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:
Assignment of all liability under a structured settlement agreement to a third-party that is not carrying on an insurance business.
Position TAKEN:
The use of such an assignee will not, in and by itself, have any effect on whether or not a favourable income tax ruling would be issued provided such an assignee receives written approval from OSFI. However, the tax consequences to the assignee will likely be unfavourable.
Reasons FOR POSITION TAKEN:
The position is consistent with previous rulings issued by this Directorate.
942830
XXXXXXXXXX M. Eisner
Attention: XXXXXXXXXX
December 6, 1994
Dear Sirs:
Re: Structured Settlements
This is in reply to your letter of November 2, 1994 in which you requested our views on whether or not certain amounts received in respect of damages for personal injury or death would be regarded as being non-taxable.
Paragraph 5 of Interpretation Bulletin IT-365R2 "Damages, Settlements and Similar Receipts" sets out the circumstances of an arrangement (referred to therein as a "structured settlement") under which periodic amounts paid in respect of a claim for damages are non-taxable in the hands of the claimant. The arrangement involves the casualty insurer.
As you are aware, this Department has provided favourable advance income tax rulings in circumstances where the casualty insurer has, with the consent of the claimant, assigned all liability under a settlement agreement to a third-party insurer provided the assignee undertakes to fund its obligations by means of an otherwise qualified structured settlement.
With respect to the above comments, you have indicated that, previously, XXXXXXXXXX had been used as an assignee. However, since this company will no longer act as an assignee, it is proposed that XXXXXXXXXX be used in the role of an assignee. XXXXXXXXXX
Provided that XXXXXXXXXX obtains written approval from the Office of the Superintendent of Financial Institutions with respect to that role, please be advised that the use of XXXXXXXXXX rather than XXXXXXXXXX will not, in and by itself, have any affect on whether or not a favourable advance income tax ruling would be issued in respect of the income tax consequences of the periodic payments in the hands of the claimant.
For your further information, we are making the following comments concerning the income tax consequences in respect of an assignee which has assumed the continuing liability to make payments to the claimant pursuant to an arrangement which is considered to be a structured settlement:
(a)The amount received (including the related fee) by the assignee from the casualty insurer as a consequence of the liability assignment would generally be required to be included in the assignee's income in the year received pursuant to paragraph 12(1)(a) of the Income Tax Act (the Act). However, if the assignee is not considered to be carrying on an insurance business, no deduction in respect of the amount included in income could be claimed. However, the amount of each periodic payment made by the assignee to the claimant would normally be a deductible expense.
(b)Since the assignee would be the owner of the related annuity contract, the assignee would not be entitled to deduct the annuity premium and would be required to report as income the interest element inherent in the annuity in accordance with the provisions of paragraph 56(1)(d) and section 12.2 of the Act. However, a deduction for the capital element would be available to the extent provided under paragraph 60(a) of the Act.
We trust that these comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
