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: Can a structured settlement annuity be transferred to another insurance company. It appears that the claimant wishes a more favourable rate thus his legal representative is asking whether a casualty insurer can transfer an annuity to another casualty insurer such that the monthly payments are improved to the claimant.
Position: Will only consider request by way of advance ruling
Reasons: Casualty insurer is the owner of the annuity and can probably transfer that annuity where the claimant and the casualty insurer agree (as well in cases of bankruptcy of the casualty insurer) however once annuity is purchased from an issuer it would be difficult, if not impossible to fund the personal injury liability again without tax consequences.
XXXXXXXXXX 2001-008670
C. Tremblay, CMA
July 2, 2001
Dear XXXXXXXXXX:
Re: Structured Settlement
This is in reply to your letter of March 7, 2001 and further to a telephone conversation of June 27, 2001 (XXXXXXXXXX/Tremblay). You asked whether it is possible to have an annuity contract that is payable as a structured settlement assigned from one casualty insurer to another casualty insurer.
You included a letter also sent to the St John's, Newfoundland taxation services office, you sent on February 21, 2001 stating that you represent a client that has settled a claim for personal injuries by way of a structured settlement with an insurance company. Your client feels that he can obtain a better monthly payment if the annuity is transferred to another insurance company.
As explained in Information Circular 70-6R4, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance income tax ruling request. However, we can provide you with the following general comments.
A structured settlement, as described in paragraph 5 of IT-365R2, is the result of an agreement between a claimant and a casualty insurer that, among other things, requires the insurer to purchase a single premium annuity contract which must be non-assignable, non-commutable and non-transferable and designed to produce periodic payments as agreed by the parties. As the beneficiary of the annuity contract is the insurer, the insurer is required to give an irrevocable direction to the issuer of the annuity contract to make all of the periodic payments to the claimant. The insurer remains liable to make the payments as required by the agreement and the payments are made to the claimant who sustained personal injury. The insurer who is the owner and annuitant under the annuity contract must report as income the interest element inherent in the annuity contract.
The Canada Customs and Revenue Agency (the "CCRA") has provided favourable advance income tax rulings in circumstances where the casualty insurer has, with the consent of the claimant(s), 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 your proposal, we would need to review all the relevant agreements before we can give a definitive opinion with respect to the income tax consequences of your particular arrangement. We have concerns with your proposal as it appears that the claimant may have physically received or intends to receive the full settlement and will re-invest the funds in an annuity, of which a portion would be taxable under subsection 12.2(1) or paragraph 56(1)(d) of the Income Tax Act. It appears that the true nature of this arrangement may be an attempt to obtain the same flexibility and control over the investment of the settlement, similar to that of a claimant who initially received a lump sum settlement, but without the tax consequences. If our general understanding of your proposal is correct, our initial reaction is that it would not comply with the requirements of IT-365R2.
However, we would be pleased to consider a request for an advance income tax ruling when a draft of a proposed consent agreement between all the relevant parties is available. However, we will only consider such a request where the claimant's rights under the original settlement have not been altered in any way other than a change in the payer (i.e. the casualty insurer).
We hope that our comments are of assistance but caution you that they do not constitute an advance income tax ruling, and, accordingly, are not binding on the Department with respect to any particular transaction.
Yours truly,
for Director,
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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