23 September 1999 Income Tax Severed Letter 9921926 - ANNUITY CONTRACT AS AN RESP

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 annuity contract can be registered as RESP

Position: Theoretically yes - but contract in issue does not appear to satisfy requirements in 146.1(2)(a), (d.1), (f) and "qualified investment" rule.

Reasons: Contract provides for other purposes than as set out in definition of "trust" in 146.1(1), allows "accumulated income payments" prematurely, and on termination permits property of the trust to be used for unacceptable purpose of providing annuity income to subscriber; and segregated fund units purchased through contract are not qualified investments.

		September  23, 1999

	HEADQUARTERS	HEADQUARTERS
	Bob D'Aurelio	M.P. Sarazin
	Director 	824-5441
	Registered Plans Division

	Attention: Bob Searle
		992192

Annuity Contracts Registered as RESPs

We are writing to you in respect of your memorandum dated August 6, 1999, wherein you requested our opinion as to whether a particular annuity contract (the "Policy"), a copy of which was enclosed with your memorandum, could be registered as a registered education savings plan ("RESP") for purposes of the Income Tax Act (the "Act"). The following discusses the requirements of the Act with respect to RESPs which we believe are relevant to a determination of the issue.

Definition of "education savings plan" in subsection 146.1(1)

An "education savings plan" is defined in subsection 146.1(1) of the Act as a contract between an individual (other than a trust), or an individual (other than a trust) and the individual's spouse, (the "subscriber" or "subscribers") and a person or organization who is the promoter whereunder the subscriber(s) agrees to make contributions to the promoter in exchange for the promoter's undertaking to make educational assistance payments to eligible beneficiaries. The terms of the Policy provide for the payment of educational assistance payments to eligible beneficiaries but also provide for other types of payments. In our view the Policy's provision for other types of payments does not offend the definition of "education savings plan" and consequently, the Policy would not fail to qualify for registration for this reason alone.

Definition of "registered education savings plan" in subsection 146.1(1)

A "registered education savings plan" is an education savings plan that has been registered for purposes of the Act because, in the Minister's opinion, the education savings plan has satisfied the conditions described in subsection 146.1(2) of the Act. We will discuss each of the relevant conditions.

Paragraph 146.1(2)(a)

The plan must provide that the property of any trust governed by the plan is irrevocably held for any one or more of the purposes described in the definition of "trust" in subsection 146.1(1) of the Act by a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee. For purposes of section 146.1 of the Act, a trust, other than in the "trust" definition and in the definition of "education savings plan", is defined to mean any person who irrevocably holds property under an education savings plan for any of the purposes described therein.

In our view it is arguable that because the purposes of the Policy are not restricted to those listed in (a) through (e) of the "trust" definition, this registration requirement may not be satisfied; the Policy appears to have several purposes and some of the purposes are not consistent with the intent of the RESP provisions of the Act. For instance, the transfer of the annuity contract from the trustee to the subscriber as a non-registered plan is not a purpose described in the definition of "trust" in subsection 146.1(1) of the Act. We note the Policy segregates its purposes and several provisions between a pre-RESP Termination Date period and a post-RESP Termination Date period. However, we are not convinced that this segregation creates two separate plans one of which would constitute a plan whose purposes satisfy this registration requirement.

Furthermore, contributions to the promoter under the Policy will be allocated among the various segregated funds chosen by the subscriber that are available under the Policy . In order to satisfy the requirement that the trust "irrevocably holds property", the units of the segregated funds would have to be held by the trustee which might not be possible where the Policy itself is held by the trustee and the contributions under the Policy are used to purchase units of the segregated funds. You may want to discuss this with the representatives.

Paragraph 146.1(2)(d.1)

Subject to ministerial waiver under subsection 146.1(2.2) with respect to a beneficiary who suffers from a severe and prolonged mental impairment, before an "accumulated income payment" can be made under the plan, several conditions must be satisfied. Two of these are 1) each beneficiary under the plan has to have attained 21 years of age and not be pursuing post-secondary education or each such beneficiary is deceased and 2) the plan has to have been in existence for at least 10 years. These conditions may not be satisfied when you look at the following provisions of the Policy :

I C states: "Upon the RESP Termination Date (see description in IV below), the Policy will be transferred from the Trust to you and will be subsequently operated by us as a non-registered Policy, which means that you may use amounts available under the Policy for such purpose(s) as you deem appropriate."

II states: "If minimum Contribution requirements are not satisfied, we reserve the right to cancel the Policy and to pay you the Policy's Accumulated Value less any applicable Surrender Charges, withholding taxes and fees."

IV states: "The Policy will cease to be a Registered Education Savings Plan upon the earliest of the following dates provided that the Policy is then in force:

1. the last day of the 25th year following the year in which this policy is entered into;

2. February 28 of the year following the year in which a withdrawal from the Policy consists wholly or in part of Accumulated Income Payments);

3. the date which is immediately prior to the Maturity Date [defined to be the date selected by you which has to be at least 10 years after the date the first Contribution is received into the Policy or the Subscriber's 90th birthday where no Maturity Date is selected]; and

4. any other date you select for this purpose in the form and manner we prescribe, subject to our Administrative Rules and applicable law."

V states: "Subject to our Administrative Rules, you may request in the form and manner we prescribe that a specified amount of this Policy's Accumulated Value be withdrawn from the Policy. Prior to the RESP Termination Date, any amount so withdrawn must be used for one or more of the purposes set forth in Section I, Part C of this Policy and you will be required to certify compliance with this requirement in the form and manner we prescribe."

V C states: "An Automatic Withdrawal Plan (AWP) is not available prior to the RESP Termination Date. Subject to our Administrative Rules, where Units credited to your Policy have a value of $5,000 or more, an AWP may be established to provide periodic cash payments upon surrender of Units after the RESP Termination Date, until the earliest of the Maturity Date, the death of the Annuitant (subscriber) or until all the Units are surrendered."

Paragraph 146.1(2)(f)

Where a trust governed by the plan is terminated, the property held by the trust is required to be used for any of the purposes described in the definition of "trust" in 146.1(1) of the Act. Based on the terms of the annuity contract, we are uncertain as to whether this condition will be satisfied. In this regard, we would refer you to provision V C of the Policy described above. The Policy may pay a series of annuity payments to the subscriber as of the chosen maturity date or, if none chosen, starting on the original subscriber's 90th birthday.

Paragraph 146.1(2)(n)

Revenue Canada can refuse to register an education savings plan if it is apparent that, immediately or in the future, the plan may become revocable. Under subsection 146.1(2.1), an RESP will become revocable if a trust acquires or otherwise holds a non-qualified investment.

A contract for an annuity issued by a licensed annuities provider will be a qualified investment, under that definition in subsection 146.1(1) of the Act, only where the trust is the only person who, disregarding any subsequent transfer of the contract by the trust, is or may become entitled to any annuity payments under the contract and the holder of the contract has the right to surrender the contract at any time for an amount that would, if reasonable sales and administrative charges were ignored, approximate the value of funds that could otherwise be applied to fund future periodic payments under the contract.

Since the Policy is the education savings plan, the plan will not be acquiring an annuity contract which may or may not qualify as a qualified investment. However, the units of the segregated funds purchased through the Policy are subject to the "qualified investment" rule and, in our view, are not qualified investments within the meaning assigned by subsection 146.1(1) of the Act. Since the Policy will acquire investments that are not qualified investments, the Policy will not satisfy the condition described in paragraph 146.1(2)(n).

In an informal discussion, a representative of the Department of Finance has confirmed that in his Department's view the provisions of section 146.1 of the Act do not contemplate the registration of an annuity contract as an RESP.

The promoter's representative provided us with a copy of your letter dated March 29, 1999 and a copy of their response letter dated April 20, 1999. Your letter requests amendments to the Policy in order to ensure that the plan satisfies the conditions described in subsection 146.1(2) of the Act. The representative's response explains why many of the changes are not necessary because, in her view, the conditions are satisfied through the repeated references to the "applicable tax legislation". Your request for the incorporation of specific terminology within an education savings plan does not involve an interpretation of the provisions of the Act. We concur that the Policy, as currently drafted, would not provide the reader with a clear indication that it constitutes an education savings plan for purposes of the Act and amendments are required in order to qualify.

We note that there may be situations where an annuity contract may be drafted to qualify as an education savings plan. It is possible that a contract could be established to provide for the payments described under the definition of "trust" by requiring the payment of the refund of payments and the payment of accumulated income payments in the form of rights to an annuity. In this case, we may ultimately conclude that the annuity contract is an investment held by the RESP which is allowed under the proposed definition of "qualified investment" in subsection 146.1(1) of the Act.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate

c.c. Dave Wurtele

Department of Finance