| 24(1) | 5-9700 |
| J.P. Dunn | |
| (613) 957-8961 |
Attention: 19(1)
August 1, 1990
Dear Sir,
We are writing in response to your correspondence of February 20, 1990 concerning the tax treatment of amounts received by a corporation or a partnership pursuant to the terms of an annuity contract.
Pursuant to subsection 48(1) and paragraph 138(12)(f) of the Income Tax Act ("the Act"), a life insurance policy includes an annuity contract and accordingly, the provisions of subsection 12.2(1) of the Act are applicable to compute the income of the annuitant. The aforementioned subsection is generally applicable to an annuity acquired after December 1, 1982 and requires the holder to include in income for particular taxation year the amount by which the accumulating fund in respect of the interest in the annuity contract exceeds the adjusted cost base of that interest to the holder. This amount is determined at the end of the calendar year which end in that particular taxation year.
The accumulating fund and adjusted cost basis in respect of the interest are determined pursuant to subsection 307(1) of the Income Tax Regulations ("Regulations") and paragraph 148(9)(a) of the Act respectively. These amounts and, consequently, the amount to be included in the taxpayer's income each year are determined through information which is available in the records of the issuer of the contract. In this regard, subsection 201(5) of the Regulations requires the issuer to prepare and file the statement of pension, retirement, annuity and other income, which discloses the amount of income earned by the annuitant for the year for purposes of subsection 12.2(1) of the Act.
We would confirm that the result of the aforementioned calculation is similar to hat obtained with blended mortgage payments in which the interest component of each payment is higher in the early term of the series of payments and gradually declines over the extent of that series.
With respect to your comments regarding paragraphs 56(1)(d) and 60(a) of the Act, we would advise that these provisions will generally remain to De applicable but only to-the-extent that the provisions of subsection 12.2(6) of the Act are applicable with respect to the annuity.
We would note that Bill C-20 as passed by the House of Commons on December 20, 1989 together with the proposed amendments to the Act as published by the Department of Finance in July, 1990 contain certain amendments to section 12.2 of the Act. These proposals primarily affect the amount to be included in computing the income of an individual from a Life insurance policy and, consequently, should not alter our comments expressed above.
While we trust that our comments are of assistance to you we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of a particular situation.
for DirectorFinancial Industries Division Rulings Directorate