| 19(1) | File No. 5-8023 |
| J.D. Jones | |
| (613) 957-2104 |
June 1, 1989
Dear Sirs:
Re: Annuities purchased from Charities IT-111R
This is in reply to your letter addressed to the Charities Division and further to our telephone conversation of May 9, 1989, wherein you requested our confirmation of your understanding of the Department's position concerning the above- noted subject as set out in Interpretation Bulletin IT-111R.
We confirm your understanding that registered charities may solicit and receive an irrevocable contribution of capital in exchange for immediate guaranteed payments of a fixed term from individuals and corporations provided, however, that if any official receipt is to be issued, it is issued in accordance with Part XXXV of the Income Tax Regulations and the amount is calculated in the manner provided for in paragraph 3 of IT-111R.
With respect to your understanding regarding the comments in paragraph 3 of IT-111R, we have provided three examples to illustrate the income tax treatment of amounts paid to charities for the purchase of annuities and our comments follow a summary of each of the examples.
1. A male age 60, gives a charitable organization ( as defined in paragraph 149.1(1)(b) of the Income Tax Act (the "Act")) an irrevocable capital contribution of $100,000 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
| Tax Treatment | |
| Capital contribution | $100,000 |
| Expected annuity payments to be received (per IT-111R: $4,000 x 20.8) | 83,200 |
| Charitable donation receipt received by taxpayer | 16,800 |
The individual would receive a current deduction (subject to the rules governing charitable donations in subsection 118.1(3) of the Act) of $16,800 and all future $4,000 annuity payments would not be taxable. For example, if the individual lived to the age of 90, no annuity payments or portion thereof would be taxable even though by age 90, the individual would have received $120,000.
2. A male age 60, gives a charitable organization ( as defined in paragraph 149.1(1)(b) of the Act ) an irrevocable capital contribution of $83,200 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
| Tax Treatment | |
| Capital contribution | $83,200 |
| Expected annuity payments to be received (per IT-111R: $4,000 x 20.8) | 83,200 |
| Charitable donation receipt received by taxpayer | NIL |
In our view, the individual in this example has not made a "gift" for the purposes of section 118.1 of the Act as the amount of the capital contributed is equal to the total amount expected to be received as annuity payments under an immediate life annuity using the tables provided in IT-111R. As a result, it is our position that paragraph 1 of IT-111R would be applicable in the income tax treatment of the annuity payments received by the annuitant. As well, no charitable donation receipt could be issued as no "gift" has been made for the purposes of section 118.1 of the Act.
3. A male age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Act) an irrevocable capital contribution of $60,000 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
| Tax Treatment | |
| Capital contribution | $60,000 |
| Expected annuity payments to be received (per IT-111R: $4,00. x 20.8) | 83,200 |
| Charitable donation receipt received taxpayer | NIL |
The individual would receive no current deduction fr charitable donations and all future $4,000 annuity payments would be included in computing the individual's income under paragraph 56(1)(d) of the Act. Paragraph 60(a) of the Act would allow for the deduction from income of the capital element of the annuity payments based on a capital cost of $60,000 as determined by Part III of the Income Tax Regulations.
In circumstances where paragraph 1 of IT-111R is applicable such that the taxpayer purchasing an annuity from a charitable organization is expected to receive annuity payments equal to or in excess of the capital contributed, the registered charity is required to complete and issue T4A supplementaries in accordance with the Income Tax Act. Your comment concerning paragraph three of IT-111R that "no portion of any payment is taxable in the hands of the individual in these circumstances" only has application as noted in the above examples.
The remaining comments contained in our letter will be responded to by officials in the Charities Division. We trust our comments will be of assistance.
Yours truly,
for Director Small Business and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. Charities Division