19 March 1996 External T.I. 9531185 - COMMUTED VALUE OF U.S. DEFERRED ANNUITY TO CDN.RESIDENT

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.

RULINGS DIRECTORATE

CORRESPONDENCE SUMMARY

Principal Issues:

Whether the commuted value of a U.S. deferred annuity contract (acquired by a U.S. resident/annuitant) and payable upon the death of the annuitant to a named Canadian resident beneficiary is included in income.

Position:

General comments provided. Could qualify as a non-taxable receipt (i.e. inheritance/gift) however there is not enough information to make that determination.

Reasons:

Legal definition of a gift and inheritance.

	                       				953118
XXXXXXXXXX                      	G. Donell

Attention: XXXXXXXXXX

March 19, 1996

Dear Sir:

Re: Payment received pursuant to an annuity contract

This is in reply to your letter of November 17, 1995 in which you have asked for our views as to the Canadian income tax treatment to a Canadian resident beneficiary in a situation where a U.S. resident acquires a deferred annuity contract in the U.S. that provides that, on the death of that U.S. resident, the commuted value of accumulated and unpaid amounts under the contract be paid to that beneficiary. In your view the commuted value payable as of the time of death to the Canadian resident beneficiary would not be subject to tax in Canada as the payment would constitute an inheritance, gift or other non-taxable receipt. We apologize for the delay of our response.

We are unable to comment directly on the tax consequences of the above mentioned transaction as we are not in possession of sufficient facts to render a determinative opinion. Such an opinion would, generally, be provided only in the form of an advance income tax ruling in respect of a definite proposed transaction. However, we offer the following general comments with regard to the issues raised in your letter which we hope will be of assistance to you.

INHERITANCE/GIFT

As you have indicated inheritances are not subject to tax in Canada there being no specific statutory provision within the Income Tax Act that requires inclusion in income. Earnings upon inheritances are however taxable. Black's law dictionary defines an inheritance as "That which is inherited or to be inherited. Property which descends to heir on the intestate death of another. An estate or property which a man has by descent, as heir to another, or which he may transmit to another, as his heir." The question of whether a specific amount can be properly characterized as an inheritance however can only be answered having regards to the facts of a given situation.

A gift is defined as "A voluntary transfer of property without valuable consideration." The common law doctrine generally requires the following elements:

(1) a donor competent to make the gift

(2) a donee capable of taking the gift

(3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion and control of the subject-matter of the gift,

(4) the irrevocable transfer of the legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it,

(5) a delivery by the donor to the donee

(6) acceptance by the donee.

Again, whether the payment would meet the definition of a gift can only be made with regards to the facts of a specific situation.

ANNUITY PAYMENT/CONTRACT

Where an amount is received as an annuity payment, paragraph 56(1)(d) of the Act requires that the amount be included in income. This amount would include both capital and income components. Paragraph 60(a) of the Act generally provides a deduction with respect to the capital element of a payment made under an annuity contract that is included in a taxpayer's income pursuant to paragraph 56(1)(d) of the Act. An "annuity" is defined in subsection 248(1) in terms of an amount "...payable on a periodic basis...". In this regard a single lump-sum payment or commuted value would generally not be considered as an amount payable on a periodic basis.

A further question to be resolved is whether the recipient beneficiary has acquired an annuity contract. The definition of a "life insurance policy" pursuant to subsection 248(1) of the Act includes an annuity contract accordingly one would have to look to the provisions of section 148 of the Act to determine the tax consequences that may arise in relation to the ownership of that contract. The determination of whether an annuity contract has been acquired can only be made having regards to other factors such as the terms and conditions of the contract.

CANADA-U.S. INCOME TAX CONVENTION (1980)

In consideration of the fact that the transaction concerns a payment arising in the United States (U.S.) and made to a resident of Canada, reference will have to be made to the provisions of the Canada-U.S. Income Tax Convention (1980) (the "treaty") which generally override the provisions of the Act. For example, Article XVIII of the treaty deals with Pensions and Annuities. Paragraph XVIII(4) of the treaty defines "annuities" as "...a stated sum paid periodically at stated times during life or during a specified number of years...but does not include a payment that is not a periodic payment".

Paragraph XVIII(2b) provides that the country where the annuities arise, in such case, is limited to a 15% withholding tax but also provides that the country where the recipient is resident may also impose tax upon the same amount. In such case the Canadian resident would generally be entitled to a tax credit or deduction under subsection 126(1) or 20(11) of the Act, respectively with respect to certain U.S. taxes paid upon that amount.

Where the annuity payment is income in the hands of the recipient and is not periodic, the provisions of article XXII of the treaty are applicable. Paragraph XXII(1) of the treaty provides that the country where the recipient resides has the right to tax the payment. If such income arises in the other country however then that other country may also impose tax on that same amount without limit except where the income with respect to that annuity is distributed by an estate or trust in which case the tax is limited to 15% in the same manner as described above. The Canadian resident would generally be entitled to a tax credit or deduction, as indicated above, with respect to certain U.S. taxes imposed and withheld. The application of such provision however is dependent upon characterization of the payment as income, a question we are unable to answer in view of the limited facts provided.

In summary it is a question of fact as to whether the payment can be considered as income or whether the payment constitutes a gift, inheritance or other non-taxable amount. We refer you to Interpretation Bulletin IT-334R2 titled "Miscellaneous Receipts", for a discussion of some non-taxable receipts including windfalls, gifts, and other voluntary payments.

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch