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:
Whether a segregated fund contract with an annuity option is an annuity contract for the purposes of paragraph 20(2.2)(c).
Position:
Factual determination to be made based on the terms of the particular contract.
Reasons:
The term "annuity contract" is not defined in the Act. Therefore, one must refer to the legal definition of "annuity contract" in order to determine if the rights and obligations created under the segregated fund contract fall within the scope of that definition.
XXXXXXXXXX 5-970176
Attention: XXXXXXXXXX
April 15, 1997
Dear Sirs:
Re: XXXXXXXXXX
This is in response to your letter of January 3, 1997 to the XXXXXXXXXX Tax Services Office which was referred to this Directorate for reply. In your letter, you referred to an opinion we gave on February 26, 1987 that a particular segregated fund contract marketed by XXXXXXXXXX did not constitute an annuity contract.
Your concern appears to relate to the addition of paragraph 20(2.2)(c) of the Income Tax Act (the "Act") in 1994, applicable to 1987 and subsequent taxation years. The effect of paragraph 20(2.2)(c) of the Act is to allow a deduction for interest on money borrowed to acquire certain segregated fund annuity contracts. You submit that a policy issued by a life insurer all the reserves for which vary in amount depending on the fair market value of a specified group of properties, that does not insure the life of an individual, and that contemplates the payment of an annuity at maturity is an annuity contract from the time of its issue, even though annuity payments have not yet commenced.
It is a factual determination as to whether a particular segregated fund contract is an annuity contract. Such a determination can only be made by analysing all of the terms and surrounding circumstances. Accordingly, we are unable to provide you with specific comments but we are prepared, however, to offer the following general comments.
While the Act provides a definition of "annuity" in subsection 248(1), the term "annuity contract" is not defined. Therefore, it is necessary to refer to the common or civil law definition of the term to determine what constitutes an annuity contract. The following expressions are defined in Black's Law Dictionary:
Annuity. A right to receive fixed, periodic payments, either for life or for a term of years...A fixed sum payable to a person at specified intervals for a specific period of time or for life.
Deferred annuity. Payments begin at some specified future date provided the beneficiary is alive at such date.
Variable annuity. A contract calling for payments to the annuitant in varying amounts depending on the success of the investment policy of the insurance company; unlike a straight annuity which requires the payment of a fixed amount.
Annuity policy. An insurance policy providing for monthly payments to insured to begin at fixed date and continue through insured's life.
Based on the above definitions, the proper characterization of a particular contract would depend on the rights and obligations created under the contract. If the contract imposes an obligation on the insurer to provide an annuity to the policyholder and confers on the policyholder the right to receive an annuity, it would appear that the contract is, at law, an annuity contract. The fact that the contract allows the policyholder to opt to receive a lump sum in lieu of the annuity payments does not, in our view, alter the nature of the contract. Also, since an annuity contract may provide for annuity payments to commence immediately or sometime in the future, we share your view that it is not necessary for annuity payments under a contract to commence before the contract becomes an annuity contract.
In summary, if, based on the rights and obligations created under a segregated fund contract, it is determined that the contract is, at law, an annuity contract and all of the insurer's reserves for the contract vary in amount depending on the fair market value of a specified group of properties, it is our view that interest on money borrowed to pay premiums on such a contract would be deductible under paragraph 20(1)(c)(i) of the Act by virtue of paragraph 20(2.2)(c) of the Act.
While we hope that our comments are of assistance to you, they do not constitute an advance income tax ruling and, therefore, are not binding on the Department in respect of a specific situation.
Yours truly,
Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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