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.
Principal Issues: Whether an income inclusion pursuant to subsection 12.2(1) is required for an annuity contract under which its first annuity payment is made after its first anniversary day, but before the end of the taxation year containing that anniversary day.
Position: Not if the annuity contract qualifies as a PAC.
Reasons: Provided that the annuity otherwise qualifies as a PAC, subparagraph 304(1)(c)(i) of the Regulations makes the annuity a PAC for the entire taxation year, such that the exclusion in paragraph 12.2(1)(b) is satisfied.
CLHIA Roundtable - May 2011
Question 8 - Prescribed Annuity Contract
Consider the situation where an annuity is issued to an individual on January 31, 2011, and the contract states that level annuity payments will be made annually as long as the annuitant is alive starting on December 31, 2012. All other requirements for the annuity to qualify as a prescribed annuity contract ("PAC") are met. The annuity is a non-registered annuity.
The issue is whether annuity payments must commence before the date of the first policy anniversary, or by December 31 of the year in which the first policy anniversary falls in order for the annuity to be a PAC from the issue date.
Accrual taxation under subsection 12.2(1) applies where a taxpayer holds an interest in an annuity contract that is not, on the anniversary day of the policy, a PAC or an annuity acquired as proceeds from a grandfathered (pre-December 2, 1982) life insurance policy.
The definition of a PAC in subsection 304(1) of the Income Tax Regulations (the "Regulations") provides that an annuity contract will be a PAC for a taxation year if, inter alia, payments have commenced in the taxation year or a preceding taxation year. Based on this wording, it would appear that where payments have commenced before December 31 of a calendar year, the policy will be a PAC for the entire taxation year (and therefore at the anniversary day) even if the payments did not commence prior to the anniversary day.
For example, if an annuity is issued on January 31, 2011, it will be a PAC if the first annuity payment is made by December 31, 2012, and income will be reported for 2012 under paragraph 56(1)(d) with a deduction under paragraph 60(a) and no accrued income will arise under section 12.2 in either 2011 or 2012.
Questions:
a) Would the CRA please confirm that, for an annuity issued to an individual in a particular calendar year, the latest possible day that the first annuity payment can be made if the annuity is to be a PAC is December 31 of the subsequent calendar year?
b) Would the CRA also confirm that, in that case, no accrued income will arise under section 12.2 in the year of issue or in the immediately subsequent calendar year?
CRA Response:
a) When a taxpayer holds an interest in a life insurance policy last acquired after 1989, subsection 12.2(1) generally requires the taxpayer to report accrued income relevant to the policy on an annual basis. However, paragraph 12.2(1)(b) provides an exception for an annuity contract that qualifies as a PAC, as defined in section 304 of the Regulations, on any anniversary day of the contract. Subparagraph 304(1)(c)(i) of the Regulations states:
304(1) For the purposes of this Part and subsections 12.2(1), (3) and (4) and paragraph 148(2)(b) of the Act, prescribed annuity contract for a taxation year means
(c) an annuity contract
(i) under which annuity payments have commenced in the taxation year or a preceding taxation year, (emphasis added)
For the purposes of subsection 12.2(1), the determination of PAC status is made on the annuity contract's anniversary day that falls in the taxation year. However, the annuity contract will be considered a PAC for the entire taxation year to the extent the requirements of subsection 304(1) of the Regulations are met.
In the example, the annuity contract is not a PAC in the taxation year of issue (2011) because the requirement that the annuity payments have commenced in the taxation year or a preceding taxation year is not met for 2011. To the extent that the requirements to qualify as a PAC are met in 2012, including the requirement that the annuity payments commence in the taxation year or a preceding taxation year, the annuity contract will be a PAC for 2012. Accordingly, where the first annuity payment under the annuity contract is made after the first anniversary day (January 30, 2012), but by the end of the taxation year (December 31, 2012), the annuity contract will not be precluded from qualifying as a PAC.
b) Given that the annuity contract does not have an anniversary day falling in 2011, subsection 12.2(1) will not apply to require an income inclusion in respect of the contract for 2011. For 2012, there will be no income inclusion pursuant to subsection 12.2(1) assuming that the annuity contract will qualify as a PAC for the entire taxation year. Instead, the provisions of paragraphs 56(1)(d) and 60(a) will apply to any annuity payments received by the individual in 2012.
Terry Young
2011-039847
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