2002 Ruling 2002-0119933 - 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.

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 (a minor) sustained personal injury while a passenger in an auto accident. The individual and XXXXXXXXXX mother (the "Plaintiffs") commenced an action and settled out of court. Pursuant to an out of court settlement, the Defendants insurer will assign its rights and obligations to another insurance carrier who will agree to make periodic payments to the Plaintiffs and if the Plaintiffs die, within a guarantee period, to the Plaintiff's estate.

The issue is the tax treatment of the periodic payments.

Position: We rule that the payments will not be taxable under any provision of the Income Tax Act as it presently reads.

Reasons: The terms of the settlement are considered to be consistent with CCRA's position set out in IT-365R2.

XXXXXXXXXX 2002-011993

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX ("Individual A") - XXXXXXXXXX
XXXXXXXXXX ("Individual B") - XXXXXXXXXX

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

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

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

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

(iii) under objection by the taxpayer 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 not expired; or

(v) subject of a ruling previously issued by the Income Tax Rulings Directorate.

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

Statement of Facts:

1. Individual A was born on XXXXXXXXXX, and presently resides in the Town of XXXXXXXXXX , in the Province of XXXXXXXXXX.

2. On or about the XXXXXXXXXX, Individual A was injured when the motor vehicle in which XXXXXXXXXX was a passenger collided with a motor vehicle. As a result of this accident Individual A sustained serious permanent personal injuries.

3. Individual A, an infant by XXXXXXXXXX next friend, Individual B and the said Individual B (the "Plaintiffs") commenced an action in the Court of Queen's Bench of XXXXXXXXXX against persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX.

4. The Plaintiffs have now reached an out-of-court settlement with the Defendants with respect to their claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement.

5. The terms of the settlement provide, among other matters, for payment of the following:

A. To Individual A:

(a) guaranteed monthly payments of $XXXXXXXXXX commencing on XXXXXXXXXX up to and including XXXXXXXXXX, indexed and compounded at XXXXXXXXXX% annually;

(b) lifetime monthly payments of $XXXXXXXXXX commencing on XXXXXXXXXX indexed and compounded at XXXXXXXXXX% annually, which payments are guaranteed to be made to and including XXXXXXXXXX; and

(c) the following lump sum payments, all of which are guaranteed to be made:

(i) XXXXXXXXXX;
(ii) XXXXXXXXXX;
(iii) XXXXXXXXXX; and
(iv) XXXXXXXXXX.

B. To Individual B:

Lifetime monthly payments of $XXXXXXXXXX commencing on XXXXXXXXXX, which payments are guaranteed to be made to and including XXXXXXXXXX.

6. The obligation to make the payments referred to in paragraph 5 will be assigned by XXXXXXXXXX to XXXXXXXXXX as set out in the draft Assignment and Assumption Agreements. In particular, the obligation to make the payments referred to above in 5.A.(a) and (c) and B. will be assumed by XXXXXXXXXX and the obligation to make the payments referred to in paragraph 5.A.(b) will be assumed by XXXXXXXXXX. In consideration of XXXXXXXXXX making such payments, the Plaintiffs settle their claims against the Defendants. XXXXXXXXXX will not, however, be released and 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 such payments.

7. XXXXXXXXXX proposes to fund its obligation to make the foregoing payments under the settlement by the purchase and issue of XXXXXXXXXX separate single premium annuity contracts issued by XXXXXXXXXX; and XXXXXXXXXX proposes to fund its obligation to make the foregoing payments under the settlement by the purchase and issue of a single premium annuity contract issued by XXXXXXXXXX. The annuity contracts will be non-commutable, non-assignable and non-transferable.

8. The owner and annuitant (beneficiary) under the annuity contracts issued by XXXXXXXXXX will be XXXXXXXXXX and the owner and annuitant (beneficiary) under the annuity contract issued by XXXXXXXXXX will be XXXXXXXXXX, however, an irrevocable direction will be executed in respect of the annuity contracts directing the issuers to make such payments directly:

(a) to Individual B, in trust, for the benefit of Individual A, until the said Individual A attains the age of 18 years and thereafter directly to Individual A during XXXXXXXXXX lifetime and, in the event of XXXXXXXXXX death prior to the expiry of the guarantee periods, to XXXXXXXXXX estate; and

(b) to Individual B, or XXXXXXXXXX estate.

Proposed Transaction

The Plaintiffs propose to enter into a settlement arrangement containing, among other matters, the provisions set forth in paragraph 5 above.

Purpose of the Proposed Transaction

The purpose of the proposed transaction is to settle the claim for damages of the Plaintiffs against the Defendants in respect of the injuries of Individual A and to provide for the payment of damages in respect of such claim.

Ruling Given

Provided that the above-mentioned facts and proposed transaction are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the Settlement Agreement and Release and the Assignment and Assumption Agreement are substantially the same as the documents provided to us, and that the transaction is carried out as described herein, we confirm that the payments described in paragraph 5 above, which will be received by Individual B in trust for the benefit of Individual A and thereafter by Individual A and Individual B or their respective estates, as the case may be, will not be subject to tax in their hands 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 70-6R4, dated January 29, 2001, issued by the Canada Customs and Revenue Agency ("CCRA"), and is binding on the CCRA provided the Settlement Agreement and Release and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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