d) of the Act?

Position TAKEN:

They constitute annuity payments.

Reasons FOR POSITION TAKEN:

The definition of "annuity" is broad enough to include these payments.

5-933000
XXXXXXXXXXC. Chouinard

Attention: XXXXXXXXXX

May 24, 1994

Dear Sir:

Re: XXXXXXXXXX Pension Plan

We are writing in reply to your letters of October 18 and November 18, 1993, wherein you requested our comments on the tax status of payments made to XXXXXXXXXX by a registered charity.

As we understand the facts, the registered charity will be set up as a trust and will provide a regular stream of income to XXXXXXXXXX You ask whether the payments made to the elders will constitute annuity payments and thus be taxable in accordance with paragraphs 56(1)(d) and 60(a) of the Income Tax Act (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. The following comments are, therefore, of a general nature only, and are not binding on the Department.

Subsection 248(1) of the Act defines "annuity" as an "amount payable on a periodic basis, whether payable at intervals longer or shorter than a year and whether payable under a contract, will, trust or otherwise. In light of the very broad ambit of this definition, in our view, the payments made by the charity to XXXXXXXXXX will constitute annuity payments. These payments will be taxable pursuant to paragraph 56(1)(d) of the Act, to the extent they are not otherwise required to be included in computing income. In the situation you describe, since the annuities will be paid under a trust, the portion of the annuities paid out of the income of the trust, if any, will be taxable under paragraph 104(13)(a) of the Act, as a distribution by the trust of its income to a beneficiary. In addition, by virtue of paragraph 60(a) of the Act, the capital element of annuity payments may be deducted. Where the annuity is paid under a trust, the capital element is the part of the payment that the recipient can establish not to have been paid out of the income of the trust.

As regards the determination of the capital element of an annuity payment, since the annuities will be paid under a trust, it is the source from which the payments will be made to the beneficiaries and the rights of the beneficiaries that will be satisfied in accordance with the terms of the registered charity trust that will determine the nature of the payments in the hands of the beneficiaries. Accordingly, the fact that the distributions made by the XXXXXXXXXX Trust to the registered charity trust will be capital distributions will have no bearing on the characterization of the distributions made by the registered charity trust to XXXXXXXXXX Hence, if the annuities are paid solely from the registered charity trust's capital, the annuity payments will not be taxable since paragraphs 56(1)(d) and 60(a) of the Act will offset each other. If, on the other hand, income is derived by the registered charity trust from the funds received from the XXXXXXXXXX Trust and such income is used to make the payments, the payments will be fully taxable under paragraph 104(13)(a) of the Act. Finally, if the payments made to XXXXXXXXXX represent blended distributions of capital and income of the registered charity trust, the portion of the payment paid out of the income of the trust will be taxable under paragraph 104(13)(a) of the Act and the balance will be non-taxable as a result of the combined application of paragraphs 56(1)(d) and 60(a) of the Act.

With respect to your question regarding the impact of the annuity payments on the Guaranteed Income Supplement (the "GIS"), section 13 of the Old Age Security Act provides that a person's income for purposes of the GIS is to be determined in accordance with the Income Tax Act. Since both paragraphs 56(1)(d) and 60(a), as well as paragraph 104(13)(a), of the Act are, to the extent they apply, considered in computing net income for income tax purposes, it follows that they will also be considered in determining a person's entitlement to the GIS.

We would caution that the new trust could jeopardize its status as a "registered charity" by distributing its income, if any, to XXXXXXXXXX since paragraph 149.1(1)(a) of the Act prohibits charities from distributing their income to their members. If the payments made to XXXXXXXXXX included income of the new trust, an argument could be made that the registered charity trust is distributing its income to its members. On the other hand, it could also be argued that XXXXXXXXXX are receiving these payments, not as members of the new trust, but because they meet the criteria established by the trust to qualify for the payments. However, since the age of XXXXXXXXXX determines not only whether they qualify for the pension payments but also whether they are members of the trust, it becomes very difficult to determine in what capacity and for what reasons they are receiving the pension payments.

Unless as otherwise stated, all references to the Act are to the Income Tax Act, S.C. 1970-71-72, c.63, as amended and consolidated to June 10, 1993.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch