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:
Where creditors are awarded ownership rights to an annuity in accordance with bankruptcy laws, are the annuity payments income to the creditors?
Position:
Yes
Reasons:
56(1)(d) applies to the recipient of the annuity payments.
960658
XXXXXXXXXX M.P. Sarazin
Attention: XXXXXXXXXX
May 2, 1996
Dear Sirs:
Re: RRSP Annuitants & Bankruptcy
This is in reply to your letter dated February 12, 1996, wherein you requested our comments regarding the reporting of payments from guaranteed income annuities ("Annuity Payments") where, in settlement of their claims against certain bankrupt individuals, the Court of Queen's Bench of Manitoba (the "Manitoba Court") ordered that the Annuity Payments be made to the creditors or their counsel. Since the Tax Court of Canada ruled that the Annuity Payments could not be included in the income of the discharged bankrupt individuals, you are of the view that the Annuity Payments should be included in the recipients' income.
The bankrupt individuals used the funds in their registered retirement savings plans ("RRSP") to purchase the guaranteed income annuities and the Manitoba Court ruled that the purchases constituted settlements within the meaning of subsection 91(1) of the Bankruptcy Act. Under the Manitoba Court decision, the Annuity Payments were to be made to the creditors. In rendering his decision on behalf of the Tax Court of Canada, Mr. Gordon Teskey J.T.C.C. concluded that the decision rendered by the Manitoba Court effectively removed the ownership of the guaranteed income annuities from the discharged bankrupt individuals to the creditors. Consequently, the discharged bankrupt individuals no longer had any beneficial ownership of, or interest in, the guaranteed income annuities and income arising therefrom, was not their income.
In your letter you have outlined an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of Tax Services offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide you with the following general comments which we hope will be of assistance.
Under the provisions of paragraph 56(1)(d) of the Income Tax Act (the "Act"), a taxpayer must include in its income any amounts received in the year as an annuity payment. Since the creditors were awarded beneficial ownership of the guaranteed income annuities, the creditors will have to include the annuity payments in their income under paragraph 56(1)(d) of the Income Tax Act. Consequently, the annuity payments should be reported in box 24 of form T4A. However, the creditors may be entitled to a deduction under paragraph 60(a) of the Act with respect to the capital element of the annuity payments as determined by Part III of the Income Tax Regulations. If any assistance is required in determining the capital element, we would suggest that George Pottage be contacted at (519) 725-7347.
Where there was a change in an RRSP plan after registration and the substituted plan did not comply with the requirements of section 146 of the Act, the provisions of paragraph 146(12)(a) would have applied to deem the plan to no longer be an RRSP. As a result, payments from the plan after the creditors took possession of the annuities would no longer be considered to be payments from an RRSP.
We trust the above comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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