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:
An individual (the "Claimant") sustained personal injuries when XXXXXXXXXX was struck by a motor vehicle. The individual commenced an action against the owner of the vehicle. Pursuant to an out-of-court settlement, the defendants' insurer will agree to make periodic payments to the Claimant, and if the Claimant dies within the guarantee period, to the Claimant's estate.
The issue is the income tax treatment of the periodic payments.
Position TAKEN:
We rule that the payments will not be taxable under any provision of the Income Tax Act as it currently reads.
Reasons FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with the Department's position set out in IT-365R2 (in particular paragraphs 3 and 5).
XXXXXXXXXX
XXXXXXXXXX 981242
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant")
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Claimant with respect to a 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:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) is under objection by the taxpayer or a related person; and
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act").
Our understanding of the facts and proposed transactions is as follows:
Statement of Facts
1. The Claimant was born on XXXXXXXXXX, and currently resides in XXXXXXXXXX.
2. On or about XXXXXXXXXX, the Claimant, while walking in a parking lot, sustained severe personal injuries when XXXXXXXXXX was struck by a motor vehicle.
3. The Claimant commenced an action (XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against the persons named therein (the "Defendants"). The insurer involved is the XXXXXXXXXX (the "Insurer").
4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to the claim subject to receipt of a favourable advance income tax ruling with respect to the payments under the settlement described in paragraph 5 below.
5. (a) The terms of settlement in respect of damages for personal injury, provide, among other matters, for payment to the Claimant of a lump sum of $XXXXXXXXXX and for payment to the Claimant or the Claimant's legal representative, commencing on XXXXXXXXXX, of lifetime monthly payments of $XXXXXXXXXX with indexing at 2% and a guarantee period of 30 years from the time of the first payment.
(b) Should the Claimant die prior to the time that all the guaranteed payments are made, the balance of the payments will be payable to the Claimant's estate or named beneficiaries.
6. The obligation to make the payments described in paragraph 5 above will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles the claim against the Defendants. The Insurer will not, however, be released and discharged from making the monthly payments described in paragraph 5 above 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 such payments.
7. The Insurer proposes to fund its obligation to make the monthly payments described in paragraph 5 above by the purchase of a single premium annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contract will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contract will be the Insurer. However, an irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make the monthly payments in accordance with paragraph 5 above.
Proposed Transaction
9. The Claimant proposes to execute the terms of the settlement arrangement containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
10. The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the Defendants in respect of the injuries of the Claimant and to provide for the payment of damages in respect of such claim.
Rulings Requested and 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 Structured Settlement Agreement and Release is substantially the same as the document submitted with your letter of XXXXXXXXXX, and that the transaction is carried out as described herein, we confirm that the lump sum payment in 5 above that will be received by the Claimant and the monthly payments described in paragraph 5 above, which will be received by the Claimant or the Claimant's legal representative, or the Claimant's estate or named beneficiaries, as the case may be, will not be subject to tax in their hands or the hands of the Claimant under any provision of the Income Tax Act, as it presently reads.
This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding on the Department provided the Minutes of Settlement and the Assignment Agreement are executed on or before XXXXXXXXXX.
The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
.../cont’d
.../cont’d
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