C. Higgins (613) 957-2103
MAR 17 1988
Dear Sirs:
Re: Prescribed Annuity Contracts
This is in reply to your letter of December 14, 1987, in which you requested our comments on the tax consequences of allowing the commutation of the remaining benefits of a Prescribed Annuity Contract ("PAC"). We regret the delay in replying.
In your hypothetical situation, a policyholder has an annuity being taxed as a PAC, as defined in Regulation 304 of the Income Tax Regulations (the "Regulations"). The annuity contract does not provide for any right of commutation. Two years after qualifying for the PAC, the policyholder requests a commutation of remaining benefits under the contract.
Based on the foregoing hypothetical situation, you have requested our comments on the consequences to both XXX and the policyholder of allowing, on a non-contractual basis, a request to commute the remaining benefits of the annuity policy.
Our Comments
Subsection 304(1) of the Income Tax Regulations (the "Regulations") provides that pursuant to the terms and conditions of an annuity contract "no payment will be made out of the contract other than as permitted by this section". The terms and conditions referred to would include those set out in the written annuity contract as well as those unwritten terms implied by circumstances and the actions of the parties. In this regard, it is not possible to enumerate all the situations where the circumstances and actions of the parties could create implied terms to the contract. While we are of course concerned with the tax consequences where a particular PAC is commuted, we are more concerned as to the significance an implied term concerning commutation would have for all the other outstanding "PAC's" issued by a particular insurance company. In addition, once the actions of a particular issuer have created such an implied term, we are concerned as to how this implied term could be removed with respect to the other outstanding "PAC's" in order to remedy the situation.
The consequences for the other outstanding "PAC's" would be significant. However, this would seem to be in accord with tax policy which is that a "PAC" will not be commuted otherwise than as a consequence of death pursuant to subsection 304(2) of the Regulations.
We trust these comments will be of assistance.
Yours truly,
ORIGINAL SIGNED By Wm. R. McColm
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch