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.
19(1) 5-8491
C. Tremblay
(613) 957-2095
Dear Sirs:
This is in reply to your letter of August 10, 1989, requesting our views on the tax treatment of several arrangements which charitable organizations are either using or contemplating using in connection with their fund raising activities. We apologize for the delay in replying.
1. The Life Income Agreement
You describe an arrangement whereby an individual
described as the "donor" gives an amount to the
charity. The agreement terminates with the last payment made
preceding the death of the donor. In consideration for
the capital contribution, the charity undertakes to pay
the donor a specified amount of the donor. The amount
to be paid each year would be fixed by reference to the
Bank of Canada interest rate on January 1st of each
year. Your understanding of the Arrangement:
The contribution by the donor would not be a gift in
law nor would it qualify as a gift for income tax
purposes. Notwithstanding the statement in the
agreement would become the absolute property of the
charity on the death of the donor, the capital
contribution would in fact vest in the charity at the
time such contribution was made to the charity. The
charity would not be required to hold or invest the
capital contribution. In your view, the capital
contributions would not be held in a trust in which the
donor had an interest. The capital contributions would
not be a deposit or a loan to the charity, would not be
held in trust by the charity and he charity would not
be under any legal obligation to invest or hold the
capital contribution. It is your opinion that the
obligation of the charity to provide periodic payments
to the donor throughout his life should be regarded as
an obligation of the charity to provide an annuity to
the donor. The annuity provided under the arrangement
would not qualify as a prescribed annuity since the
agreement does not provide for equal annuity payments. Our Comments
We agree that the annuity would not qualify as a
prescribed annuity,; the annuity payments would vary
from year to year depending on the Bank of Canada rate
on January 1st of each year thus the criteria in clause
304(1)(c)(iv)(A) of the Income Tax Regulations (the
Regulations) would not be met. In order to calculate
the supposed donation, we must also be able to
determine the expected payout over the life of the
annuity. This would not be possible where the annuity
is calculated on a variable rate of interest.
Furthermore, no portion of the contribution regarded as
a gift under the Act. In our view, IT-111R
is not
applicable; other than paragraph 1 which was written
before the enactment of subsection 12.2(3) and
paragraph 56(1)(d.1) and means only that the ordinary
rules will apply. Thus, paragraph 56(1)(d.1)and
subsection 12.2(3) of the Act would apply to determine
the tax treatment of the donor. You mention that the consideration for the issue of an
annuity would be the lesser of the capital contribution
and the amount that would be charged by a commercial
annuity issuer. Although the difference between the
capital contribution and the consideration by some
annuity be a commercial annuity issuer may be
considered by some annuity issuers as being the gift
component, this is not recognized for tax purposes.
Moreover, if we refuse to regard any part of the
donor's payment as the gift because the donor receives
as consideration for annuity payments. it follows that
the cost of the annuity is not less than the payment to
the charity. We find it difficult to agree that this
amounts to preferential tax treatment for annuities
issued by charities as opposed to annuities issued by
commercial issuers. As you note, the annuitant forgoes
the benefit of an immediate tax credit for a gift to a
charity; in a sense, he is deferring the tax credit
benefit of his "gist" to later years, which would not
usually be seen as advantageous.
1a) The Alternative
If the arrangement were altered to provide for a
constant annuity payment, the annuity would qualify as
a prescribed annuity. If there was a gift to the
charity, paragraph 3 of IT-111R
would apply and the
excess contribution over the aggregate of the expected
annuity payments could be considered gift to the
charity for income tax purposes, and the remainder of
the payment (i.e. in excess of the gift) is the cost of
the annuity. Where the aggregate of the expected
annuity payments exceeded the capital contribution
where no gift element is recognized, the regular
accrual rules pertaining to annuities apply. Other Tax Issues - Annuities
The gift component that is recognized by IT-111R
is
less than the gift that could be recognized if the
individual used a portion of the amount that would
otherwise be contributed to the charity as a gift. In
your view, IT-111R
appears to treat the excess of the
individual's contribution over the gift component that
is not recognized (the difference between the
consideration for the annuity as determined in IT-111R
and the amount that would be charged by a commercial
annuity issuer) is considered to be an annuity reserve.
You feel that if the charity took certain steps to
eliminate such annuity risks, that gifts portion could
be recognized. You suggest that, if on receipt of a
contribution for an annuity the charity immediately
used a portion of such contribution to purchase the
required annuity from a commercial annuity issuer,
irrevocably assigned annuity payments to the individual
contributor equal to the annuity payments that the
charity was required to make and obtained a release
from the individuals charity's obligation to make such
annuity payment, the charity would not have any
continuing liability to provide the annuity. The gift
component not recognized in the it-111R will thus be
available to the charity without restriction. You feel
that since the charity would continue to be the
annuity issuer, if could qualify as a prescribed
annuity. You question whether the department would
consider the excess of the amount contributed by the
individual over the amount paid by the charity for
income tax purposes. Our Comments:
The position in IT-111R
is an administrative position
that is only available where the individual pays
(donates) more for the annuity than the total amount
expected to be received as annuity payments to the
charity; the Department is not prepared to go beyond
the position set out in paragraph 3 of IT-111R
. In the
situation you describe the charity arranged the annuity
funding with the annuity issuer rather than the
individual doing so directly. If the individual were
to purchase an annuity from an annuity issuer and the
gift the remainder to charity, the gift would be
recognized for income tax purposes and the annuity
would be subject to the regular rules for annuities.
This more direct approach could be pursued by any
individual who wished to claim a tax credit for a
larger gift than would be calculated pursuant to
IT-111R
, without the need to interpose a charity as the
issuer of an annuity. Business Activity and Related Business
Whether a business is carried on for profit or with a
reasonable expectation of profit is an issue which is
supplementary and distinct from that of whether or not
a business exists. In this respect "business" includes
an undertaking of any kind. Thus we regard the issue
of annuities by a charity as a business activity. Provided that the activity yields the charity a
significant gift portion, it is our position that that
annuities issued by the charity would be considered a
related business. However, you may wish to discuss
this with Mr. Gordon Murray, Director of Charities
Division who could best answer this question.
2) Irrevocable Charitable Agreement
You describe an arrangement whereby a donor purports to
make an irrevocable contribution to a charity. The
contribution is made to the charity as trustee. The
trustee is instructed to invest the contribution in
property in which a trustee in Ontario is permitted to
invest and to pay the net income from such investment
to the donor. On the death of the donor the
contribution and accrued income would fully vest in the
charity. Your Understanding of the Agreement
In your view, the Agreement would create a settlement
trust in which the charity would be the trustee and
residual beneficiary and the settlor would be the
income beneficiary. The contribution would be a
transfer of property to a trust which is not a charity.
The donor would be the income beneficiary and the
charity would be the residual beneficiary. The value
of the residual interest would vest in the charity and
would be recognized by the donor would be subject to
tax to the extent that such income was not paid or
payable in the year to a beneficiary. Our Comments
Generally, we agree with your understanding. We agree
that IT-226
would apply and IT-111R
has no relevance.
Where there is gift of residual interest to a charity,
IT-226
would apply. The value of the residual interest
must be determined. Since the annuity payments are to
be paid form income, it would appear that subparagraph
60(a)(ii) of the Act would deny any deduction to the
taxpayer except the extent that the payment contained a
portion paid out of capital. In our view, the trust
would be subject to tax and subsection 12(3) would
apply to the trust if one more of the beneficiaries
were as corporation. 24(1)
Your Understanding
24(1)
Our Comments
24(1)
The foregoing comments represent an expression of
opinion and accordingly are not binding on the
Department. We note that, in preparing these comments,
we have not considered representations from taxpayers
utilizing the arrangements which you have described. We trust our comments are of assistance.
Yours truly,
for Director
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
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© Her Majesty the Queen in Right of Canada, 1989
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© Sa Majesté la Reine du Chef du Canada, 1989
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