Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NOVA SCOTIA ROUND TABLE
FEBRUARY 1994
Question # 7
ANNUITIES PURCHASED FROM CHARITABLE ORGANIZATIONS
The Department's position as outlined in Interpretation Bulletin IT-111R allows a charity to pay an amount as an annuity back to a donor who has made a contribution to the charity. To the extent that the annuity payments during the lifetime of the donor are not expected to exceed the amount of the contribution, the difference will be considered to be a gift and the payments to the donor from the charity will be considered to be capital payments. A problem arises, however, in certain provinces through their statutes on insurance and annuities which limit the issuing of annuities to insurance companies. This problem exists in Nova Scotia. A solution may be to have the donor make his contribution to the charity, which the charity then uses to purchase an annuity from a life insurance company. The annuity amount is paid to the charity and then distributed to the donor. The question becomes, is the annuity taxable in part?
DEPARTMENT'S POSITION
As set out in paragraph 1 of Interpretation Bulletin IT-111R, certain registered charities solicit interested individuals to make an irrevocable contribution of capital to the charity in exchange for immediate guaranteed payments to the individual for life at a specified rate depending on life expectancy. As this type of an arrangement is considered to be an annuity for income tax purposes it is subject to tax under the rules relating to annuities except in the very narrow circumstances of paragraph 3 of Interpretation Bulletin IT-111R. Revenue Canada, does not control who can or cannot issue annuities. We presume that the relevant authorities would consider exercising control over the unauthorized issue of annuities.
A charity is not restricted as to the steps it may take to facilitate payment of an annuity. The charity may simply make payments from its resources or it may purchase an annuity from a recognized annuity issuer, either in the name of the donor or in its own name with a direction to pay in favour of the donor. The amount of the gift to the registered charity will, in accordance with paragraph 3 of the bulletin, equal the amount, if any, by which the amount of the payment to the charity exceeds the total of the annuity payments expected to be received by the donor pursuant to the life expectancy tables provided in the bulletin. In the circumstances of paragraph 3 of the bulletin, no portion of the annuity payments received by a donor will be subject to tax.
Author:B. Kerr
File:7-940145
Date:February 16, 1994