| 19(1) | File No. 5-8028 |
| G. Ozols | |
| (613) 957-2127 | |
| July 5, 1989 | |
| 19(1) |
Re: Paid-Up Deferred Annuity
This is in reply to your letter of April 15, 1989, concerning the tax treatment under the Income Tax Act (the "Act") of two paid-up deferred annuities which you hold. You have inquired as to whether a change or exemption from such treatment could be considered.
As we understand it, 24(1)
Under subsection 12.2(3) of the Act, income that is accruing in a deferred annuity contract is subject to tax every three years, or on an annual basis if the taxpayer so elects under subsection 12.2(4) of the Act. As you have noted, this income is taxed in the hands of the holder (owner) of the annuity and not the annuitant. This is consistent with the general tax principle of taxing investment income in the hands of the investor. We would advise that in certain circumstances this is so even where the payments have begun.
Annuities which qualify as prescribed annuity contracts ("PAC's") under the Income Tax Regulations are not subject to the accrual rules. However, an annuity cannot be a PAC until the payments commence. When such payments do commence and the annuity meets the other requirements for a PAC, it is the recipient of the annuity payments, and not the owner of the annuity, who must include the amount representing interest in income. In many cases, a deferred annuity contract may qualify as a PAC when the payments begin. The company that issued your annuities will be able to tell you whether they will qualify as PAC's when the payments begin. If they do not however, the accrual rules will continue to apply to include the interest portion in your income.
24(1)
You made reference to a provision which allows parents to buy bonds or otherwise invest family allowance payments on behalf of their children and report the resulting interest as their children's income. There is no specific statutory provision in the Act which allows this. Nevertheless, it is our view that this is an acceptable practice in recognition of the fact that although family allowance payments are made to the parent of a child, they are made to the parent on behalf of the child. In order to receive this treatment, the family allowance must be deposited in a bank account in the name of the child or in a trust (whether or not the child is named) or otherwise invested in the child's name and the investment must be readily identifiable as the property of the child. However, we are not prepared to extend this practice to situations where the money invested came from a source other than the family allowance payments, as this would allow parents to "shelter" their investment income by directing it to their children or placing the investment in the name of their children.
It is the responsibility of Revenue Canada, Taxation to administer the Act as it is written. The inclusion of accrued income from a deferred annuity in the income of the annuity holder is required under the provisions of the Act. To obtain any other result would require an amendment to the Act, consideration which is the responsibility of the Department of Finance.
We trust the foregoing adequately explains the issues you have raised.
Yours truly,
for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch