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:
can paragraph 254(a) apply where RCA acquires annuity for beneficiary?
Position:
Yes
Reasons:
Law does not prevent the acquisition; XXXXXXXXXX
960031
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts and proposed transactions is as follows:
Facts
XXXXXXXXXX (the "Company") is a Canadian-controlled private corporation within the meaning assigned by subsection 125(7) of the Income Tax Act (the "Act").
XXXXXXXXXX is a resident of Canada for purposes of the Act and an employee of the Company. XXXXXXXXXX is not related to the Company.
On XXXXXXXXXX the Company established a non-registered supplemental pension plan (the "Plan") for the purposes of augmenting XXXXXXXXXX retirement benefits. The Plan is a retirement compensation arrangement within the meaning assigned by subsection 248(1) of the Act.
Under the terms of the Plan, XXXXXXXXXX may choose to be paid in either of the following ways:
a monthly payment of $XXXXXXXXXX commencing on the first day of the month following XXXXXXXXXX retirement and continuing on the first day of each and every month thereafter until the Plan's assets are exhausted; or
the Plan may purchase an annuity contract in XXXXXXXXXX name on his retirement. In this regard, the Plan permits, but does not require, the Company to loan funds to the Plan equal to the refundable tax balance that is recoverable on the purchase of the annuity and the total of such loan proceeds along with the other assets held in the Plan may be used to purchase the annuity contract.
The Plan was drafted with a retirement date of XXXXXXXXXX or such earlier date that XXXXXXXXXX ceases to be employed by the Company and requests payments under the terms of the Plan. This date was selected because it was originally anticipated that XXXXXXXXXX would retire on XXXXXXXXXX It is now anticipated that XXXXXXXXXX will retire on or about XXXXXXXXXX and, as a result, XXXXXXXXXX and the Company have agreed that the reference to "XXXXXXXXXX" in the Plan shall be read accordingly.
The current fair market value of the property held in the Plan is approximately $XXXXXXXXXX.
Proposed Transactions
The Company will loan (the "Company Loan") the Plan an amount equal to the Plan's "refundable tax", within the meaning assigned by subsection 207.5(1) of the Act, at the end of the Plan's 1995 taxation year plus the amount, if any, remitted to the Receiver General on account of the Plan's tax for the Plan's 1996 taxation year pursuant to subsection 153(1) of the Act. The Company Loan will bear a commercial rate of interest and be repayable immediately on receipt of the Plan's refundable tax. The interest on the Company Loan will be paid monthly.
The proceeds of the Company Loan and all of the other assets in the Plan (net of a reserve for expenses including interest on the Company Loan) will be used to purchase an annuity contract in XXXXXXXXXX name. The annuity contract will be a "prescribed annuity contract" within the meaning assigned by subsection 304(1) of the Income Tax Regulations (the "Regulations").
On or before December 31, 1996, the Plan will, using the reserved funds referred to in paragraph 8 above, pay all of its outstanding liabilities (other than the Company Loan). If there are any funds remaining after such payment, the balance will be used to retire a portion of the Company Loan. Consequently, on December 31, 1996, the Plan will hold no assets other than a right to claim a refund of refundable taxes.
Within 90 days after the end of the Plan's taxation year ended December 31, 1996, the custodian of the Plan will file a return in prescribed form pursuant to subsection 207.7(3) of the Act and will elect therein pursuant to subsection 207.5(2) of the Act. As at December 31, 1996, the Plan will not have any assets other than the right to claim a refund of refundable tax and, therefore, the Plan's refundable tax at the end of its 1996 taxation year will be deemed to be nil.
The return filed by the custodian of the Plan will claim a refund equal to the amount by which the Plan's refundable tax at the end of its 1995 taxation year plus any additional refundable tax added during 1996 exceeds its refundable tax at the end of its 1996 taxation year. Since the refundable tax at the end of its 1996 taxation year is deemed to be nil, the refund will be equal to the Plan's refundable tax at the end of its 1995 taxation year plus any additional refundable tax added during 1996.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to provide XXXXXXXXXX with the maximum supplementary pension through the purchase of an annuity with all of the Plan's assets.
To the best of your knowledge and the knowledge of the Company, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and that the proposed transactions are completed in the manner described herein, our rulings are as follows:
Paragraph 254(a) of the Act will apply to the Plan's acquisition of the annuity in XXXXXXXXXX name and no amount will be included in XXXXXXXXXX income as a result of such acquisition.
The Plan's acquisition of the annuity in XXXXXXXXXX name will not result in the application of subsection 153(1) of the Act.
Annuity payments received by XXXXXXXXXX will be included in his income under subsection 56(1) in the year received.
Provided the annuity acquired by the Plan in XXXXXXXXXX name qualifies as a prescribed annuity contract, section 12.2 of the Act will not result in any amount being included in XXXXXXXXXX income with respect to the annuity contract.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, and are binding on Revenue Canada, Customs, Excise, and Taxation provided that the proposed transactions are completed within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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