F. Francis (613)957-3498
July 29, 1988
Dear Mr. Gordon:
Re: Program for Older Worker Adjustment
This is in reply to your letter of July 15, 1988, wherein you requested our views with respect to the tax treatment of the proposed purchase of insured annuity contracts from insurance companies to provide retirement benefits for certain employees.
We have reviewed the letter from XXXX and will comment on their opinions in the same order that they were noted:
1,2,3) It is our view that if Labour Canada purchases an annuity contract to provide retirement benefits to ED employee and the employee is the beneficiary under the annuity contract, the employee will be considered to have constructively received the value of the annuity contract at the time the amount is paid to the insurer. As a consequence thereof, the employee will have to report the amount paid for the annuity contract as employment income in that year and thereafter will be taxed in accordance with the provisions of the Income Tax Act (the "Act") as the beneficiary of an annuity contract.
However, the employee will not be considered to have constructively received the commuted value of the annuity contract where the following conditions are met
a) Labour Canada will be the owner and beneficiary of the annuity contract;
b) Labour Canada will irrevocably assign the annuity payments to the employee. The employee will have no other interest or rights in the annuity contract and the annuity payments will not be commutable.
If the above conditions are met, the annuity payment will be included in the employee's income in the year received as employment income.
4. We confirm your position that the insurance company will be subject to income tax with respect to any profits from the annuity contract.
It should be noted that Bill C-139 which received first reading on June 30, 1988, proposes to introduce a new Part XII.3 tax on the accumulated investment income of life insurance companies. Our comments above do not reflect the impact, if any, of the proposed legislation.
We trust the above comments will be of assistance to you.
Yours truly, ORIGINAL SIGNED BY C.B. Darling Director Financial Industries Division Rulings Directorate