5-910936
Dear Sirs:
Re: Purchase of annuity to fund pension
This is in reply to your letter of April 4, 1991 concerning the above mentioned subject.
Specifically, you have asked our opinion as to whether the retirement compensation arrangement rules of the Income Tax Act (the "Act") would be applicable where a corporation, to provide additional retirement income to an employee, purchases a life annuity for the employee. The corporation will own and be the beneficiary of the annuity but will make a binding irrevocable direction to the life insurance company issuing the annuity to remit payments from the annuity directly to the employee.
In our opinion, subsection 207.6 (2) of the Act applies to such an arrangement. Benefits are being provided by the employer on the retirement of a taxpayer. The employer acquires an interest in a life insurance policy which includes an annuity pursuant to the definition in paragraph 138(12)(f) of the Act. The interest in the annuity has been acquired to fund the retirement benefits to be paid to the former employer.
Consequently, in our opinion, the following income tax consequences result:
(a) the corporation is deemed to be the custodian of a retirement compensation arrangement ("RCA");
(b) the interest in the annuity is deemed to be subject property of the RCA;
(c) two times the amount paid to purchase the annuity is deemed to be a contribution under the RCA; and
(d) annuity payments received by the corporation are deemed to be amounts received under an RCA
The foregoing opinion is our best interpretation of the law as it applies generally. It may, however, not always be appropriate in every circumstance and, as stated at paragraph 21 of Information Circular 70-6R2, it is not binding on this Department.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate