4 August 1988 Income Tax Severed Letter 5-6350 - [880804]

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.

XXXX

G. Thornley (613) 957-2101

AUG 4 1988

Dear Sirs:

This is in reply to your letter of March 25, 1988 addressed to the St. John's District Office in Newfoundland that was referred to us on July 26, 1988 from our Enquiries & Taxpayer Assistance Division. We regret the delay occasioned by these referrals.

Your enquiry concerns the tax treatment of a corporate owned non- life annuity contract acquired by the corporation in September of 1976.

As suggested by some of your remarks, a corporately owned contract last acquired before December 20, 1980 that was not disposed of before 1985 became subject to annual accrual taxation in the holder's first taxation year-end ending after December 30, 1984. At that time, all income accrued from January 1, 1982 to December 31, 1984 had to be reported. Income was to be accrued and reported annually after that time. Income accrued before 1982 (unallocated income accrued before 1982) is to be taxed at the time of a subsequent disposition, or on a yearly basis during the payout period based on the number of payments to be made or expected to be made under the contract.

In answer to your specific question we provide the following comments.

Our Comments

1) A non-life annuity contract, regardless of when acquired, is a life insurance policy by virtue of the definition in section 248 (life insurance policy) and paragraph 138(12)(f) of the Income tax Act (the "Act"). Thus by the interaction of these provisions and that of subparagraph 39(1)(a)(iii) of the Act, an annuity is not a capital property. In view of the foregoing, an absolute assignment of the corporation's interest in the policy is a disposition under which the policy holder must take into income any excess of the proceeds of disposition over the adjusted cost basis of the policy in accordance with the rules in section 148 of the Act.

2) In a partial disposition of an annuity, the amount taken into income may represent post-1981 income as well as unallocated income accrued before 1982 as the unallocated 1982 income is an integral part of the accumulating fund. However the amount taken into income on a partial disposition will reduce the accrual income on the next accrual date or dates. Thus a deferral of the unallocated 1982 income may still be preserved.

We have not responded to your subsequent questions as they involve treating an annuity as a capital property which as indicated above, it is not.

We trust our comments will be helpful.

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch