R.A. Primeau (613) 993-7295
February 5, 1986
Dear XXXX
This is in reply to your letter of November 15, 1985 and further to our telephone discussions on January 31 and February 3, 1986.
You have described a situation with respect to a life annuity contract which is not a Prescribed Annuity Contract in which the income that will accrue for the annuity holder's taxation purposes in the early years exceeds the annuity payments to be received in those years. Conversely, the income which will accrue for taxation purposes in the subsequent years is less than the annuity payments to be received in those years. We understand that this is caused by the fact that the annuity premium was calculated by the insurer (issuer of the annuity contract) by using two different interest rates - a higher rate with respect to the above-mentioned earlier years and a lower rate with respect to the subsequent years.
It is your position that the taxation of this annuity should be on a blended basis whereby so much of the income is to be treated as a return of capital and the balance as interest. By this we understand you to mean that a single or "blended" rate of interest, equal to the rate that could have been used by the insurer to arrive at the same amount of annuity premium as was in fact calculated using the dual rates, should be used for purposes of calculating the annuity holder's income accruing for taxation purposes because the income so calculated could never exceed the annuity payments received.
Your letter indicates a belief on your part that this blended basis of reporting income by the annuity holder would be possible if it were not for the fact that certain insurance companies will not agree with the Department of Finance to the use of this method. (As you may know, the use of a single or blended rate rather than the dual rates actually used would reduce the insurer's deductible maximum tax actuarial reserves in the early years of the annuity contract).
However, the use of a single or blended rate of interest for taxation purposes, both for the annuity holder's accrued income and the insurer's deductible reserves, when dual rates are actually used by the insurer to calculate the annuity premium is not permitted by the existing income tax legislation. In this regard, subsection 1403(1) of the Income Tax Regulation (the "Regulations") specifically refers to "the rates used by the insurer", and not "the rate used by the insurer".
We understand from our telephone discussions that you are writing to the Department of Finance requesting an amendment to the income tax legislation which would eliminate this problem for annuity holders.
Your letter also indicates that the specific life annuity contract which you have in mind cannot qualify as a Prescribed Annuity Contract because the annuity holder is under 60 years of age and is only partially disabled. You then mentioned in our telephone discussions that you were wondering whether such annuity holder might be considered as "totally and permanently disabled" and inquired as to our position on the meaning of this expression in subparagraph 304(1)(d)(i) of the Regulations.
In our view, the question of whether a person is "totally and permanently disabled" is a question of fact. We have indicated that an individual who is considered to be totally and permanently disabled for purposes of C.P.P./ Q.P.P. or U.I.C. would meet the requirement of subparagraph 304(1)(d)(i) of the Regulations. If the individual has not contributed to and is not covered under one of these plans, the Department would require satisfactory evidence of the total and permanent disability. In our opinion, this would be the same type of evidence required by an insurer with respect to an insurance claim based on total and permanent disability.
We trust that the above comments will be of assistance to you.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch