29 May 1998 External T.I. 9730525 - ATTRIBUTION RULES - ANNUITY CONTRACT

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:

1. Do subsections 74.1(1) and 74.2(1) apply where a spouse is designated as an irrevocable beneficiary of an annuity contract?

2. Does subsection 75(2) apply in a particular situation?

Position:

1. Subsection 74.2(1) would not apply assuming that there is no part of the life insurance policy acquired in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust. As for the application of subsection 74.1(1), no position taken.

2. Where no trust exists, no. Where a trust exists, no position taken.

Reasons:

1. (Application of 74.2(1)) The annuity would not be a capital property.

(Application of 74.1(1)) Question of fact. It depends on whether the annuity contract is a prescribed annuity contract or not, on whether the spouse is the holder of the interest in the annuity contract. The determination can only be made upon the review of the particular contract and all relevant documents.

2. Where a trust exists, question of fact.

XXXXXXXXXX 5-973052
Syvie Labarre, CA

Attention: XXXXXXXXXX

May 29, 1998

Dear Sir\Madam:

Re: In-trust Accounts - Irrevocable Beneficiary

This is in reply to your letter dated November 13, 1997 wherein you requested our comments on the attribution rules in a situation where an in-trust account is established for the benefit of a minor child to allow his parent to contribute money to purchase a life insurance product. We apologize for the delay in responding to your request.

In the hypothetical scenario you described in your letter, Parent A would give money to an in-trust account established for his child and Parent B (the spouse of Parent A) would be the trustee of the in-trust account. There would be no formal trust document prepared and the intent would be that no trust be created. The money would be used to purchase an annuity contract that would be registered as owned by "Parent B, in trust" for the minor child. You mention that, when the child would reach the age of 18, he would have unrestricted access to the funds.

As an alternative to avoid an unrestricted access to the funds when the child reaches the age of 18, Parent B would be named as an irrevocable beneficiary under the annuity contract. As a consequence of that designation, you state that Parent B would have no entitlement to income or capital unless the child dies but he or she would have to sign off on any withdrawals and that this arrangement would enable Parent B to control the child’s use of the funds.

You question whether the designation of Parent B as an irrevocable beneficiary under the annuity contract would have the effect of changing the application of the attribution rules such that subsections 74.1(1) and 74.2(1) of the Act would be applicable instead of subsection 74.1(2) of the Act. You have also asked whether we would take the position that subsection 75(2) applies under these circumstances.

As explained in Information Circular 70-6R3, it is not the Department’s practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Our comments

Attribution rules

Under the present heading, we comment on the attribution rules in a situation where it is established that a trust does not exist.

Our first remark concerns your statement that the child would be taxed on any capital gains in the situation where Parent B is not an irrevocable beneficiary and your question concerning subsection 74.2(1) of the Act in the situation where Parent B is the irrevocable beneficiary. Assuming that there is no part of the life insurance policy acquired in respect of which a policyholder is deemed by paragraph 138.1(1)(e) to have an interest in a related segregated fund trust, we failed to see that a capital gain would result from the disposition of the annuity contract. An annuity contract is a life insurance policy by virtue of the definitions contained in section 248 (life insurance policy) and subsection 138(12) of the Act. Thus, by the interaction of these provisions and that of subparagraph 39(1)(a)(iii) or subparagraph 39(1)(b)(ii), as the case may be, an annuity would not be a capital property (any gain or loss from the disposition of it would not be a capital gain or capital loss, as the case may be, of the taxpayer).

As for the application of subsection 74.1(1) or subsection 74.1(2) of the Act, we cannot confirm your view that subsection 74.1(2) of the Act would apply in the case where Parent B is not an irrevocable beneficiary so that any income would be attributed to

Parent A unless the child, has before the end or the year, attained the age of 18 years without a review of the particular facts to determine, inter alia, whether the child has income from the annuity contract to be attributed to Parent A.

For the purpose of the following comments, we will assume that the annuity contract is not a prescribed annuity contract and that subsection 12.2(1) of the Act applies. Subsection 12.2(1) of the Act will apply to the taxpayer who holds an interest in a life insurance policy. While the term "an interest in a life insurance policy" is not defined in the Act, it refers to an ownership interest. It is a question of fact whether or not a taxpayer has an ownership interest in an annuity contract. This determination can only be made upon the review of the particular contract and all relevant documents.

Whether or not Parent B is designated as an irrevocable beneficiary under the annuity contract, it could be determined that Parent B is the holder of an interest in the annuity contract rather than the child. In that case, except for the possible application of the attribution rules, any income arising in respect of the annuity contract would be included in the income of Parent B.

The application of subsection 74.1(1) of the Act would require a determination of whether there has, in fact, been a transfer of property, either directly or indirectly, by one spouse to the other spouse. This is a question of fact which can only be determined subsequent to a review of all of the facts including the relevant documents. In the particular situation you described, it seems that the terms and conditions of the transfer or gift serve to divest, deprive or dispossess Parent A of title to the deposited funds. The question is whether the substituted property acquired with the deposited funds vests, directly or indirectly, in the spouse’s hands. That question is relevant whether or not the spouse is designated as an irrevocable beneficiary.

In our view, if Parent B holds an interest in an annuity contract that does not qualify as a prescribed annuity contract, subsection 74.1(1) of the Act would apply so that any income of Parent B from the annuity contract would be deemed to be income of Parent A.

Subsection 74.1(1) applies to any income or loss of the spouse from the property transferred. Even if we could consider, after the review of the relevant documents, that the annuity contract has been transferred to Parent B because of the designation as an irrevocable beneficiary, subsection 74.1(1) of the Act would be applicable only if Parent B has income from the annuity under the Act (for example, the spouse also holds an interest in an annuity contract other than a prescribed annuity contract).

Subsection 75(2) of the Act

In a situation where no trust exists, we agree with your view that subsection 75(2) of the Act would not apply. Whether a trust exists is a question of fact and particular to the circumstances of each case.

Assuming a trust did exist at law and considering the particular facts described in your letter, we are unable to comment on the potential application of subsection 75(2) of the Act and more particularly on the potential application of paragraph 75(2)(b). This would require a complete review of all facts and documentation.

As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

Marc Vanasse, CA
for the Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch