3-2267
M. Shea-DesRoliers
613-957-895319(1)
July 6, 1989
Dear Sirs:
This is in reply to your letters of December 12, 1988 and April 4, 1989, concerning the following situation.
24(1) Since the tax consequence of the receipt of lottery winnings in the form of periodic payments is currently before the courts, we are not in a position to provide you with binding advance income tax rulings on this matter.
It is the Department's position, as supported by the Rumack case, that where a lottery prize consists of a series of periodic payments, the payments constitute an annuity as defined in subsection 248(1) of the Income Tax Act (the "Act"). Such payments must therefore be included in the recipients's income pursuant to paragraph 56(1)(d) of the Act and a return of capital deduction will be allowed under and to the extent permitted by subparagraph 60(a)(i) of the Act. In accordance with subsection 52(4) of the Act, the fair market value of the property acquired by the lottery winner (i.e. the right to receive the payments) will be the adjusted purchase price of the annuity for the purposes of determining the return of capital pursuant to section 300 of the Income Tax Regulations.
Since it appears that the primary purpose of interposing the trust in your situation is to obtain a tax benefit for the lottery winner consisting of the avoidance of tax in respect of the periodic payments, it is our view that the interposition of the trust is an avoidance transaction within the meaning of subsection 245(3) of the Act. If the general anti-avoidance rule is applied, the prize winner's deduction for the capital element of the annuity will be calculated pursuant to subparagraph 60(a)(i) of the Act as if the trust did not exist.
Your deposit will be returned under separate cover.
Yours truly,
for Director Financial Industries Division Rulings Directorate