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:
Confirmation of tax consequences on purchase of annuity contract to provide retirement benefits for employee.
Position TAKEN:
Deemed RCA.
Reasons FOR POSITION TAKEN:
Routine reading of 207.6(2); departmental position on refundable tax on refundable tax halted at third calculation.
XXXXXXXXXX 950528
Attention: XXXXXXXXXX
May 19, 1995
Re: Subsection 207.6(2) of the Income Tax Act (the "Act")
This is in reply to your letter of February 17, 1995, in which you describe the purchase and holding of an annuity contract by an employer which is subject to the above-noted provision. You ask us to confirm the tax consequences surrounding contributions, payment of Part XI.3 tax, and receipt of income and refundable tax.
Although we cannot confirm the tax consequences attendant on the particular transactions described by you, we can make the following general comments which are not binding on the Department.
An employer who acquires an annuity contract in circumstances contemplated by subsection 207.6(2) of the Act, is deemed to be the custodian of a retirement compensation arrangement (RCA) pursuant to paragraph 207.6(2)(a) of the Act. Section 207.7 of the Act requires the custodian to file the return and pay the Part XI.3 tax.
Twice the amount of any premium paid by the employer is deemed to be a contribution under the RCA (paragraph 207.6(2)(c) of the Act) and 50% of a contribution to the RCA must be withheld and remitted as tax by the custodian (see paragraph (a) of the definition of "refundable tax" in subsection 207.5(1) and paragraph 153(1)(p) of the Act).
Where the annuity contract is not a prescribed annuity, subsection 12.2(1) of the Act requires the policyholder to include in income the interest on the accumulating fund as determined in prescribed manner. Since the interest in the policy is deemed to be the subject property of the RCA under paragraph 207.6(2)(b) and such property is deemed to be the property of the trust and not to be the property of any other person (paragraph 207.6(1)(b) of the Act), the interest on the accumulating fund is income of the RCA. Such income interest is subject to the Part XI.3 tax in accordance with paragraph (b) of the definition of "refundable tax". Where the RCA has no cash on hand to satisfy the payment of this tax, the custodian (employer) must remit the tax on its behalf.
In our view, the payment by the employer of this tax is considered to be an additional contribution to the RCA. As an additional contribution, it would also be subject to the refundable tax, as would the payment of that tax and so on. We have confirmed with the T3 Programs Section of the Individual Returns and Payment Processing Directorate that the Department would agree to stop this pyramiding of refundable tax after the third calculation.
The employer may deduct the amount of a contribution to an RCA in accordance with paragraph 20(1)(r) of the Act; this deduction applies equally to the premiums paid for the annuity contract and to the refundable tax paid on behalf of the RCA with respect to the income (i.e., the subsection 12.2(1) interest on the accumulating fund) of the RCA trust.
Amounts received in respect of the interest in the annuity and refunds of refundable tax are deemed to be amounts received out of or under the RCA by the recipient pursuant to paragraph 207.6(2)(d) of the Act. Thus, when the employer receives refundable tax, it will be included in its income under paragraph 12(1)(n.3) of the Act, and when the employee receives an amount of an annuity payment, it will be included in the employee's income under paragraph 56(1)(x) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c.: Ms Aileen Wade
T3 Programs Section
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