15 June 2000 External T.I. 2000-0019075 - DEMUTUALIZATION ANNUITY CONTRACT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

An employer receives a demutualization benefit in respect of a group annuity contract. If the employer distributes it to the plan members, will the flow-through rule in draft subsection 139.1(16) apply to the distribution?

Position:

Yes, provided that the requirements of draft 139.1(16) are met.

Reasons:

Draft legislation.

XXXXXXXXXX 		2000-001907

Attention: XXXXXXXXXX

June 15, 2000

Dear Sirs:

Re: Demutualization Benefit

This is in reply to your letter dated March 31, 2000 concerning the application of the draft demutualization legislation in Bill C-25 to a proposal to distribute a demutualization benefit received by XXXXXXXXXX to the members of its pension plan. We also acknowledge receipt of your facsimile of May 11, 2000.

XXXXXXXXXX

Draft subsection 139.1(16) of the Income Tax Act (the "Act") permits an employer which has received a cash demutualization benefit to distribute such benefit to its employees. Where draft subsection 139.1(16) of the Act is applicable, it generally treats the employer as a conduit by deeming the employer not to have received the demutualization benefit and by providing that no amount is deductible in computing the employer's income because of the distribution. The employees are then deemed to have received a dividend equal to the amount of the distribution.

For draft subsection 139.1(16) of the Act to apply, the following conditions in draft paragraphs 139.1(16)(a) to (e) must be met:

• a stakeholder receives a conversion benefit because of the interest of any person in an insurance policy,

a) the stakeholder makes a payment of an amount (except, in general, a payment made by way of a transfer of a share) to a particular individual

• who has received benefits under the policy,
• who has, or had at any time, an absolute or contingent right to receive benefits under the policy,
• for whose benefit insurance coverage was provided under the policy, or
• who received the amount because an individual either received such benefits or had such a right or insurance coverage,

b) it is reasonable to conclude that the purpose of the payment is to distribute an amount in respect of the conversion benefit to the particular individual,

c) either

• the main purpose of the policy was to provide retirement benefits or insurance coverage to individuals in respect of their employment with an employer, or
• all or part of the cost of insurance coverage under the policy had been borned by individuals (other than the stakeholder), and

d) draft subsection 139.1(14) of the Act does not apply to the conversion benefit.

In XXXXXXXXXX case, if all of the above conditions are met, pursuant to draft paragraph 139.1(16)(f) of the Act, XXXXXXXXXX may elect to have draft subsection 139.1(16) of the Act apply in respect of the distribution. This election must be made in writing filed with the Minister within six months after the end of the taxation year in which XXXXXXXXXX received the conversion benefit. However, we note that the coming into force rule for draft subsection 139.1(16) of the Act extends the filing due date by deeming an election to have been filed on a timely basis if it is filed within six months after the end of the month in which Bill C-25 receives Royal Assent.

With regard to the preparation of T5 slips, pursuant to draft paragraph 139.1(16)(i) of the Act, XXXXXXXXXX will be deemed to have paid a dividend to XXXXXXXXXX employees at the time the distribution is made by XXXXXXXXXX. However, under draft 139.1(16)(j) of the Act, XXXXXXXXXX assumes the obligations, including the reporting obligations, with regard to the deemed dividend that would otherwise be imposed on XXXXXXXXXX. Accordingly, XXXXXXXXXX will be responsible for preparing the T5 slips to the plan members.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R3 and are not binding on the Agency in respect of any particular situation.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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