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: Does the income keep its tax-free status where a trust is interposed to pay a non-resident Claimant under a structured settlement?
Position: YES on the annuity payments contributed to the trust and paid to the beneficiaries
Reasons: Nature of funds to the trust is the annuity payment from the structured settlement- IT-365R position is still applicable.
XXXXXXXXXX 2004-007227
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - Structured Settlement
XXXXXXXXXX, a Minor (the "Claimant") by her
Litigation Guardian, XXXXXXXXXX
(the "Litigation Guardian")
XXXXXXXXXX (the "Trust")
This is in reply to your letter of XXXXXXXXXX, and further to our telephone conversation of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Claimant and the proposed Trust.
To best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(i) in an earlier tax return of the Claimant or a related person;
(ii) being considered by a tax service office or taxation centre in connection with a previously filed tax 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 judgement has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate;
Our understanding of the facts and proposed transactions is as follows:
Facts
1. The Claimant, XXXXXXXXXX, was born on XXXXXXXXXX in XXXXXXXXXX and for reasons related to XXXXXXXXXX care now resides in XXXXXXXXXX.
2. On XXXXXXXXXX, when the Claimant was XXXXXXXXXX old, the Claimant was struck by a motor vehicle, causing serious and permanent personal injuries. The Claimant, through the Litigation Guardian, commenced an action, Court File No. XXXXXXXXXX in the XXXXXXXXXX Superior Court of Justice against the persons named therein (the "Defendants") and a second action, Court File NoXXXXXXXXXX, also in the XXXXXXXXXX Superior Court of Justice, against XXXXXXXXXX (the "Insurer").
3. The Insurer had two interests in this case; one as the tort insurer and the other as the accident benefit insurer. XXXXXXXXXX ("Other Insurer") provided excess coverage.
4. The tort action was settled for a total of $XXXXXXXXXX. The Other Insurer paid $XXXXXXXXXX. The parties agreed to "structure" $XXXXXXXXXX of the agreed settlement of the tort action in a CPI indexed income stream with a XXXXXXXXXX-year guarantee period.
5. The Claimant required extensive attendant care, which was largely provided by the mother of the Litigation Guardian (the "paternal grandmother"). The paternal grandmother, who is in her XXXXXXXXXX, wanted to return to XXXXXXXXXX to be with the other members of her family. She and the Claimant returned to XXXXXXXXXX in the XXXXXXXXXX and still reside there.
6. The Litigation Guardian became a landed immigrant in XXXXXXXXXX and is currently studying at the University of XXXXXXXXXX as a post-doctoral fellow and is making arrangements for the Claimant to return to Canada to live with him in the future.
7. Since the Claimant is an infant, and does not currently live in XXXXXXXXXX, in order to make the funds available to XXXXXXXXXX, in completing the settlement it was necessary to create the Trust to receive the proceeds of the settlement.
8. The paternal grandmother who has been the Claimant's principal caregiver since the date of the accident does not have a permanent visa to Canada and as such the Claimant, who could not travel without assistance, has been living with XXXXXXXXXX paternal grandmother.
9. Under the terms of the Settlement Agreement, the Litigation Guardian established the Trust.
10. The benefits under the annuity from XXXXXXXXXX ("Lifeco") shall commence following the approval of the settlement by the Court and be subject to the receipt of a favourable income tax ruling. All payments pursuant to the structured settlement will be made to the Trustees of the Trust and disbursed by the Trustees to the "Beneficiaries" which, as defined in the Trust, are:
(a) the Claimant during XXXXXXXXXX lifetime, and
(b) following the Claimant's death, in order of entitlement:
(A) the Claimant's issue in equal shares per stirpes;
(B) such person or persons as may be appointed in writing by the Litigation Guardian in the exercise of a power of appointment;
(C) The Litigation Guardian;
(D) The Litigation Guardian's issue in equal shares per stirpes; and
(E) The paternal grandmother's issue.
(c) a trust, the beneficiaries of which are either the Claimant or any of the beneficiaries listed in (b) (A) to (E) following the death of the Claimant.
11. The terms of the structured settlement implementing the settlement proposals to be presented to the Court for approval are:
(a) lifetime monthly payments of $XXXXXXXXXX indexed at the Consumer Price Index payable commencing XXXXXXXXXX and guaranteed for a minimum period of XXXXXXXXXX years; and
(b) two lump-sum payments of $XXXXXXXXXX on the XXXXXXXXXX and the XXXXXXXXXX, respectively.
12. Should the Claimant die prior to the time that all guaranteed payments are made, the balance of the guaranteed payments will be made to the Beneficiaries of the Trust in the priority order indicated above in paragraph 10.
13. The obligation of the Insurer to make the payments referred to in paragraph 11 above will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant and XXXXXXXXXX Litigation Guardian settle all claims against the Defendants in the lawsuits. The Insurer will not, however, be released and discharged from making such payments and each payment shall, to the extent thereof and only to the extent, operate as a pro tanto release and discharge of the obligations to make such payments.
14. The Insurer has funded the obligation to make the payments described in paragraph 11 above by the purchase of an annuity contract issued by Lifeco. The annuity contract will be non-commutable, non-assignable and non-transferrable.
15. The owner and annuitant (beneficiary) under the annuity contract will be the Insurer, however, the irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make such payments in accordance with paragraphs 10 and 11 above.
Proposed Transactions
16. The Litigation Guardian, on behalf of the Claimant, proposes to enter into the arrangements containing the structured settlement proposed, with the result that all payments will be made directly from Lifeco to the Trust to be dealt with in accordance with the terms of the Trust.
17. The Claimant will be the sole beneficiary of the Trust during XXXXXXXXXX lifetime (that is, no person other than the Claimant will be entitled to any portion of the income or capital forming the Trust funds during the claimant's lifetime).
Purpose of the Proposed Transactions
18. The purpose of the proposed transactions is to resolve the claim for damages for the costs of future care of the Claimant against the Defendants in respect of the injuries of the Claimant and to provide for the payment of the damages in respect of such claim in accordance with the settlement to the Claimant as the beneficiary of the Trust.
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 Deed of Settlement is substantially the same as the document provided to us, and that the transactions are carried out as described herein, we confirm that
A. The transfer to the Trust of the proceeds of the structured settlement as described in paragraph 11 above, will not be subject to tax in the hands of the Trustees of the Trust or the Claimant under any provision of the Income Tax Act (the "Act").
B. Amounts described in A above that are distributed by the Trustees to a beneficiary who is a non-resident of Canada, will not be subject to Part XIII of the Act on the distributions.
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 Revenue Agency ("CRA"), and is binding on the CRA provided the Deed of Settlement is executed on or before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any future amendments, whether currently proposed or not, to the Act.
Yours truly,
XXXXXXXXXX
for 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