19 December 1995 External T.I. 9519965 - CHARITABLE ANNUITY AGREEMENTS

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 Charitable Foundation avail itself of the policy outlined in IT-111R2 by having an insurance company issue an annuity to a donor and the donor will not be required to report the annuity payments as income?

Position:

Basically it appears no as by entering into an annuity arrangement the foundation would be considered to have incurred a debt other than those allowed.

Reasons:

The position in IT-111R2 is applicable to only the particular transactions described therein.

									951996
XXXXXXXXXX							Michael Cooke

Attention: XXXXXXXXXX

December 19, 1995

Dear Sirs:

Re: Charitable Annuity Agreements

This is in reply to your letter of July 19, 1995, wherein you requested our views on the accuracy of your interpretation of the policy set out in Interpretation Bulletin IT-111R to the proposed transactions set out in your letter.

Our Comments

We are unable to confirm your views. Confirmation as to the income tax consequences of a proposed transaction can only be obtained in an advance income tax ruling obtained under the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. We can, however, provide you with the following general comments as they may apply to your situation.

These types of arrangements are considered to be annuities for the purpose of the Income Tax Act (the "Act"), therefore, they are subject to tax under the ordinary rules relating to annuities except in the very narrow circumstances as outlined in paragraph 3 of Interpretation Bulletin IT-111R, dated February 27, 1984. However, IT-111R has recently been replaced by IT-111R2, dated September 22, 1995. While IT-111R2 incorporates the Department's position as expressed in IT-111R, it provides our additional views on this matter as they have evolved over time. Where the conditions outlined in IT-111R2 are not met, then the favourable income tax consequences described in paragraph 3 are not applicable.

Paragraph 2 of IT-111R2 states that, "A charitable foundation, as defined in that subsection, should not enter into any arrangements to issue annuities. The registration of a charitable foundation may be revoked if the foundation has, at any time since June 1, 1950, incurred debts other than certain debts described in subsections 149.1(3) and (4). An undertaking to make annuity payments is considered to be a debt incurred by the charity which, in the case of a charitable foundation, is cause for the revocation of its registration."

Paragraph 7 of IT-111R2 allows a charitable organization that issued an annuity to purchase an annuity on the donor's life in order to offset the risk of a donor living beyond the donor's normal life expectancy. While we have stated in the past that it generally does not matter what steps a charitable organization may take to fund its liability under the annuity, it is still our position that the charitable organization has incurred a debt.

In your letter you have stated that, "

XXXXXXXXXX

". It is our understanding that the administrative positions as outlined in paragraphs 3 and 7 of IT-111R2 have never been extended to any charitable foundation, even where the risk to the foundation was to have been "reinsured" as described above. This is due to the fact, as noted in paragraph 2 of IT-111R2 and as discussed above, that we would consider such a foundation to have incurred a debt which is other than those allowed in paragraphs 149.1(3)(d) and (4)(d).

In addition, pursuant to paragraph 149.1(4)(a) of the Act, a charitable foundation may not carry on any business. A charitable foundation might be viewed as carrying on a business if there were sufficient frequency of such transactions. This would be a question of fact.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R and are not binding on the Department. We enclose for your information a copy of IT-111R2 and IC 70-6R along with the Special Release thereto.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch