Update: CRA newsletter on annuity purchases from pension plans
On July 24, 2020, the Registered Plans Directorate of the Canada Revenue Agency (CRA) released Newsletter 20-1 on the topic of buy-out annuity contracts and, in particular, the question of what constitutes a “material difference” between an annuity purchased in satisfaction of a pension obligation and the original pension benefit.
The release follows the publication of a draft version of the newsletter, which was discussed in the February 2019 News & Views.
Under section 147.4 of the Income Tax Act, a beneficiary will not be taxed on the acquisition of an annuity that was purchased in satisfaction of a pension obligation, provided the annuity’s terms are “not materially different” from those of the pension plan. The newsletter considers what constitutes a material difference in certain contexts.
The CRA newsletter remains largely unchanged from the initial draft. The major development in both the draft and final versions of the newsletter is that the CRA has indicated it will generally accept fixed-rate indexation in lieu of a full indexed adjustment based on the Consumer Price Index. The CRA had indicated that the fixed rate could be based upon either the mid-range of the Bank of Canada’s inflation-control range at the date of purchase or the spread between Canada long-term bond yields and real return bonds in the month of purchase or the month preceding. A fixed rate between these two options would also be acceptable.
If an annuity contract uses a different substitution method, the CRA will consider the alternative upon written request.
The publication of the final version of the newsletter will give comfort to administrators of plans with indexation provisions that wishing to satisfy pension obligations though the purchase of buy-out annuities, as well as former members of defined benefit pension plans who wish to purchase annuities in lieu of receiving a pension directly from the plan.