7 October 1997 External T.I. 9723115 - PRESCRIBED ANNUITY CONTRACT - DISPOSITION

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:

A terminally ill taxpayer wishes to terminate his prescribed annuity contract ("PAC"). What are the tax consequences?

Position:

To qualify as a PAC, a requirement is that the holder's rights in the annuity contract cannot be disposed of otherwise than on the holder's death. However, there is no provision in the Act or the Regulations which specifically prevents holders from renegotiating the terms of the PAC such that it no longer qualifies as a PAC. If the PAC is terminated prior to the holder's death and the commuted value is paid to the holder, any gain resulting from the disposition would be included in the holder's income under subsection 148(1).

Reasons:

Legislation.

XXXXXXXXXX 5-972311

Attention: XXXXXXXXXX

October 7, 1997

Dear Sirs:

Re: Prescribed Annuity Contract

This is in response to your facsimile letter of August 29, 1997 concerning the income tax consequences if an individual terminates his prescribed annuity contract ("PAC") notwithstanding that there are no provisions in the contract which would enable the individual to terminate the annuity before death. You advise that the individual in question is terminally ill and wishes to put his affairs in order prior to his death.

The determination of the proper tax consequences relating to any particular situation will depend on an analysis of all the facts, documentation and other information pertaining to the situation. However, we can provide you with the following general comments which are not binding on the Department.

The definition of PAC is found in subsection 304(1) of the Income Tax Regulations ("Regulations"). One of the conditions which must be met for an annuity contract to qualify as a PAC is found in clause 304(1)(c)(iv)(D) of the Regulations. That condition requires that a holder's rights in the annuity contract not be disposed of otherwise than on the holder's death. Notwithstanding the condition in clause 304(1)(c)(iv)(D) of the Regulations, there is no provision in the Income Tax Act (the "Act") or the Regulations which specifically prevents holders from renegotiating the terms of the PAC such that it no longer qualifies as a PAC. If the circumstances indicate that the parties to the PAC arrangement contemplated a renegotiation of the terms of the PAC at the time it was issued it is quite likely that the annuity contract never qualified as a PAC.

In the situation where a PAC is terminated and the commuted value is paid to the holder, it is our view that a disposition has occurred. Accordingly, subsection 148(1) of the Act would apply to include in the holder's income for the year of disposition the excess of the proceeds of the disposition over the adjusted cost basis of the annuity contract.

We note that amended information slips need not be prepared for the years prior to the year of disposition as long as the annuity contract qualified as a PAC from the start. It is a question of fact whether an annuity contract qualifies as a PAC.

We trust that the above comments are of assistance.

Yours truly,

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