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 an auto accident. The Claimant commenced an action against the XXXXXXXXXX (Defendants). Pursuant to an out of court settlement with some of the Defendants, the Defendants insurers will purchase two single premium annuity contracts from an insurance company who will agree to make periodic payments to 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 2003-004452
XXXXXXXXXX, 2003
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling - Structured Settlement
XXXXXXXXXX (the "Claimant") SIN XXXXXXXXXX
We are replying to your letters of XXXXXXXXXX and 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 the City of 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 she was struck by a motor vehicle. As a result of this accident, the Claimant sustained serious permanent personal injuries.
3. The Claimant commenced an action against persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").
4. The Claimant has now reached an out-of-court settlement with some of the Defendants with respect to her 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 Claimant of:
(a) a lump sum amount of $XXXXXXXXXX;
(b) monthly payments in the amount of $XXXXXXXXXX per month commencing XXXXXXXXXX, guaranteed to be payable for XXXXXXXXXX years from XXXXXXXXXX and for so long thereafter as the Claimant remains alive;
(c) monthly payments in the amount of $XXXXXXXXXX per month commencing XXXXXXXXXX, increasing by XXXXXXXXXX% per annum, compounded annually from XXXXXXXXXX, guaranteed to be payable for XXXXXXXXXX years from that date, and for so long thereafter as the Claimant remains alive; and
(d) 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 or named beneficiaries.
6. The obligation to make the payments referred to in paragraph 5(c) will be assigned by the Insurer to XXXXXXXXXX ("Second Insurer") as set out in the Assignment and Assumption Agreement and the obligation to make the payments referred to in paragraph 5(b) will be met by the Insurer.
In consideration of the Insurer and the Second Insurer making such payments, the Claimant will settle her claims against the Defendants. The Insurer and the Second Insurer 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 Insurer 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 ("Lifeco"). The Second Insurer 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 ("Second Lifeco"). Both 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 and the owner and annuitant (beneficiary) under the annuity contract issued by Second Lifeco will be the Second Insurer, however, an irrevocable direction will be executed in respect of the annuity contracts directing the issuers to make such payments directly to the Claimant or her estate, as the case may be.
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.
Rulings 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 Minutes of 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 Claimant or her 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 Minutes of 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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