Principal Issues: Can a foreign currency contract be a prescribed annuity contract?
Position: YES
Reasons: inferred from previous letters.
CALU - Conference for Advance Life Underwriting (2005)
Question 1
Foreign Currency Annuity Contracts
One of the conditions an annuity contract must meet to qualify as a "prescribed annuity contract" is that its terms and conditions must require that "all payments made out of the contract be equal annuity payments made at regular intervals but not less frequently than annually..." (clause 304(1)(c)(iv)(A) of the Income Tax Regulations). It is unclear whether this condition is satisfied if an annuity contract provides for equal periodic payments in US dollars, or in some other currency other than the Canadian dollar. The condition would be satisfied if it is to be applied based on the amount of the payments expressed either in the currency of the contract or in the Canadian dollar equivalent using the conversion rate in effect at the time the contract is entered into. It would not be satisfied if it is interpreted to refer to the Canadian dollar equivalent of each payment at the time of payment, since the exchange rate can fluctuate (and almost certainly will).
The CRA appears to have accepted that a foreign currency annuity contract can be a prescribed annuity contract. In a letter dated February 17, 2004 (document 2003-003982), the CRA held out the possibility that an annuity issued in the Netherlands could be a prescribed annuity contract. The annuity contract in question was clearly not a Canadian dollar contract.
Questions:
(a) Does the CRA agree that the above-noted equal payments condition is to be applied to the payments under an annuity contract expressed in the currency of the contract?
(b) If the CRA agrees with this, is the capital element of each payment to be determined under subsection 300(1) of the Income Tax Regulations using Canadian dollar amounts computed based on the exchange rate at the time the annuity contract is issued?
Agency's Response
(a) In our view, the "...equal annuity payments made at regular intervals but not less frequently than annually..." condition set out in clause 304(c)(iv)(A) of the Income Tax Regulations is to be applied to the payments under the annuity contract expressed in the currency of the contract.
(b) We have not previously had the opportunity to address this particular issue and as such are unable at this time to provide a clear answer. We are continuing to analyze the issue with the goal of providing a technical interpretation to CALU in the near future.
May 3, 2005