2003 Ruling 2003-0183113 - 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 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 permanent personal injuries XXXXXXXXXX The parents, who are the court appointed Guardians of the Claimant, commenced an action against the XXXXXXXXXX on behalf of the Claimant. Pursuant to an out of court settlement, the Defendants insurers will assign their responsibilities to another insurer who will purchase a single premium annuity contract from an insurance company who will agree to make periodic payments to the Guardians 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 						2003-018311

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling - Structured Settlement
XXXXXXXXXX (the "Claimant")
XXXXXXXXXX (the "Guardians")

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 a 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 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. The Claimant was born on XXXXXXXXXX, and presently resides in the District of XXXXXXXXXX, in the Province of XXXXXXXXXX within the jurisdiction of the XXXXXXXXXX Tax Services Office.

2. XXXXXXXXXX. As a result of complications XXXXXXXXXX , the Claimant suffered severe permanent injuries.

3. The Claimant and XXXXXXXXXX Guardians commenced an action (Action No. XXXXXXXXXX) in the Court of Queen's Bench for XXXXXXXXXX, against persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").

4. The Claimant and XXXXXXXXXX Guardians has now reached an out-of-court settlement with the Defendants with respect to their claims, subject to the 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 Guardians on behalf of the Claimant of:

(a) Lifetime monthly payments in the amount of $XXXXXXXXXX per month commencing XXXXXXXXXX, increasing by XXXXXXXXXX% per annum, compounded annually and guaranteed to be payable for XXXXXXXXXX years until and including XXXXXXXXXX; and

(b) Lifetime monthly payments in the amount of $XXXXXXXXXX per month commencing XXXXXXXXXX, with no indexing and guaranteed to be payable for XXXXXXXXXX years until and including XXXXXXXXXX.

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 obligation to make the payments referred to in paragraph 5(a) and (b) will be assigned by the Defendants and 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(a) and (b) will be met by the Second Insurer.

In consideration of the Second Insurer making such payments, the Claimant and the Guardians will settle their claims against the Defendants. 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 Second Insurer proposes to fund its obligation to make the foregoing payments under the settlement by the purchase and issue of an annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contract 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 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 Guardians on behalf of the Claimant, subject to any other Order the Court may make, or XXXXXXXXXX estate, as the case may be.

Proposed Transaction

9. The Claimant and XXXXXXXXXX Guardians propose 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 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 which will be received 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 (the "CCRA"), and is binding on the CCRA provided the Minutes of Settlement and Release and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate

LLP