11 January 1999 External T.I. 9814125 - LUMP-SUM ANNUITY PAYMENT, RRIF

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:

Can a lump-sum annuity payment be transferred to a RRIF?

Position:

If it is the commuted value of a matured RRSP then yes, otherwise no.

Reasons:

Paragraph 146.3(2)(f) lists the amounts that may be transferred to a RRIF.

XXXXXXXXXX									981412
M. P. Sarazin
January 11, 1999

Dear Sir:

Re: Transfer of an Annuity to a Registered Retirement Income Fund (“RRIF”)

This is in reply to your facsimile dated April 25, 1998, wherein you asked whether a lump-sum annuity payment could be transferred to your self-directed RRIF.

You are 73 years old and you are a resident of the United States. Your Canadian pension and other income, including amounts received from your self-directed RRIF with XXXXXXXXXX, are subject to Canadian withholding taxes and you have not filed a Canadian income tax return since 1988 or 1989. You recently discovered that you own an annuity contract with the XXXXXXXXXX having a fair market value of approximately $XXXXXXXXXX. You believe that the annuity may be a matured registered retirement savings plan (“RRSP”) for purposes of the Income Tax Act (the “Act”). XXXXXXXXXX has advised you that they will not transfer the amount under the annuity contract to your RRIF without a favourable advance income tax ruling. You would like to know whether the property held under the annuity contract could be transferred to your RRIF.

Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling submitted in accordance with Information Circular 70-6R3 (copy enclosed). However, we are prepared to offer the following general comments which may or may not be applicable to your particular situation. We note our comments only address the Canadian tax implications on this topic.

Where an individual enters into a contract with a person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an annuities business, under which, the individual makes a payment or payments to the person in order to receive a retirement income at maturity from that person, the contract would qualify as a retirement savings plan under paragraph (a) of the definition of “retirement savings plan” in subsection 146(1) of the Act. The contract would qualify as a RRSP where the retirement savings plan has been accepted by the Minister for registration because it complies with the requirements of section 146 of the Act. The determination of whether a particular contract has been registered as a RRSP is a question of fact.

If an annuity contract is a RRSP, its commuted value may be transferred to a RRIF pursuant to the provisions of subparagraph 146.3(2)(f)(a) of the Act. Under that provision, a RRIF carrier may accept property under a RRIF contract for an individual if the property is transferred from a RRSP under which the individual is the annuitant. (The mechanics of such a transfer are outlined below). If the annuity contract is not a RRSP, paragraph 146.3(2)(f) of the Act will prohibit the transfer of property under the contract to a RRIF.

Annuity Contract is Registered as a RRSP

An annuity contract that is registered as a RRSP for purposes of the Act would provide for the payment of a retirement income commencing on the contract’s maturity date. The fact that an insurance company (the “Company”) was not able to locate an annuitant would not preclude the Company from reporting the amount that should have been paid to the annuitant each year under the annuity contract, including the remittance of the applicable withholding taxes. “Maturity” is defined to mean the date fixed under a retirement savings plan for the commencement of the payment of the retirement income. The maturity of a RRSP contract must occur before the end of the year in which the annuitant attains 69 years of age. (For plans registered before 1997 the age referred to in the previous sentence is 71.)

As stated in paragraph 7 of the enclosed Interpretation Bulletin IT-528, Transfers of Funds Between Registered Plans, the commuted value of a matured RRSP may be transferred directly to a RRIF. The amount transferred has to be included in the individual’s income for the year under paragraph 56(1)(h) and can be deducted under paragraph 60(l) of the Act. In our view, the commuted value of a matured RRSP is a commutation of the retirement income remaining under the annuity contract under the matured RRSP. Consequently, the commuted value would only represent the present value of the future stream of payments under the contract and would exclude the payments that were or should have previously been made under the contract. An individual can request to have the commuted value of a RRSP transferred to a RRIF by completing the Form T2030 and forwarding it to the RRIF carrier.

Annuity Contract is not Registered as a RRSP

Where an annuity contract is not registered as a RRSP, paragraph 146.3(2)(f) would prohibit the transfer of the property held under the annuity contract to a RRIF.

With regard to the taxation of payments from the annuity, where a non-resident person is the annuitant under an annuity, paragraph 212(1)(o) of the Act requires that person to pay tax on every amount paid or credited to him in respect of “a payment under an annuity contract ... to the extent of the amount in respect of his interest in the contract that, if the non-resident person had been resident in Canada throughout the taxation year in which the payment was made, would be required to be included in computing his income for the year...”. Accordingly, it must be determined whether a person resident in Canada throughout the particular year would be required to include an amount in computing his income for the year and, should the question be answered in the affirmative, that amount would be subject to the provisions of paragraph 212(1)(o) (i.e. withholding tax) with respect to a non-resident person. In respect of your particular annuity contract, XXXXXXXXXX should be able to tell you whether a lump-sum withdrawal under the particular annuity contract would be subject to a tax under paragraph 212(1)(o) of the Act.

The Canada-U.S. Tax Convention may also apply to this situation. Under subparagraph 2(b) of Article XVIII of the Convention, annuities may also be taxed in the Contracting State in which they arise and according to the laws of that State (i.e. Canada); but if a resident of the other Contracting State is the beneficial owner of an annuity payment, the tax so charged shall not exceed 15% of the portion of such payment that would not be excluded from taxable income in the first-mentioned State if the beneficial owner were a resident thereof. However, paragraph 4 of Article XVIII of the Convention defines annuity to mean a stated sum paid periodically at stated times. Consequently, a lump-sum withdrawal under an annuity contract would not benefit from the 15% tax rate under Part XVIII of the Convention. Rather, the amount would be taxed at 25% under paragraph 212(1)(o) of the Act.

We trust these comments will be of assistance.

Yours truly,

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

Encl.

3