Dear Sirs:
This is in reply to your letter of October 18, 1990 concerning your proposal to enter into certain arrangements with individuals to whom you are obliged to make disability payments.
The facts in your letter appear to relate to actual proposed transactions. Therefore no specific confirmation can be provided in this response. Revenue Canada, Taxation provides advance income tax rulings on the income tax consequences of proposed transactions where the issues involved are primarily questions of interpretation of the Act. The issues raised in your letter would be more appropriately dealt with in an advance income tax ruling and in this regard we enclose a copy of our Information Circular 70-6R2. Nevertheless, we have set out below our general comments on the main interpretation issues raised in your letter.
In circumstances where an individual policyholder is suffering from a permanent disability and an insurer negotiates a settlement to pay an annuity to the individual in satisfaction of its obligation to make disability payments that would not otherwise be included in computing the individual's income pursuant to paragraph 6(1)(f) of the Income Tax Act (the "Act") it is your view that the annuity payments to be received by the individual would be non-taxable and the conversion of the disability contract to an annuity arrangement would not give rise to a taxable event.
In our opinion the annuity payments would be included in the individual's income in accordance with the rules in section 12.2 or section 56 of the Act. Furthermore, while it depends on the circumstances of the particular case, the conversion of the disability contract is likely to result in a disposition for purposes of section 148. The availability to an insurer of policy reserves pursuant to section 138 or subsection 20(7) of the Act is dependent on the existence of an insurance policy. Whether or not the annuity arrangement between the individual and the insurer constitutes an insurance policy, a "life insurance policy" for purposes of paragraph 138(12)(f) of the Act or a "life insurance policy in Canada" within the meaning of paragraph 138(12)(g) of the Act is a question of fact to be determined in the particular circumstances.
We trust our comments will be of some assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch