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
An individual (Claimant) sustained personal injuries while involved in a motorcycle/auto accident. The Claimant commenced an action against XXXXXXXXXX (Defendants). Pursuant to an out of court settlement, the Defendants Insurers will assign its rights and obligations to provide for periodic payments to an Insurer who will purchase a single premium annuity contract from an insurance company who will agree to make the periodic payments to a Public Trustee on behalf of the Claimant and if the Claimant dies, within a guarantee period, to the Claimant's estate.
The issue is the 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 presently reads.
REASON FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with CCRA's position set out in IT-365R2.
XXXXXXXXXX 2003-001682
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
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 the 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 is:
(i) dealt with in an earlier tax return of the Claimant or a related person;
(ii) being considered by a tax services office or taxation center in connection with a previously filed return of the Claimant or a related person;
(iii) under objection by the Claimant 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 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. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX, in the Province of XXXXXXXXXX within the jurisdiction of the XXXXXXXXXX Tax Services Office.
2. On or about XXXXXXXXXX, the Claimant was injured when XXXXXXXXXX was a passenger on a motorcycle, which collided with a motor vehicle. As a result of this accident, the Claimant sustained serious personal injuries.
3. The Claimant, by XXXXXXXXXX litigation guardian, commenced an action (Action No. XXXXXXXXXX) in the Supreme Court of XXXXXXXXXX, against persons named therein (the "Defendants").
4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement described in paragraph 5 below.
5. The terms of the settlement provide, among other matters, for payment to the Public Trustee on behalf of the Claimant of monthly payments in the amount of $XXXXXXXXXX per month commencing on XXXXXXXXXX, indexed at the annual consumer price index from XXXXXXXXXX, guaranteed to be payable for XXXXXXXXXX years from XXXXXXXXXX to XXXXXXXXXX; and should the Claimant die prior to the time that all guaranteed payments are made, the balance of the payments will be payable to the Claimant's estate.
6. The Defendants will assign their rights and obligation to provide for the periodic payments in paragraph 5. The obligation to make the payments referred to in paragraph 5 will be met by XXXXXXXXXX (the "Insurer"). In consideration of the Insurer making such payments, the Claimant settles XXXXXXXXXX claims against the Defendants. The Insurer will not, however, be released and discharged from making such payment 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 foregoing payments referred to in paragraph 5 under the settlement by the purchase and issue of a single premium annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contracts will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contract issued by Lifeco will be the Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the issuers to make such payments to the Public Trustee during the Claimant's lifetime, and in the event of death to the Estate of the Claimant.
Proposed Transaction
9. The Claimant proposes to enter into a 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.
Ruling 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 Order Approving Settlement 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 which will be received by the Public trustee on behalf of the Claimant or XXXXXXXXXX estate, as the case may be, as set forth in paragraph 5 above, 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 70-6R5, dated May 17, 2002, issued by the Canada Customs and Revenue Agency ("CCRA"), and is binding on the CCRA provided the Order Approving Settlement and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© His Majesty the King in Right of Canada, 2003
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