| 24(1) | 902619 |
| J. Peter Dunn | |
| (613) 957-8953 |
19(1)
November 28, 1990
19(1)
Re: Taxation of a Non-Resident, Non-Registered Insurance Contract
We are writing in response to your correspondence of September 6, 1990 addressed to the Kitchener District Office of this Department which has been forwarded to us for reply.
As the example described in your letter is a hypothetical situation we are unable to provide an income tax ruling. We would, however, offer the following general comments relative to the taxation of annuities although these comments should not be construed as a confirmation that a "non-registered insurance contract" is, in fact, an annuity as such a determination can only be made after a comprehensive review of the pertinent contract.
Subsection 248(1) of the Income Tax Act (the "Act") considers that an "annuity" includes an amount payable on a periodic basis whether payable at intervals longer or shorter than a year and whether payable under a contract, will or trust or otherwise.
Also, paragraph 138(12)(f) of the Act provides that, inter alia, a life insurance policy includes an annuity contract. Subsection 12.2(3) of the Act determines the amount to be included in the income of an individual who holds an interest in a life insurance policy or, by extension an annuity, where that person is resident in Canada at any time in the particular year.
Briefly, the amount required to be included in income pursuant to subsection 12.2(3) of the Act is the amount by which the "accumulating fund" in respect of the annuity exceeds the "adjusted cost base" of the annuity to the individual with the calculation being made as of December 31 of every third year during which the individual holds the annuity. This year is defined in paragraph 12.2(11)(b) as the "third anniversary" year of the life insurance policy. The accumulating fund of or annuity is determined pursuant to section 307 of the Income Tax Regulations (the "Regulations") while the adjusted cost base is defined in paragraph 148(9)(a) of the Act. Where the annuity payment is made in a year other than a "third anniversary" year, subparagraph 56(1)(d.1)(ii) of the Act will include in income that portion of the payment which represents any annuity income not previously included in income. Further, subsection 201(5) of the Regulations requires that the insurer prepare an information return with respect to the amount to be included in income. (T4A Supplementary-Statement of Pension, Retirement, Annuity and Other Income).
We would note that subsection 12.2(3) of the Act has recently been amended to provide that the amount of annuity income is to be calculated annually rather than every three years with respect to annuities purchased after 1989.
Paragraph 212(1)(o) of the Act requires that every non-resident person pay an income tax of 25% of the amount paid or credited to him by a person resident in Canada in respect of a payment under an annuity contract to the extent of the amount that, if the non- resident person had been resident in Canada throughout the year, the amount would have been included in computing his income for the year. The income tax rate of 25% may, however, be reduced pursuant to an income tax convention entered into between Canada and the country of residence of the recipient.
Subsection 215(1) of the Act requires the payor to withhold and remit to the Receiver General the appropriate amount of tax and paragraph 202(2)(g) of the Regulations requires that the payor prepare an information return with respect to the amount of the annuity payment. (NR4A Supplementary-Statement of Amounts Paid or Credited to Non-Residents of Canada).
We would also advise that paragraph 115(1)(vi) of the Act provides that the taxable income earned in Canada of a person who was, at no time in the year, resident in Canada includes the amount that would be required to be included in income in respect of a disposition of a life insurance policy in Canada by virtue of subsection 148(1) or (1.1) of the Act if the non-resident had been resident in Canada throughout the year.
As an annuity issued to a non-resident of Canada does not come within the definition of a "life insurance policy in Canada" in paragraph 138(12)(g) of the Act, no amount would be required to be included in the taxable income earned in Canada of the non-resident pursuant to paragraph 115(1)(vi) in respect of a disposition described in either of subsections 148(1) or (1.1) of the Act. Accordingly, subsection 116(5.4) of the Act concerning a disposition of an interest in a life insurance policy by a non- resident would not be applicable to require the non-resident to acquire a certificate with respect to the proposed disposition nor would the insurer be liable for any amount of tax pursuant to subsection 116(5.3) of the Act.
While we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department with respect to any particular situation.
for DirectorFinancial Industries DivisionRulings Directorate