A J Frost:—This is an appeal from reassessments dated February 13, 1970, concerning the appellant’s 1966 and 1967 tax years with respect to which a dispute arose regarding the taxation of annuity payments received by the appellant from Canada Life Assurance Company. The appeal was heard at Calgary, Alberta, on September 29, 1971 by the Tax Appeal Board as it was then constituted.
The appellant’s mother, Mrs Margaret Whittaker, purchased the following annuity contracts from Canada Life Assurance Company:
| Single | ||
| stipulated | Monthly | |
| payment | payment | |
| August 1, 1963 — Policy #B 111-856 | $31,110.00 | $300.00 |
| March 11, 1964 — Policy #B 114-049 | 9,857.60 | 100.00 |
The premium or purchase price was the amount indicated under the “single stipulated payment” heading.
Each contract provided for monthly payments to Mrs Whittaker for life, but stipulated that should the annuitant die before the total amount of the monthly annuity payments equalled the amount of the single payment “the annuity shall continue until the total amount of all annuity payments which have fallen due equals the said single stipulated payment, the final annuity payment being reduced if necessary. Such payments shall be paid as they respectively fall due to William John Speerstra, the annuitant’s son if he is living, otherwise to the estate of the last decedent of the annuitant and the annuitant’s said son”.
Mrs Whittaker was 78 and 79 years old when the above contracts were purchased. She died on July 2, 1964 and under the contract annuity payments became payable to the appellant until the total amount paid out by the assurance company would match the premium price paid by the appellant’s mother, at which point the annuity contracts would expire. The annuity contracts provided that payments should continue to the appellant or his estate until such time as the total of all payments matched the lump sum premium price paid by Mrs Whittaker, subject to the right to commute.
The question before the Board is: do the annuity payments under the two contracts contain an income element subsequent to the date of death of the original annuitant and, if so, does paragraph 300(2)(d) of the Income Tax Regulations provide any relief to the taxpayer?
The appellant in his argument submitted that commencing August 1964 the monthly annuity payments were instalment refunds of the single premiums paid by his mother; that these payments were paid pursuant to the instalment refund clause of the contract and that the contract did not provide for interest on these amounts. He further claimed that all instalment refund payments were in the nature of capital refunds and relied on said paragraph 300(2)(d) as support for his contention.
It is my understanding, and there appears no doubt about it from an actuarial science point of view, that all annuity contracts issued by Canadian Life Insurance Companies and the Department of Labour (Annuities Branch) are contracts of blended payments of capital and interest and the proportions are mathematically determined as of the date annuity payments commence. The contracts before the Board are what are called Refund Annuity Contracts with the option of a Modified Cash Refund Settlement on the death of the annuitant if there are annuity instalments still payable. Paragraph 300(2)(d) of the Income Tax Regulations has an application only to the extent that it is necessary to determine what is deemed to be the terms certain under the contracts.
The capital element of the annuity is determined “in prescribed manner” according to section 300 of the Income Tax Regulations. The “payments expected to be made” are determined pursuant to paragraph 300(2)(a) of the Regulations. An illustration of factors relevant to the annuities are as follows:
Number of payments expected to be made
guarantee guarantee no guarantee 5 years 10 years Female 78 10.1 10.8 12.8 Female 79 9.6 10.3 12.5
Neither of these two life annuities has a stipulated “term certain” in the contracts. However, paragraph 300(2)(d) of the Regulations states the formula which shall be used in determining the “minimum term certain” for the purposes of determining the “number of payments expected to be made”.
| In the first contract, the term “certain” is | — 8.6417 years. |
Paragraph 300(2)(d) says that it will be 9 years, being the nearest integral number of years.) The number of payments expected to be made for a female 78, guaranteed 9 years, would be 12.3 years by interpolation in the above table.
| In the second contract the term “certain” is | — 8.2147 years. |
(The nearest integral number of years is 8.) The number of payments expected to be made for a female 79, guaranteed 8 years would be 11.5 years by interpolation in the above table.
Under the Income Tax Act capital and interest elements of annuity payments are determined conclusively as of the date the first annuity payment commences and remain unaltered for the duration of the contract. The death of Mrs Margaret Whittaker does not affect the capital and interest elements of the payments continuing after her death to her son, the appellant, as beneficiary. All relevant sections of
the Income Tax Act and Regulations refer exclusively to the annuity payments without mentioning who receives them. A change of payee therefore cannot be interpreted to change the formula upon which the interest element is based, or alter its taxability in the hands of a new recipient.
Appeal dismissed.