William John Speerstra (Appellant)
v.
Minister of National Revenue (Respondent)
Trial Division, Sheppard D.J.—Calgary, Alta.,
February 22; Vancouver, B.C., March 2, 1973.
Income tax—Annuity payments—Deduction for capital
element—Income Tax Act, s. 6(1)(aa)—Income Tax Regula
tions, s. 300(2)(d).
W (the appellant's mother) purchased two annuity con
tracts for lump sum payments of $31,110 and $9,857
respectively. The contracts provided for annuities of $300
and $100 a month for life. Each of the contracts contained a
provision that if W died before annuity payments equal to
the lump sum payment had fallen due, the annuity would be
paid to S until that time.
Held, annuity payments paid to S after Ws death were
assessable as income under section 6(1)(aa) of the Income
Tax Act without any deduction therefrom for capital. Sec
tion 300(2)(d) of the Income Tax Regulations does not
authorize a deduction for capital.
O'Connor v. M.N.R. [1943] Ex.C.R. 168, Sothern-Smith
v. Clancy [1941] 1 All E.R. 111, applied.
INCOME tax appeal.
COUNSEL:
The appellant in person.
M. J. Bonner for respondent.
SOLICITORS:
Deputy Attorney General of Canada for
respondent.
SHEPPARD D.J.—The issue raises the right of
the appellant to deduct as capital from the pay
ments of annuity made in the taxation years
1966 and 1967, by reason of the Instalment
Refund Guarantee clause in the policies in ques
tion under which the annuities were paid or
under s. 300(2)(d) of the Regulations under the
Income Tax Act.
The facts are:
Margaret Elizabeth Whittaker, then aged sev-
enty-eight, entered into a policy with the
Canada Life Assurance Company bearing date
2nd of August 1963 whereby for a single pay-
ment of $31,110 on the 1st of October 1963, by
her to the Assurance Company, the Company
agreed to pay her $300 per month for her life,
commencing the 15th of August 1963, and
thereafter under an instalment refund guarantee
clause. Also, Mrs. Whittaker when aged seven-
ty-nine, entered into a further policy with the
Canada Life Assurance Company bearing date
the 18th of March 1964, whereby for a single
payment of $9,857.60 made by her to the
Assurance Company the Company agreed to
pay her $100 per month for life commencing the
11th of April 1964, and thereafter under a like
instalment refund guarantee clause.
The instalment refund guarantee clause in
each policy read as follows:
If, at the death of the ... annuitant, the total amount of the
annuity payments which have fallen due is less than the
single stipulated payment to the Company, the annuity shall
continue until the total amount of all annuity payments
which have fallen due equals the said single stipulated
payment, the final annuity payment being reduced if neces
sary. Such payments shall be paid, as they respectively fall
due, to WILLIAM JOHN SPEERSTRA, the annuitant's son, if
living, otherwise to the estate of the last decedent of the
annuitant and the annuitant's said son.
Mrs. Whittaker died on the 2nd of July 1964,
and the appellant her son, received in each of
the taxation years 1966 and 1967 the sum of
$3,600 under the first policy and $1,200 under
the second policy pursuant to the instalment
refund guarantee clause. These payments were
within the meaning of s. 6(1)(aa) of the Income
Tax Act to be included in the appellant's income
in the years in which they were received, sub
ject to the deduction under s. 11(1)(k) of the
capital element of the annuity payments which
capital element is to be determined under s. 300
of the Regulations. The Minister assessed the
appellant's income for the said years by deduct
ing as capital a portion of the payments expect
ed during the life of Mrs. Whittaker as deter
mined by s. 300(1)(b) and s. 300(2)(a) of the
Regulations. (See paragraphs 3 to 6 inclusive of
the agreed facts.)
The appellant contends that the payments
received by him for the taxation years 1966 and
1967 were capital (a) being under the instalment
refund guarantee clause of the said policies or
(b) by virtue of s. 300(2)(d) of the Regulations.
(a) The appellant contends that Mrs. Whittak-
er had received during her life, under the first
policy, about eleven payments or $3,300 and
under the second policy about three payments
or $300; therefore considerably less than the
capital she had paid, and under the instalment
refund guarantee clause the monies paid to him
(the appellant) during the taxation years being
less than the amount paid by Mrs. Whittaker for
the policies, were therefore capital. That does
not follow. The amount paid by Mrs. Whittaker
being the consideration for _ the policies has
become the property of the Assurance Compa
ny and in return for that consideration the
Assurance Company has promised to pay annui
ty payments to Mrs. Whittaker for her life, then
to the appellant under the instalment refund
guarantee clause but such annuity payments to
the appellant are limited to the amount paid as
consideration for the policies. However, that is
a limitation of the annuity payments but does
not make the annuity payments capital.
In O'Connor v. M.N.R. [1943] Ex.C.R. 168
Thorson P. stated at p. 176:
As Best J. said in Winter v. Mouseley ((1819) 2 B. & Ald.
802 at 806):
I have, however, always understood the meaning of
an annuity to be where the principal is gone forever,
and it is satisfied by periodical payments.
And at p. 183:
... Paragraph (b), dealing with contractual annuities,
reads:
(b) annuities or other annual payments received under
the provisions of any contract, except as in this Act
otherwise provided:
... In a contractual annuity the person who put up the
capital and transferred it to the person or company that is
charged with the obligation to pay the annuity is ordinarily
himself the recipient of the annuity when it becomes
payable. His capital has gone but his right to receive the
annual payments takes its place. The annuity under a
contract is in a sense the result of an inseparable blending
of capital and interest. If it is truly an annuity, it is all
taxable within the meaning of section 3(b) notwithstand
ing the fact that it was made possible by the expenditure
of capital and in that sense includes a return of it. If the
capital is not clearly distinguishable by reason of the fact
that it has disappeared and ceased to exist as such, the
whole annuity is dealt with as subject to tax under section
3(b), whatever its original source may have been.
In Sothern-Smith v. Clancy [1941] 1 All E.R.
111 Sir Wilfrid Greene M.R. stated at p. 117:
. I feel bound to regard the purchase of an annuity of
the kind to which I have referred as the purchase of an
income, and the whole of the income so purchased as a
profit or gain, notwithstanding the way in which the
payments are calculated. The sum paid for the annuity has
ceased to have any existence, and the fact that, at the end
of the annuity period, the recipient will have received an
amount equal at least to what he paid I feel bound to treat
as irrelevant.
And at p. 118:
. The sum paid by Sothern has gone once and for all.
... Sothern purchased an income, and the capital amount
which he paid came into the matter only for the purpose
of defining the period during which that income was to be
paid.... It seems to me that the capital sum did cease to
exist once it was paid, and that the so-called guarantee
was an undertaking not to refund a capital sum or any part
of a capital sum, but to continue annual payments for an
ascertainable period.
It follows that the amount paid as considera
tion for the said policies does not determine
what is capital in the hands of the annuitant.
The amounts received by the appellant under
each policy during the taxation years as annuity
payments would be income within s. 6(1)(aa) of
the Income Tax Act, which reads as follows:
6. (1) Without restricting the generality of section 3,
there shall be included in computing the income of a taxpay
er for a taxation year
(aa) amounts received in the year as annuity payments;
Section 11(1)(k) of the Income Tax Act only
permits a deduction of capital as determined "in
prescribed manner"—and that is pursuant to s.
117(1)(a) determined by Regulation 300.
Further, it appears that s. 300(2)(d) of the
Regulations is not a determination of the capital
sum as required by s. 11(1)(k). Where it applies,
s. 300(2)(d) of the Regulations only fixes the
minimum term during which there is a continu
ance of the payments under the said policies.
There is nothing in s. 300(2)(d) of the Regula
tions which determines any portion of the pay
ments to be capital and therefore this section
does not assist the appellant.
The onus is on the appellant. Johnston v.
M.N.R. [1948] S.C.R. 486 per Rand J. at p. 488
and Kellock J. at p. 492. Dezura y. M.N.R.
[1948] Ex.C.R. 10 per Thorson P. at p. 19.
Therefore the appellant has not established any
error in the assessment by the Minister and the
appeal is dismissed. The costs have not been
requested.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.