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:
Whether Department's position in paragraph 3 of IT-111R2 will apply in specific fact situation?
Position:
NO
Reasons:
Series of transactions were structured so as to avoid risk of revocation under paragraph 149.1(3)(d)/
March 5, 1996
R. A. Davis HEADQUARTERS
Director W.P. Guglich
Charities Division (613) 957-2102
Attention: Amy Crober
960509
XXXXXXXXXX (the "Hospital")
Annuity Issued to a Individual
This is in reply to your request for our comments respecting Scenario 1, described in a letter dated January 30, 1996, from XXXXXXXXXX.
XXXXXXXXXX
The following hypothetical situation was described in Scenario 1:
?The Hospital is a registered charity.
?An individual pays a lump sum of $10,000 to the Hospital,
?The Hospital purchases an annuity, from an insurance company for $8,500. The annuity will pay the individual $1,000 per year for a guaranteed period of five years.
?The life expectancy of the individual was determined by XXXXXXXXXX to be nine years.
?The Hospital will turn over the gain of $1,500 (being the difference between the $10,000 received and the $8,500 cost of the annuity) to the XXXXXXXXXX.
OUR VIEWS
Interpretation Bulletin IT-111R2 describes the Department's position regarding the purchase of annuities from charitable organizations.
As stated in paragraph 1 of IT-111R2, where an individual pays an amount to a registered charity and receives an annuity, such an arrangement is considered to be an annuity contract for purposes of the Income Tax Act and, except in the circumstances described in paragraph 3 of IT-111R2, the annuity payments are included in computing the annuitant's income under paragraph 56(1)(d) of the Act. Paragraph 60(a) of the Act provides for a deduction from income of the capital element of the annuity payment included in income under paragraph 56(1)(d). Notwithstanding the general meaning of gift, where the circumstances described in paragraph 3 of IT-111R2 are met, that is where an individual pays more to a charity for an annuity than the total amount the individual can expect to receive from the charity as annuity payments, the Department accepts that the excess of the purchase price over the amount expected to be received as annuity payments is a gift.
In the situation described above the gain on the transaction is passed on by the Hospital to the Foundation. If the payment by the individual were to be made directly to the Foundation and the Foundation were to arrange for the annuity, the Foundation would be considered to have incurred a debt and risk revocation pursuant to paragraph 149.1(3)(d) of the Act. In our view, the only purpose of having the Hospital act as a conduit in the situation described above is to avoid the risk of revocation of the Foundation's registration. Consequently, the Department's position described in paragraph 3 of IT-111R2 should not apply in the type of situation described above. The Department's position should not apply in situations where it is part of a scheme to avoid application of other provisions of the Act. As no portion of the payment by the individual would, in common law, be considered a gift, the annuity payments would be required to be included in computing the annuitant's income under paragraph 56(1)(d) of the Act and the capital element of the payment may be deducted under paragraph 60(a).
Bryan W. Dath
Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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