4 June 1997 External T.I. 9707075 - RCA PURCHASE OF AN ANUITY

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:

Issues relate to the creation or amendment of RCAs so that section 254(a) of the Act can be applied so annuities can be purchased in the name of the beneficiaries and the RCA woundup. Since this plan appeared to relate to a factual situation, we provided general comments. The principal questions are.

1.Will payments be deductible to the employer?

2.How do the provisions of 107.2(b) apply to RCAs?

3. Will 254(a) apply?

4. Will GAAR apply

5. Will 254(a) override the income accrual rules for annuities?

Position:

1.No reply provided.

2.No reply provided.

3.No reply provided.

4.General statement on GAAR provided.

5. General statement of law provided

Reasons:

1. 2.& 3. should be answered only with respect to an advance income tax ruling.

4. Only general comments could be provided.

5. General restatement of the applicable law.

XXXXXXXXXX 970707

Attention: XXXXXXXXXX

June 4, 1997

Dear Sirs:

Re: Application of Paragraphs 254(a), 56(1)(x) and (y) subsection 56(11) and Section 107(2) of the Income Tax Act (the "Act")

This is in reply to your letter of February 20, 1997, requesting our comments on the application of the above noted provisions of the Act to a specific scenario described in your letter.

The following comments relate to the treatment of deferred annuities acquired by retirement compensation arrangements ("RCAs"). They are general in nature and may or may not apply to a plan as described in your scenario. More specific replies to your enquiry may only be provided by this directorate where they are requested in the form of an advance income tax ruling request.

Subsection 56(1) of the Act applies to include actual receipts of amounts paid out of or under a pension fund or plan in income for the year in which the amount is received. However, paragraph 254(a) of the Act provides that if that section applies to a document or contract:

any payment under the document or contract will be a payment out of or under a superannuation or pension fund or plan; and

any payment of an amount out of or under a superannuation or pension fund or plan will be deemed not to have been received by the taxpayer as a consequence of the issuance of the document or entering into the contract.

Accordingly, if section 254(a) applies to a document or contract, no amount will be included in the taxpayers income by virtue of subsection 56(1) of the Act until such time as an amount is received under the terms of the document or contract. On the other hand, paragraph 254(a) of the Act has no application to limit the provisions of subsection 12.2(1) of the Act. Accordingly, if an annuity is not a prescribed annuity, the provisions of that subsection may have application. In such a case the provisions of subsection 248(28) may provide relief from taxation under the provisions of subsection 56(1) of the Act of any amounts previously included in income in accordance with subsection 12.2(1) of the Act.

We would also like to note that where an actual series of transactions is designed to circumvent a specific provision of the Act, the Department will consider the application of the general anti-avoidance rules found in subsection 245(2) of the Act. The Department's general views on the application of these rules can be found in the Department's Information Circular 88-2 dated October 21, 1988 and the supplement thereto dated July 13, 1990.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch