Dear Sir:
Re: Registered Retirement Savings Plan ("RRSP")
This is in reply to your letter of November 2, 1990 concerning the withdrawal of the entire amount in your RRSP upon your attaining the age of 71 years to purchase an annuity from a charitable organization.
In our telephone conversation 19(1) Shea-DesRosiers) of November 29, 1990, you stated that 24(1)
As noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request. As a consequence thereof, we may only offer the following general comments.
In the year that a taxpayer becomes 71, he must whitdraw the entire amount included in his RRSP. Upon doing so, the issuer of the RRSP has to withhold from 10% to 30% tax depending upon the amount being withdrawn unless the taxpayer purchases a life annuity or a term- certain annuity and directs the issuer to forward the entire amount from his RRSP to pay for said annuity. Where the entire amount is withdrawn from the RRSP, it must be included in the taxpayer's income in the year of such withdrawal.
In the situation you describe, you want to withdraw the funds from your RRSP and purchase an annuity from a charitable organization and have the income from said annuity paid to you. The amount withdrawn would be subject to withholding tax as mentioned above and would have to be included in the taxpayer's income in the year received. The income accrued on the annuity would be included in the taxpayer's income in the year received pursuant to subsection 12.2(3) of the Income Tax Act.
Where an annuity is structured in such a way that the owner is the donor, the interest income is paid to the donor during his lifetime, the charity is named as an irrevocable beneficiary so that at the death of the donor the capital would go to the charity, and the charity as beneficiary has an unassailable right of ownersnip in the capital element of the annuity and this right cannot be defeated or varied in any way, it is our opinion that a charitable donation receipt could be issued by the charitable organization at the time of vesting of the gift to the donor.
As mentioned in paragraph 1 of Interpretation Bulletin IT-111R ("IT-111R"), certain registered charities solicit interested individuals to make an irrevocable contribution of capital to the charity in exchange for immediate guaranteed payments to the individual for life at a specified rate depending on life expectancy. As this type of an arrangement is considered to be an annuity contract it is subject to tax under the rules relating to annuities except in the very narrow circumstances of paragraph 3 of IT-111R. (a copy of IT-111R is enclosed for your information).
A transfer of property to a registered charity is not a gift for the purposes of section 118.1 of the Income Tax Act (the "Act") if there is consideration of any kind being received in return. In our view, the word "gift" has been interpreted as being a voluntary transfer of property without consideration and without conditions. Furthermore, it is one in which no right, privilege, benefit or material advantage may accrue to the donor or to a person designated by the donor. This interpretation is set out in paragraph 3 of Interpretation Bulletin IT-110R2, a copy of which is enclosed for your information.
However, the Department's administrative position with respect to annuities purchased from charitable organizations is to consider a "gift" to have been made in circumstances where an individual pays more for the annuity than the total amount expected to be received as annuity payments. In this instance, the "gift" portion is the excess of the purchase price over the amount so expected to be returned as stated in paragraph 3 of IT-111R. We have provided three examples to illustrate the income tax treatment of gifts to charities through annuities and our comments follow a summary of each of the examples.
1. A male age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Act) an irrevocable capital contribution of $100,000 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
Tax Treatment
Capital contribution $100,000 Expected annuity payments to be received (per IT-111R: $4,000 x 20.8) - 83,200
Charitable donation receipt received by taxpayer $ 16,800
The individual would receive a current deduction (subject to the rules governing charitable donations in subsection 118.1(3) of the Act) of $16,800 and all future $4,000 annuity payments would not be taxable. For example, if the individual lived to the age of 90, no annuity payments or portion thereof would be taxable even though by age 90, the individual would have received $120,000.
2. A male age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Act) an irrevocable capital contribution of $83,200 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
Tax Treatment
Capital contribution $83,200 Expected annuity payments to be Received (per IT-111R: $4,000 x 20.8) 83,200
Charitable donation receiptreceived by taxpayer NIL
In our view, the individual in this example has not made a "gift" for the purposes of section 118.1 of the Act as the amount of the capital contributed is equal to the total amount expected to be received as annuity payments under an immediate life annuity using the tables provided in IT-111R. As a result, it is our position that paragraph 1 of IT-111R would be applicable in the income tax treatment of the annuity payments received by the annuitant. As well, no charitable donation receipt could be issued as no "gift" has been made for the purposes of section 118.1 of the Act.
3. A male age 60, gives a charitable organization (as defined in paragraph 149.1(1)(b) of the Act) an irrevocable capital contribution of $60,000 in exchange for immediate guaranteed payments of $4,000 per year to the individual for life.
Tax Treatment
Capital contribution $60,000 Expected annuity payments to be received (per IT-111R: $4,000 X 20.8) 83,200
Charitable donation receipt received by taxpayer NIL
The individual would receive no current deduction for charitable donations and all future $4,000 annuity payments would be included in computing the individual's income under paragraph 56(1)(d) of the Act. Paragraph 60(a) of the Act would allow for the deduction from income of the capital element of the annuity payments based on a capital cost of $60,000 as determined by Part III of the Income Tax Regulations.
In circumstances where paragraph 1 of IT-111R is applicable such that the taxpayer purchasing an annuity from a charitable organization is expected to receive annuity payments equal to or in excess of the capital contributed, the registered charity is required to complete and issue T4A supplementaries in accordance with the Income Tax Act.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate