Dear Sirs:
Re: Insured Prescribed Annuities
We are writing in response to you correspondence of May 24, 1991 wherein you requested our comments regarding the taxability of benefits of an insured prescribed annuity. We apologize for the considerable delay in rendering our response.
We are not able to address the alternative situations described in your letter due to lack of sufficient specific details concerning the proposed transaction, however, we would offer the following general comments relative to the taxation of amounts received pursuant to an annuity.
Subsection 12.2(3) of the Income Tax Act (the "Act") provides that certain amounts are to be included, on an accrual basis, in the income of a taxpayer where that taxpayer holds an interest in an annuity contract other than a "prescribed annuity contract". Also, notwithstanding that some other person may be entitled to receive the payments under the annuity, it is the holder of the interest in the annuity who must report the accrued income.
A "prescribed annuity contract" is defined ln section 304 of the Income Tax Regulations (the "Regulations") and one of the conditions required for an annuity contract to be a "prescribed" contract is, pursuant to clause (l)(c)(iii)(B) thereof, that each holder of the contract must be an annuitant thereunder. Furthermore, an "annuitant" is defined in subsection 304(4) of the Regulations as a person who is entitled to receive annuity payments under the contract.
Insofar as a "prescribed annuity contract is concerned, the amount of the annuity payments received during the year is included in the income of the annuitant pursuant to paragraph 56(1)(d) of the Act and a deduction is allowed pursuant to paragraph 60(a) with respect to the capital element of those payments. As noted previously, the recipient of the payments must also be a holder of the annuity contract for it to qualify as a "prescribed contract".
With respect to your query regarding the taxation of annuity receipts in a situation in which the holder and the annuitant are dealing at arm's length as opposed to one in which the parties are not at arm's length, we would advise that there are provisions in the Act and Regulations which address this type of situation, however, the application is dependent upon a number of factors including the type of annuity being considered and the nature of the relationship between the parties.
As noted previously, we are unable to consider a hypothetical situation in a general letter of opinion. Should you wish the views of the Department with respect to a completed transaction, you should contact the Vancouver District Taxation Office which serves the area in which you are resident. Alternatively, if the hypothetical situation presented constitutes an actual proposed transaction, you may wish to request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-R2 dated September 28, 1990, a copy of which is enclosed for your perusal.
Although we trust that our comments are of assistance to you, we would again note that they do not constitute an advance income tax ruling and, consequently, may or may not be applicable with respect to any specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch