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:
Would it not only be acceptable to provide for commutation in a structured settlement where the plaintiff dies and the beneficiary is the casualty insurer and the reversion goes to the owner (the owner of the annuity is the assignee) ?
Position TAKEN:
Portion of the guaranteed portion remaining on death on death of the injured person which will be payable to the insurer may be commuted without changing the character. Original Ruling would no longer be binding unless written confirmation received prior to amending the terms.
Reasons FOR POSITION TAKEN:
E9717705
IC-706R3
ATR 68
XXXXXXXXXX 2000-001233
C. Tremblay, CMA
April 26, 2001
Dear XXXXXXXXXX:
This is in reply to your letters of March 7 and May 30, 2000, wherein you requested our views on two issues pertaining to structured settlements. In the first issue, you describe a situation similar to that of paragraphs 3 & 5 of ATR-68 (dated April 20, 1995) where a portion of the monthly payments that relate to the costs of future care will be payable, after the death of the injured person, to the insurer. However, since the settlement in question pre-dated ATR-68, the settlement was structured so that the guaranteed payments due to the insurer could not be commuted. You wish to know whether the terms of the settlement can now be amended to provide for commutation to the insurer only. In the second issue, you have asked us to confirm that after the Judgment becomes final and the appeal period has expired (i.e. it is no longer possible for the court to amend the amount of the award or the payment schedule relating thereto), it is no longer possible to establish a structured settlement in respect of personal injury. We apologize for the delay in responding.
As a brief overview of personal injury damage settlements, an award of damages for personal injury or death does not become income merely by virtue that it decrees that it is to be paid in periodic payments as opposed to a lump sum. Where an injured person agrees to accept, or is awarded by a Court, a stream of payments as a settlement for damages, the fact that the obligation of the defendant or insurer may be funded by the purchase of an annuity contract generally does not cause the periodic payments to lose their character as non-taxable damage (see paragraph 5 of IT-365R2). The CCRA would have to review all documentation relating to a particular settlement before it could determine whether an injured party is entitled, at any particular time, to a lump sum payment or a future stream of payments. For example, if the CCRA determines that a stream of payments payable to an injured party or his or her estate can be commuted at any time, that would suggest to us that the injured person actually has a right to a lump sum payment, so that the stream of payments that are paid in lieu of the lump sum may have an interest element.
With respect to the first issue, that portion of each of the guaranteed payments remaining on the death of the injured person which will be payable to the insurer may be commuted without changing the character (i.e. non-taxable damages) of any payments made to the injured person or his or her estate. However, if the parties to the original settlement have received an advance income tax ruling with respect to that settlement, and the terms of the settlement were subsequently amended to provide for commutation, the ruling would no longer be valid unless a written confirmation from our Directorate was received prior to amending the terms of the settlement.
With respect to the second issue, it is a question of fact whether an amount in respect of damages for personal injuries or death has been awarded in the form of a lump sum payment or periodic payments. The CCRA would have to review all the relevant documentation relating to the settlement. However, where a court determined the amount of the settlement, then generally the final Judgment would be the key instrument in determining the nature (i.e. lump sum or periodic payments) of the injured person's entitlements.
We trust our comments are of assistance.
Yours truly,
Jim Wilson
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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