28 April 1995 External T.I. 9501085 - TRANSFER OF RRSP FUNDS TO CHARITY ISSUED ANNUITY

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:

	Whether gift annuities can be purchased with funds out 	of an RRSP.

Position TAKEN:

Question of fact whether charity is qualified to issue annuities. Charitable donation not possible where RRSP funds used to acquire retirement income annuity, or where transfer from RRSP under paragraph 60(l). If annuity is acquired as qualified investment, any donation would be that of the RRSP and not the annuitant, and subsection 146(9) would apply to include the excess of the cost over the FMV of the annuity in the income of the annuitant.

Reasons FOR POSITION TAKEN:

	See 932169, August 31, 1993; 921910, September 15, 1992 	and issue sheet.

XXXXXXXXXX 950108

Attention: XXXXXXXXXX

April 28, 1995

Dear Sirs:

Re: Transfer of Registered Retirement Savings Plan ("RRSP")
Funds to Charity Issued Annuity

This is in reply to your letter of January 9, 1995, in which you requested a ruling on the above-noted subject. Advance income tax rulings are only given where a specific proposed transaction is identified, and where the request is made in the manner set out in Information Circular 70-6R2. However, we can make the following general comments.

You have asked if RRSP funds can be rolled over tax free into both a "self-insured gift annuity" and a "re-insured gift annuity". We assume that your charity issues "gift annuities" in accordance with Interpretation Bulletin IT-111R and that your reference to a "self-insured gift annuity" means an annuity issued by the charity itself.

Although we are prepared to answer your query, we wish to point out that there is no income tax advantage in using RRSP property to acquire an annuity from a charitable organization. Indeed, there is a definite disadvantage if an RRSP trust purchases a charitable annuity as a qualified investment (see item 1 below). We will explain further in the following comments which describe the three methods of using RRSP funds to acquire an annuity and the various tax consequences.

1. QUALIFIED INVESTMENT

Method:

When RRSP's are trusteed type plans the trust may hold various forms of qualified investments. Qualified investments for RRSP's are described in subsection 146(1) of the Income Tax Act (the "Act"). Among other types of investments, an RRSP may acquire an annuity described in the definition of "retirement income" but only if it is purchased from a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada.

Under the Act annuities are generally defined as life insurance contracts and in addition to holding annuities as "qualified investments" an RRSP may also hold certain life insurance contracts in restricted circumstances. The rules for these are very complex and are discussed at length in the Department's Interpretation Bulletin IT-408R, a copy of which is enclosed.

Tax Consequences:

It is our opinion that any amount paid by the RRSP trust which exceeds the amount expected to be returned under the terms of the annuity can reasonably be treated as a charitable gift as outlined in paragraph 2 of IT-111R. The charitable donation, however, is that of the RRSP trust and not the annuitant; and since the RRSP trust is for the most part a tax-exempt entity, usually there is no tax advantage in its making a charitable donation.

While an RRSP might acquire a charitable annuity as an investment, the application of subsection 146(9) of the Act must also be considered. Under this provision, if a trust governed by an RRSP acquires an investment for an amount greater than the fair market value of the investment at the time of its acquisition, the difference between the cost and the fair market value must be included in the income of the annuitant in the year of acquisition. Accordingly, if an RRSP were to acquire a typical form of charitable gift annuity where the cost of the annuity exceeds its fair market value, it would, in our opinion, be necessary to include in the income of the annuitant for the year an amount equal to the excess of the amount paid for the annuity over its fair market value.

With respect to the value of the RRSP's charitable donation, it would be a question of fact whether or not the amount expected to be returned under an annuity is equal to the fair market value of the annuity. We would accept that the RRSP's charitable donation is equal to the amount included in the annuitant's income, as described in the previous paragraph.

When payments are made under the terms of an annuity to an RRSP they would be payable as a return of capital or income as the case may be. However since an RRSP is not generally subject to taxation, the distinction between an income and capital receipt is not usually critical. If any amounts are paid directly to the RRSP annuitant, however, they would be fully taxable to the annuitant as benefits out of the RRSP.

Other Considerations:

In addition to the rules respecting qualified investments for RRSP's, certain registration requirements will affect the manner in which the annuity purchase is handled. Specifically, an RRSP cannot provide for the payment of any benefit before or after maturity of the plan to anyone except the annuitant of the RRSP.

However, because of the definition of "benefit" in subsection 146(1) an RRSP could pay amounts to a charity after the death of the RRSP annuitant. It is also a requirement of registration that the RRSP provide that retirement income may not be assigned.

2. RETIREMENT INCOME

Method:

When an RRSP matures it must provide the annuitant with a "retirement income" which must be in the form of an annuity. "Retirement income" is defined in subsection 146(1) of the Act as follows:

"retirement income" means

(a) an annuity commencing at maturity, and with or without a guaranteed term commencing at maturity, not exceeding the term referred to in paragraph (b), or, in the case of a plan entered into before March 14, 1957, not exceeding 20 years, payable to

(i) the annuitant for the annuitant's life, or

(ii) the annuitant for the lives, jointly, of the annuitant and the annuitant's spouse and to the survivor of them for the survivor's life, or

(b) an annuity commencing at maturity, payable to the annuitant, or to the annuitant for the annuitant's life and to the spouse after the annuitant's death, for a term of years equal to 90 minus either

(i) the age in whole years of the annuitant at the maturity of the plan, or

(ii) where the annuitant's spouse is younger than the annuitant and the annuitant so elects, the age in whole years of the spouse at the maturity of the plan,

issued by a person described in the definition "retirement savings plan" in this subsection with whom an individual may have a contract or arrangement that is a retirement savings plan,

or any combination thereof;....

For purposes of this definition, a life annuity, as described in paragraph (a) of the definition, can be issued by any person. However, various provincial and/or federal statutes may prevent some persons or organizations from issuing life annuities. A charity would therefore have to determine if it is legally capable of issuing such annuities in order to have the provision apply.

Term annuities, as described in paragraph (b) of the definition, on the other hand, must be issued by a person, described in the definition of a retirement savings plan", with whom the annuitant under the plan may have an RRSP. That latter definition provides that such persons are:

1. persons licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an annuities business;

2. a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee; or

3. a "depositary" type institution.

Tax Consequences:

The acquisition of the "retirement income" annuity does not result in any amount being included in the annuitant's income, nor is the annuitant permitted a deduction. Therefore, a charitable donation would not be possible in these circumstances. As income is received under the annuity, the annuitant is taxed on the full amount as a benefit received out of an RRSP.

3. TRANSFERS TO ANNUITIES FROM RRSP'S

Method:

Paragraph 60(l) of the Act provides for the payment of amounts out of RRSP's to acquire annuities in certain limited circumstances. The paragraph, however, also provides that any such transfer to acquire an annuity must be paid to acquire the annuity from a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada. Again, it would be a question of fact as to whether or not a particular charity is qualified to issue annuities.

Tax Consequences:

Any amount directly transferred under paragraph 60(l) is brought into the individual's income, but there is a deduction in an equivalent amount permitted the individual. As with the purchase of a "retirement income" annuity, a paragraph 60(l) transfer would not result in any charitable donation by the individual. Amounts received under the annuity would be fully taxable to the annuitant.

Please note that paragraph 146(16)(a) of the Act does not apply to the situation you describe in your letter.

Summary

It is a question of fact whether your charity is qualified to issue annuities in accordance with the provisions listed above. In any event, a charitable donation is not possible where RRSP funds are used to acquire an annuity to provide retirement income, or RRSP funds are transferred to an annuity in the limited circumstances where it is allowable, as discussed in (2) and (3) above. If the RRSP funds are used to acquire a charitable annuity as an investment, the donation is that of the RRSP and not the annuitant, and the difference between the cost and the fair market value would be included in the income of the annuitant.

These comments are an expression of opinion only and therefore are not binding on the Department. We trust, however, that they will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.