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.
This is in reply to your letter of January 27, 1987 and further to your telephone conversion with us on February 16, 1987. You are seeking clarification of the operation of paragraph 212(1)(n) of the Income Tax Act (the "Act") as it applies to an income averaging annuity contract (an "IAAC") acquired with the proceeds of a loan received from the issuer.
You explained that under the existing arrangement, payments to the annuitant are applied against loan principal and interest, with the result that the annuitant does not receive any cash.
Our Comments
Although the annuitant does not receive a "cash" IAAC payment, the preamble to subsection 212(1) states that "... every non-resident person shall pay an income tax of 25% on every amount that a person in Canada pays or credits, ... to him as, on account or in lieu of payment of, or in satisfaction of ...".
Resort must be had to general rules of interpretation for the meaning of "pays or credits", "payments", "paid", "credited", "deemed to have been paid or credited", since these words and phrases are not defined in the Act. In this regard, it is the Department's position that an amount has been "paid or credited" when the payor applies an amount of the periodic annuity against an obligation owing by the payee to the payor, where is reduces the principal or interest owing with respect to that obligation. This is especially so where the periodic annuity has been offset against the obligation at the direction of the payee.
We note that pursuant to subsection 215(6) of the Act, the resident payor is liable for Part XIII withholding tax "where a person has failed to deduct or withhold any amount as required by this section from an amount paid or credited or deemed to have been paid or credited to a non-resident person ...". We also note that pursuant to subsection 214(1) of the Act, Part XIII tax applies to the gross amount of the payment. Finally, as you may know, because of the definitions in Article XVIII(3) and (4) of the Canada-U.S. Income Tax Convention (1980), there is no relief from the 25% Part XIII withholding tax on an IAAC.
We trust that the above comments have been of some assistance to you.
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© Her Majesty the Queen in Right of Canada, 1987
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© Sa Majesté la Reine du Chef du Canada, 1987
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