| 19(1) | 900120 |
| A. Glen Thornley | |
| (613) 957-2101 | |
| EACC9304 |
August 15, 1990
19(1)
Re: Annuities issued by charities
This is in reply to your letters of February 7 and 8, 1990 concerning the above noted subject. We regret the delay in replying.
As set out in paragraph 1 of Interpretation Bulletin 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 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. We do not consider that the Department is enticing charitable organizations into the annuities business by responding, by way of an Interpretation Bulletin, to the reality of some charities issuing annuities. Revenue Canada, Taxation does not control who can or cannot issue annuities. We presume that the relevant authorities would consider exercising control over the unauthorized issue of annuities.
With respect to paragraph 3 of IT-111R, as indicated in our precious letter and in subsequent discussions, this is an administrative position of the Department and is only applicable in the exact circumstances of that paragraph. As an example, a 65 year old female gives $110,000 to a charity on the understanding that she is gifting $10,000 to the charity and purchasing an annuity with the remaining $100,000. Her annual annuity payments cannot exceed 100,000 divided by 20.1 (the number of yearly instalments expected according to the tables in the Bulletin); being $4975.12 per year. This amount is, on the assumption that the annuity is issued on the basis of zero interest, merely a return of her capital and is received tax free. In the event that an annuitant lives beyond the actuarially determined mortality date, the charity would have to continue the annuity payments which would, presumably, be paid out of their tax free earnings from, in our example, the investment of the initial $100,000.
With respect tot he issue of reasonableness raised in your letter, we expect that the Department would have difficulty challenging the cost to an individual of an annuity purchased from a charity in an arm's length transaction. The cost (adjusted cost basis) of an annuity is determined in accordance with the rules in paragraph 148(9)(a) of the Act. Initially this would be whatever the taxpayer paid for his contract. The capital element of each annuity payments is determined under the provisions of section 300 of the Income Tax Regulations. Where no interest is being paid by the charity this should result in each payment being a return of capital.
We recognize that an argument could be made that paragraph 3 of IT-111R may go beyond what a strict interpretation of the Act might allow. This position has however been in place for more than twenty years. We do not intend to recommend any changes to the bulletin at this time, however we propose to forward a copy of your letter and our reply to our Publications Division to be considered with the next revision of the bulletin. We will likely be soliciting input from all interested parties at that time.
With respect to the "Moneywise" article included with your February 8, 1990 letter, we have determined that the article does not accurately reflect the product that is being offered.
We thank you for your submission and comments.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. Roy Shultis DirectorTechnical Publications Division