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:
Does an annuity that may have a variable guaranteed term that does not appear to be wholly or partly dependent on the beneficiaries life qualify as a prescribed annuity (PAC) under section 304 of the Regulations.
Position:
Advised to come in for ruling since this is a question of fact. We have concerns that the proposed annuity may not qualify since the term is not certain and the investment income of the issuer may be "shared" with the beneficiary.
Reasons:
See above
XXXXXXXXXX 962589
Attention: XXXXXXXXXX
September 23, 1996
Dear Sirs:
Re: Single Premium Annuity Contract
This is in reply to your letter dated July 25, 1996, wherein you requested our comments as to whether a type of single premium annuity contract will be a "prescribed annuity contract" ("PAC") described in paragraph 304(1)(c) of the Regulations to the Income Tax Act (the "Act").
Under the terms of an annuity contract, equal monthly payments are to be made to a holder (the "annuitant") for the lifetime of the annuitant. However, if the annuitant dies before attaining the age of 91, the annuitant's named beneficiary will have the option of receiving the same equal monthly payments for an "guaranteed period", or receiving a lump-sum commutation payment based on the equal monthly payments to which the beneficiary would otherwise be entitled at a discount rate of not more than 1%. The "guaranteed period" is determined by dividing the remaining "balance of the issuer's fund" at the time of the annuitant's death by the amount of one equal monthly payment; however, in no circumstance will the "guaranteed period" exceed the date on which the annuitant has, or if alive, would have attained the age of 91.
The situation described in your letter appears to relate to a proposed transaction. It is not the Department's practice to provide opinions on the income tax consequences of specific proposed transactions without a complete review of all the relevant facts and information of the particular situation unless an advance income tax ruling is requested in the manner set out in Information Circular 70-6R2 dated September 28, 1990 (as amended by special release dated September 30, 1992). Such a request would require identification of the issuer of the annuity, the annuitant, and the beneficiary and should include a copy of the proposed annuity contract. While we are not in a position to give you a definitive response to the situation described in your letter, we offer the following comments which may be of some assistance to you.
Assuming the other conditions of section 304 of Regulations are met, where an annuity contract (other than a joint and last survivor annuity or one held by a testamentary or spouse trust) requires that payments be made over a term that is guaranteed or fixed, and such term does not exceed the date on which the annuitant would, if he survived, attained the age of 91, such an annuity contract would qualify as a PAC.
While it appears that the "guaranteed period" in your situation would not result in payments that would exceed the date on which the annuitant would, if he survived, attained the age of 91, we are not convinced that the annuity you describe is a PAC. For example, because the payments in the "guaranteed period" are computed by reference to the value of the assets in the fund of the issuer at the time of the annuitant's death, we have a concern that such a formula appears to allow a beneficiary to participate in the investment earnings of the issuer, and if that were the case, subject to paragraph 304(2)(d) of the Regulations, such an annuity would not be a PAC.
Moreover, because the formula may result in no "guaranteed period" or one that can be fixed or ascertainable at the time the annuity is issued, we are concerned that any commutation payment made to the beneficiary, as described above, may not fit squarely within the exception provided in paragraph 304(2)(c) of the Regulations.
While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.
Yours truly,
Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch
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