Revenue Canada Taxation Head Office
A. Glen Thornley (613) 957-2101
XXXX
October 29, 1990
Dear XXXX
Re: Annuities issued by charities
This is in reply to your letter of August 30, 1990 in which you comment upon the contents of our letter to you of August 15, 1990 dealing with annuities issued by charities as set out in Interpretation Bulletin IT- 111R.
You state in the first sentence of your letter that, "Revenue Canada regards IT-111R as applicable only in the precise circumstances set out in paragraph 3 of this bulletin". What we said in essence was that paragraph 1 of the Bulletin applies to annuities issued by a Charity, "except in the very narrow circumstance of paragraph 3". Paragraph 3 of the Bulletin only applies when an individual pays more for the annuity than the total amount expected to be received as annuity payments. In these circumstances the excess of the purchase price over the amount so expected to be returned is a gift for which the individual is entitled to a charitable donation receipt. No portion of any annuity payments received in these circumstances is taxable in the hands of the annuitant.
Thus where there is no gift element the entire amount received by the charity represents the cost of the annuity to the annuitant. According to paragraph 1 of the Bulletin such an arrangement is considered a life annuity contract for purposes of the Income Tax Act and the annuity payments are included in income pursuant to section 56 of the Act. A deduction is allowed under paragraph 60(a) for the capital element, such capital element being determined pursuant to the rules in section 300 of the Income Tax Regulations on the basis of life expectancy and other factors.
With respect to the cost of the annuity we stated, "the Department would have difficulty challenging the cost to an individual of an annuity purchased from a charity in an arm's length transaction" (emphasis added). We did not say, however, that we would not challenge it. As indicated in paragraph 10 of IT-419 , Meaning of Arm's Length, each particular transaction must be examined on its own merits. Thus where it became apparent that unrelated parties were not dealing at arm's length, in the context of IT-419 , or an outlay or expense was not considered reasonable in the circumstance, the Department would quite likely wish to challenge the arrangement or the outlay or expense.
We are thus unable to give you assurances that the determination of the income element of annuity payments made by a charity to an individual in the circumstance of your letter will not be challenged. If you have concerns about specific completed transactions we would suggest you discuss them with personnel at your local District Taxation office. On the other hand, if you have a particular proposed transaction in mind you may wish to submit an Advance Income Tax Ruling request to the Rulings Directorate here in Head Office.
We trust our comments will be of assistance to you in this matter.
Yours truly
for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch