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.
Principal Issues: Can a non-insurance corporation have access to reserves under a structured settlement arrangement?
Position: No
Reasons: no "reported reserves" or "policy reserves"
2003-003291
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
February 27, 2004
Dear XXXXXXXXXX,
Re: Structured Settlements - XXXXXXXXXX
We are replying to your letters of July 25, October 16, 2003 and January 9, 2004, and is further to telephone conversations most recent of which are January 7 and February 12, 2004 (XXXXXXXXXX/Tremblay) wherein you requested an advance income tax ruling on behalf of the above named corporation with respect to a proposed arrangement involving an assignment facility for an annuity purchased in support of a structured settlement.
The issue in your request involves a corporation (the "Assignee") whose only business will be to accept assignments on behalf of defendants with the condition that the Assignee purchase a non-assignable, non-commutable, non-transferrable annuity contract issued by a life insurance company with an irrevocable direction to pay an amount directly to the claimant involved in the personal injury or wrongful death action. You request that the Assignee be allowed to report no taxable income or loss in any taxation year except income earned from the assignment fee. You asked that we consider that the full amount received be included under paragraph 12(1)(a) of the Income Tax Act (the "Act") and allow a reasonable reserve under paragraph 20(1)(m) of the Act. In your submission, you request that the interest income earned on the annuity be netted against the present value of the future obligation. You further stated that the Assignee will not be a licensed insurer nor will it be required to meet any requirements of the Superintendent of Insurance and Financial Institutions for the Province of Alberta. It also appears that the Assignee Corporation will have virtually no assets.
We have reviewed your request and as previously discussed we are unable to provide you with a favourable income tax ruling since a non-insurance corporation assignee would not have access to the specific reserves under the Act that would allow it to receive favourable tax consequences as an annuitant under a structured settlement.
Whether or not an assignee is an insurance corporation, the assignee would include the payment received from the defendant (generally, the cash payment received from a property and casualty insurer) in computing its income under section 9 of the Act in the year it receives the cash payment. Each year, the assignee as the annuitant under the annuity contract will be required to include the amount determined under section 12.2 of the Act in computing its income. Where the assignee is an insurance corporation, it may be entitled to deduct a reserve in computing its net income for tax purposes under paragraph 20(7)(c) of the Act. The amount of the reserve that may be claimed under paragraph 20(7)(c) of the Act is prescribed by paragraph 1400(3)(E) of the Regulations. Where the assignee is not an insurance corporation, section 9 and 12.2 of the Act would still be applicable, however, since a non-insurance corporation would not have "reported reserves" or "claim liabilities" as those terms are defined, it would not be entitled to any claim for a reserve under paragraph 20(7)(c) of the Act. Furthermore, since consideration received as compensation for the assumption of the obligation under the structured settlement would be income included under section 9 of the Act rather than under paragraph 12(1)(a) of the Act, the non-insurance assignee would not be entitled to a reserve under paragraph 20(1)(m) of the Act.
We trust our comments are of assistance. We have closed our file on this matter and a refund of your deposit will be sent to you under separate cover.
Yours truly,
Steve Tevlin
For Division Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2004
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2004
Email this Content