4 November 1991 Income Tax Severed Letter 9128485 F - Prescribed Annuity as the Funding Medium for Alimony Payment to an Ex-Spouse

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.

Dear Sirs:

Re:  Paragraph 60(b) of the Income Tax Act (the "Act")

We are writing in reply to your letter of October 11, 1991 wherein you requested a technical interpretation regarding the use of a prescribed annuity as the funding medium to provide for alimony payments to an ex-spouse.

You have described the following scenario:

I.   Taxpayer `A' is required, pursuant to a written agreement to make alimony payments to his ex-spouse, `B'. 'B' is uncertain `A' can be relied upon to make the required payments each month.  A transfer of capital to `B' by `A' would not be considered as an alimony payment and therefore would not be tax deductible to 'A', nor taxable to `B'.

In order to obtain the desired tax results, you have proposed theologizing:

1.      ` A' would purchase a prescribed annuity contract from 24(1)                24(1)

2.      `A' would be the owner and annuitant under the contract.

3.      The taxable portion of the annual annuity payments would be reported to `A' and be taxable to him pursuant to paragraph 56(1)(d)

4.        B' would be appointed irrevocable beneficiary under the contract. The result of this is that the contract cannot be altered without `B's' permission.

5.      At the written direction of `A', `B' would be made irrevocable payee under the contract. The result of this is that payments would be made directly to `B' by the insurer.  This has no impact on the tax reporting of this income element to `A'.

You have requested a technical interpretation as to whether the payments to `B' at the direction of `A' (the owner of the contract), would satisfy the condition in paragraph 60(b) of the Act that the payments be "an amount paid by the taxpayer ['A'] in the year".

In your view, all the conditions in paragraph 60(b) of the Act have been met and `A' should be entitled to a deduction for the amounts received by `B'.  You are of the opinion that the payments are being made at `A's' request and that this is simply a redirection of an amount to which `A' is entitled. You believe that there is constructive receipt of the payments by `A', as the payments, in the absence of a written direction to the contrary, would be made to `A'.

Our Comments

It appears that the above scenario is an actual situation which should, according to Information Circular 70-6R2, be the subject of an advance income tax ruling request.  We are, however, prepared to provide the following comments:

a)        In order for an amount to be included in the recipient's income as alimony under paragraph 56(1)(b) of the Act and deductible by the payor under paragraph 60(b) of the Act it must be a predetermined sum of money which once paid is under the recipient's complete control and is one of a series of payments payable on a periodic basis pursuant to a decree, order or judgement of a competent tribunal or pursuant to a written agreement.

b)        A lump sum payment made pursuant to a decree, order or judgement of a competent tribunal or pursuant to a written agreement in satisfaction of a payor's obligations under a marriage is neither included in the income of the payee under paragraph 56(1)(b) of the Act nor deducted from the income of the payor under paragraph 60(b) of the Act.

c)        An annuity contract could be purchased which would satisfy the requirements in paragraph (a) above. However where the capital element of the annuity vests indefeasible in the beneficiary at the time of purchase, the requirements in paragraph (a) would

not be satisfied and the purchase of the annuity would be treated as noted in paragraph (b) above.

d)        Paragraph 1 of IT-449R states in essence that a property vests indefeasibly when a person obtains a right to absolute ownership of it in such a manner that the right cannot be defeated by any future event, even though that person may not be entitled to the immediate enjoyment of all benefits arising from that right. Where, for instance, there is an appointment of an irrevocable beneficiary in an annuity policy under which the beneficiary obtains the unassailable right to ownership of the capital element of the policy, such property would normally be considered to vest indefeasibly.  However, where changes can be made to the contract provided consent is given by the `irrevocable beneficiary', in our view, the capital element of the annuity has not vested indefeasibly.

e)        Generally, where an individual purchases an annuity in his own name, is the annuitant under the annuity, names an irrevocable beneficiary but the property does not vest in the irrevocable beneficiary, and then signs a direction to have each annuity payment paid to an irrevocable payee, the individual would be considered to be the actual holder of the policy and is considered to have constructively received the annuity payments before their payment to the irrevocable payee.

f)        It is a necessary corollary of the doctrine of constructive receipt that, when it applies, the actual recipient, in this case the irrevocable payee, must treat the payment as if it had come from the person who is constructively deemed to have received it.

The above comments are an expression of opinion only and are not binding on the Department.

G. Thornley for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch