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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues
A minor child (Claimant) sustained personal injuries as a passenger involved in an auto accident. The Claimant's parent commenced an action against the XXXXXXXXXX (Defendants) XXXXXXXXXX . Pursuant to an out of court settlement, the Defendants insurers will purchase an annuity contract from an insurer with an irrevocable direction to make periodic payments to the Claimant. However, because of the parents concern for XXXXXXXXXX safety and brain damage suffered, a Trust will receive the payments and the distribution will be made to the Claimant out of the Trust. The provision of 75(2) will apply during the lifetime of the trust (the trust will end upon XXXXXXXXXX death) to allocate the income and capital gains to the Claimant. The trust will also feature contingent beneficiaries who will receive the capital of the trust when the Claimant dies. The issue is the tax treatment of the periodic payments and the distribution from the trust.
Position TAKEN
We rule that the payments will not be taxable under any provision of the Income Tax Act as it presently reads. We also rule that 75(2)(a)(i) of the Act will apply to deem the income and capital gains of the Trust will be the income and capital gains of the Claimant during XXXXXXXXXX lifetime. We will rule that provided the court approves the terms of the trust, and provided the trust is a personal trust that any distribution will be subject to the provisions of subsection 107(2) of the Act.
REASON FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with CCRA's position set out in IT-365R2. During the lifetime of the Claimant is the only individual entitled to the income and capital of the Trust funds.
XXXXXXXXXX 2002-014347
XXXXXXXXXX, 2002
Dear Sir:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Claimant") and the
XXXXXXXXXX (the "Trust")
This is in reply to your letters of XXXXXXXXXX, and further to our meeting of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Claimant and the proposed Trust.
To the best of our knowledge and that of the taxpayers involved, none of the issues contained herein:
(i) is in an earlier return of the Claimant or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the Claimant or a related person;
(iii) is under objection by the Claimant or a related person;
(iv) is before the courts or, if a judgement 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:
Facts
1. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX.
2. On XXXXXXXXXX, the Claimant sustained a serious brain injury as a passenger in a motor vehicle accident.
3. The Claimant, an infant by XXXXXXXXXX, and the said XXXXXXXXXX commenced an action (Action No. XXXXXXXXXX) in the Supreme Court of XXXXXXXXXX against the persons named therein (the "Defendants"). The insurers involved are XXXXXXXXXX (the "Insurers").
4. The Claimant has now reached an out of court settlement with the Defendants with respect to XXXXXXXXXX claims, and has agreed to settle the action on terms set out in a Structured Settlement Agreement and Release set out in paragraph 5 below.
5. The terms of the settlement in respect of damages for personal injury provide, amongst other matters, for payment of the following:
i) a lump sum payment of $XXXXXXXXXX less legal fees which are expected to approximate $XXXXXXXXXX;
ii) commencing on XXXXXXXXXX, monthly payments of $XXXXXXXXXX for a guarantee period of XXXXXXXXXX years with yearly indexing at XXXXXXXXXX%;
iii) commencing on XXXXXXXXXX, monthly payments of $XXXXXXXXXX for a guarantee period of XXXXXXXXXX years with yearly indexing at XXXXXXXXXX%;
iv) commencing on XXXXXXXXXX, monthly payments of $XXXXXXXXXX for a guarantee period of XXXXXXXXXX years with yearly indexing at XXXXXXXXXX%;
v) commencing on XXXXXXXXXX, monthly payments of $XXXXXXXXXX for a guarantee period of XXXXXXXXXX years or the lifetime of the Claimant whichever time is the longer with yearly indexing at XXXXXXXXXX%;
guaranteed lump sum payments of XXXXXXXXXX.
6. The obligation to make the payments referred to in paragraph 5 will be met by the Insurers. In consideration of the Insurers making such payments, the Claimant settles XXXXXXXXXX claims against the Defendants. The Insurers 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. The Insurers propose to fund the obligation to make the foregoing payments described in paragraph 5 above by the purchase of two single premium annuity contracts issued by the XXXXXXXXXX ("Lifecos"). The annuity contracts will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contract will be the Insurers, however, an irrevocable direction will be executed in respect of the annuity contracts directing the Lifecos to make such payments in accordance with paragraph 5 above.
9. The Claimant is currently XXXXXXXXXX years of age. The undisputed evidence in the action is that XXXXXXXXXX will never surpass the mental age of XXXXXXXXXX as a result of XXXXXXXXXX brain injuries. However, XXXXXXXXXX is expected to mature physically in the same manner as any other healthy young XXXXXXXXXX.
10. The Claimant's parents are gravely concerned that XXXXXXXXXX may be susceptible to individuals having a desire to enter into a relationship with XXXXXXXXXX in the coming years with the ulterior purpose of accessing payments for the benefit of the Claimant pursuant to the Structured Settlement Agreement (the "SSA"). The evidence and medical advice is that XXXXXXXXXX brain injury could indeed make XXXXXXXXXX susceptible to such a destructive relationship. Naturally, the Claimant's parents have a strong desire to prevent such an occurrence.
Proposed Transactions
11. The Claimant's parents, as XXXXXXXXXX Legal Guardians, will apply to the Court for an Order approving a proposal that the right to the initial lump sum payment of approximately $XXXXXXXXXX (the "Initial Payment") and the right to all subsequent payments from the insurer pursuant to the draft SSA (which will be amended before being finalized so as to be consistent with such an Order) vest in the Trust, with the result that all such payments (the Initial Payment and the SSA) will be made directly from the insurer to the Trust to be dealt with in accordance with the terms of the Trust.
12. The essential terms of the Trust, to be approved by the Court, will be as follows:
(i) The Settlor of the Trust would be the Claimant through XXXXXXXXXX parents as Legal Guardians;
(ii) The initial Trustees of the Trust would be the Claimant's parents and a third person, who is a trusted family friend and chartered accountant, all of whom are residents of Canada;
(iii) The Trust Fund shall include the right to and any actual receipt of the Initial Payment and SSA Payments pursuant to the Order of the Court as described above, as well as any income from and capital accretions to such payments;
(iv) The Claimant will be the sole Beneficiary of the Trust during XXXXXXXXXX lifetime (that is, no person other that the Claimant will be entitled to any portion of the income or capital forming the Trust Fund during the Claimant's lifetime);
(v) During the Claimant's lifetime, the Trustees will have full discretion to apply any portion of the income or capital of the Trust Fund to or for the benefit of the Claimant; however, the trustees will be required to apply all or so much of the capital and the income of the Trust fund as is required for the basic care and maintenance of the Claimant;
(vi) In the event the Claimant dies, the Trust Fund will be distributed to the Claimant's children, if XXXXXXXXXX has children alive at that time, and if the Claimant has no children at that time, the Trust Funds would be distributed as follows: (a) to the Claimant's brothers, sisters and parents in equal proportions, and if no such persons are alive at that time, (b) to persons who would be entitled to the Claimant's estate had XXXXXXXXXX died intestate in the Province of XXXXXXXXXX, and if no such persons are alive at that time, (c) equally to XXXXXXXXXX for their charitable purposes; and
(vii) The Trustees, with prior approval of the Court, may add persons to the class of contingent beneficiaries to whom the Trust Fund may be distributed only in the event of the Claimant's death (the only such person is likely to be a spouse of the Claimant, and then only in the event the Trustees are satisfied that there is no concern of the kind described in paragraph 10 above).
Purpose of Proposed Transactions
The Claimant's parents are concerned the Claimant may become subject to inappropriate and destructive suggestions and influence from third parties whose motives are to access for themselves the Claimant's right to future payments (and income from and capital accretions thereto) under the SSA. The purpose of the Trust arrangement as described above, which must be approved by the Court, is to protect the Claimant from such possibilities.
Rulings Given
A. Subject to the Claimant being the sole beneficiary of the Trust during XXXXXXXXXX lifetime as described above, the right to and receipt of the Initial Payment and the SSA Payments pursuant to the Order of the Court as described above will not be subject to tax in the hands of the Trust or the Claimant under any provision of the Income Tax Act (the "Act").
B. Any income or loss from the Initial Payment and the SSA Payments, or property substituted therefor (within the meaning of paragraph 248(5)(a) of the Act), held by the Trust, and any taxable capital gain or allowable capital loss from the disposition of property substituted for the Initial Payment and the SSA Payments by the Trust shall, during the lifetime of the Claimant while XXXXXXXXXX is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the Claimant pursuant to subparagraph 75(2)(a)(i) of the Act and will accordingly be subject to tax in the hands of the Claimant as provided in the Act.
C. Provided the terms of the Trust are as described in paragraph 12 and are approved by the Supreme Court of XXXXXXXXXX and provided the Trust is a "personal trust" as defined in subsection 248(1) of the Act at the time of any distribution of capital to the Claimant, or after the Claimant's death to persons described in paragraph 12(vi) above and provided all such persons are resident of Canada, the provisions of subsection 107(2) of the Act will apply to such a distribution.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002, issued by the Canada Customs and Revenue Agency (the "CCRA"), and are binding on CCRA provided the proposed transactions are completed on or before XXXXXXXXXX.
The above rulings are 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 rulings provided herein.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Ruling Directorate
Policy and Legislation Branch
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