| 19(1) | 5-7920 |
| R.B. Day | |
| (613) 957-2136 |
June 16, 1989
19(1)
We are writing in reply to your recent letter wherein you requested our views regarding the income tax implications for a deferred annuity contract in the following situation:
A taxpayer purchased a deferred annuity contract through a life insurance company.
This contract had a market value adjustment penalty which came into effect in the event of cash surrender prior to maturity.
19(1)
Our Comments
All statutory references are to the Income Tax Act.
Since paragraph 56(1)(d.1) only applies to situations where payments have commenced under the terms of the annuity contract, the 19(1) in "interest" would not be included in the taxpayer's income under paragraph 56(1)(d.1). Because the contract was surrendered prior to the third anniversary, no amount of accrued interest would be brought into income pursuant to subsection 12.2(3).
Subsection 148(1) includes in a taxpayer's income the amount, if any, by which the proceeds of disposition of the taxpayer's interest in a contract exceeds the adjusted cost basis of the contract to the taxpayer.
Upon surrender of a deferred annuity contract, proceeds of disposition, as defined in subparagraph 148(9)(e.2)(i), is the amount, if any, by which the cash surrender value the contract exceeds any policy loans outstanding the contract.
Based on the information provided, it is our view that for purposes of computing the amount to be included in the taxpayer's income under subsection 148(1), the proceeds of disposition of the contract would be. It would appear, therefore, that no amount would be included in the taxpayer's income under subsection 148(1). We note that, in the event the proceeds of disposition than the adjusted cost basis of the contract, no amount would be deductible in respect of the loss.
We hope these comments will be of assistance to you.
Yours truly,
for Director Small Business and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch