23 April 1997 Internal T.I. 9708690 - RCA, ANNUITY, 254(A)

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:

Does the Department allow for the deferment of taxes where the conditions of 254(a) are satisfied even though the result may be inconsistent with policies underlying other provisions in the Act?

Position: Yes

Reasons:

Provision clearly states that recipient is deemed not to have received any amount as a result of the issuance of the document or the entering into the contract.

		THE CONFERENCE FOR ADVANCED LIFE UNDERWRITING

			     1997 Annual Conference

Question 14

Where an exempt life insurance policy is distributed to a beneficiary of an RCA on its wind-up and the transfer of the policy meets the conditions of paragraph 254(a) of the Act, will the beneficiary be taxable only as amounts are received under the policy? Basically, paragraph 254(a) of the Act provides that there is no immediate taxation where a beneficiary of a pension plan receives an annuity to replace his or her rights under the pension plan, and the annuity does not provide any additional rights. In this case, the beneficiary will be taxed on the annuity payments as received. Similarly, where a corporation transfers an exempt life insurance policy that meets the conditions of paragraph 254(a) to an employee in satisfaction of the employee's rights under a non-registered pension plan, will the employee be taxable only as amounts are received under the contract or policy? In both situations, there appears to be a tax policy concern. The employee will not have any immediate tax consequences even though the transfer of the policy, in the first case, will be considered a distribution from an RCA resulting in a refund of Part XI.3 taxes. In the second case, the employer will be entitled to an immediate deduction.

Response

Where the conditions of paragraph 254(a) of the Act are satisfied, the Department has previously ruled and opined that a taxpayer will only be taxed as amounts are received in accordance with the particular document or contract. Even though the results might be seen as being inconsistent with general tax policies underlying other provisions in the Act, paragraph 254(a) clearly provides for the deferment of the recognition of income by the taxpayer. Consequently, the beneficiary in the first case and the employee in the second case will be taxable only as amounts are received under the contract or policy, as the case may be. However, the determination of whether the conditions of paragraph 254(a) of the Act would be satisfied is a question of fact requiring a review of all of the relevant contracts and agreements. In particular, the contract or policy cannot provide the taxpayer with additional rights that are not in the original pension plan.

Prepared by M.P. Sarazin
April 23 1997
970869