Dear Sirs:
Re: Annuities purchased from Charitable Organizations
This is in reply to your letter of December 14, 1990 wherein you requested our opinion with respect to the above noted subject.
A transfer of property to a registered charity is not a gift for the purposes of section 118.1 of the Income Tax Act (the "Act") if there is consideration of any kind being received in return. The word "gift" has been interpreted by the Department as being a voluntary transfer of property without consideration and without conditions. Furthermore, no right, privilege, benefit or material advantage may accrue to the donor or to a person designated by the donor as a result of making the gift. This interpretation is set out in paragraph 3 of Interpretation Bulletin IT-110R2
Notwithstanding the above comments, the Department's administrative position, with respect to annuities purchased from charitable organizations, is to consider a "gift" to have been made in circumstances where an individual pays more for the annuity than the total amount expected to be received as annuity payments. The "gift" portion of such an annuity is equal to the excess of the purchase price over the amount so expected to be returned as stated in paragraph 3 of Interpretation Bulletin IT-111R.
Where the amount of the annuity payment varies with fluctuations in the interest rate, as in the annuity contract you have proposed, it would not be possible to determine the cost of the annuity. It would therefore be impossible to make a determination of the amount of donation where the annuity payments will be calculated on a variable rate of interest. In such a case, no charitable donation receipt may be issued by the charitable organization, 24(1) for any part of the individual's contribution. The Taxpayer would be required to include in the calculation of taxable income both the capital and the interest component of any annuity payment received. Paragraph 60(a) of the Act would allow for the deduction from income of the capital element of the annuity payments based on the capital cost as determined by Part III of the Income Tax Regulations.
In response to your last question, the Department does not have any preference as to descriptive title given to a contract. It is the substance of an agreement that will determine it's tax status, not the title.
We trust these comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch