2006 Ruling 2006-0176341R3 - Structured Settlement

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.

Principal Issues: Whether payments received under a structured settlement arrangement that is an out-of-court settlement would be taxed in the hands of the recipient?

Position: No

Reasons: The terms of the structured settlement arrangement are consistent with the CRA's position as set out in Interpretation Bulletin IT-365R2

XXXXXXXXXX 							2006-017634

XXXXXXXXXX, 2006

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling: Structured Settlement
XXXXXXXXXX (the "Claimant")
XXXXXXXXXX ("Individual A")
XXXXXXXXXX ("Individual B")
XXXXXXXXXX ("Individual C")

We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Claimant with respect to the proposed structured settlement for damages arising out of personal injuries suffered by the Claimant.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier tax return of the Claimant or a related person;

(ii) being considered by a tax services office or taxation center in connection with a previously filed return of the Claimant or a related person;

(iii) under objection by the Claimant or a related person;

(iv) before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) subject of a ruling previously issued by Canada Revenue Agency's ("CRA's") Income Tax Rulings Directorate.

Our understanding of the facts and proposed transaction is as follows:

Facts

1. The Claimant was born on XXXXXXXXXX, and presently resides in the XXXXXXXXXX.

2. On or about XXXXXXXXXX, the Claimant and others (collectively, the "Plaintiffs") were involved in a motor vehicle accident when the motor vehicle in which the Claimant was a passenger collided with a tractor and trailer. As a result of this accident, the Claimant suffered severe personal injuries.

3. The Plaintiffs commenced an action, Action No. XXXXXXXXXX, in the Court of XXXXXXXXXX (the "Action"), against persons named therein (the "Defendants"). The Claimant is an infant litigant and Individual A acts on the Claimant's behalf as XXXXXXXXXX Next Friend in the Action. The insurer involved is XXXXXXXXXX (the "Insurer"). Individual B and Individual C are respectively, the father and mother of the Claimant.

4. The Plaintiffs have now reached an out-of-court settlement with the Defendants with respect to their claims contained in the Action, as described in the draft Settlement Agreement and Release (the "Agreement"), subject to receipt of a favourable income tax ruling with respect to the payments described in paragraphs 5 and 6 below.

5. The Insurer will also pay to the Claimant, guaranteed lump sum payments in the amounts and on dates as follows: XXXXXXXXXX.

6. In addition to the above payments, the Insurer also will pay the Claimant certain periodic payments per year commencing XXXXXXXXXX for XXXXXXXXXX (the "Guarantee Period") or the Claimant's lifetime, whichever is greater. The terms of the Agreement provide for payment to the Claimant or to some other person in trust for the benefit of the Claimant, of the following structured settlement payments: XXXXXXXXXX.

7. In support of the payments described in paragraphs 5 and 6 above, the Insurer plans to apply for and purchase single premium annuity contracts issued by XXXXXXXXXX ("AnnuityCo1") and XXXXXXXXXX ("AnnuityCo2") that will provide the payments as described. The single premium annuity contracts will be non-commutable, non-assignable and non-transferable.

8. The Insurer will be responsible for making, or causing to be made, all payments described in the Agreement and will give irrevocable direction to AnnuityCo1 and AnnuityCo2 to make annuity payments described in paragraph 7 above to the Claimant as follows: to Individual B and Individual C jointly, in trust, for the benefit of the Claimant provided the Claimant resides with them both until the Claimant reaches the age of 18 years on XXXXXXXXXX, and thereafter directly to the Claimant but in the event of the Claimant's death before the end of the Guarantee Period, to such secondary payee(s) as the Claimant shall direct in writing as provided in the Agreement but in the absence of such direction or if the secondary payee(s) are not living at the time of the Claimant's death, to the estate of the Claimant.

9. In consideration of the Insurer making such payments as described above, the Claimant agrees to settle XXXXXXXXXX claims under the Action but the Insurer will not be released or discharged from making such payments and each payment shall to the extent thereof and only to that extent operate as a pro tanto release and discharge of the obligation to make that payment.

10. As owner and annuitant under the annuity contracts, the Insurer will include the interest element of the annuity payments in its income for income tax purposes pursuant to paragraphs 56(1)(d) and 60(a) of the Income Tax Act (the "Act").

Proposed Transaction

11. The Claimant by XXXXXXXXXX Next Friend, Individual A, proposes to enter into the Agreement containing, among other matters, the provisions set forth in the above paragraphs.

Purpose of the Proposed Transaction

12. The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the Insurer in respect of the injuries of the Claimant and to provide for the payment of damages in respect of the Claimant's claims.

Ruling Given

Provided that the above mentioned facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the Agreement is substantially the same as the documents provided to us, and that the transaction is carried out as described herein, the payments described in paragraphs 5 and 6 above which will be received by the Claimant or XXXXXXXXXX estate or named secondary payee, as the case may be, will not be subject to tax in XXXXXXXXXX hands under the Act as it presently reads.

The ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act and given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, issued by the CRA, and is binding on the CRA provided the Agreement is executed on or before XXXXXXXXXX.

Yours truly

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch