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: 1. Where a general insurance carrier is insolvent- can it assign the structured settlements it owns to other general insurance carriers? 2. Are the claimants still entitled to receive the amounts from the Lifeco tax-free? 3. Are the new assignee corporations that are insurance corporations entitled to a paragraph 20(7)(c) reserve?
Position: 1. YES, provided the Claimants consent
2. YES 3. Probably NO
Reasons: 1. Consent from claimant - policy in IT-365R2 2. Nothing changes for the claimant. The same Annuity is received from the same LIFECO 3. We cannot determine whether the Assignee corporation qualifies for the reserve under paragraph 20(7)(c)
XXXXXXXXXX 2004-008609
XXXXXXXXXX, 2006
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")
XXXXXXXXXX ("B Co")
XXXXXXXXXX ("C Co")
This is in reply to your letter dated XXXXXXXXXX . is the liquidator and representative of A Co and is now requesting the rulings XXXXXXXXXX.
In the original letter from XXXXXXXXXX, an advance income tax ruling was requested on behalf of A Co, B Co, and C Co with respect to proposed assignments of structured settlements as described herein. We acknowledge information provided during numerous telephone conversations with XXXXXXXXXX (XXXXXXXXXX). We also acknowledge telephone conversations with XXXXXXXXXX insolvency practice (XXXXXXXXXX) in their attempts to resolve an issue that involved the entitlement to a policy reserve under paragraph 20(7)(c) of the Act to an assignee insurance corporation in respect of their obligations under the Assignment and Assumption Agreements. We were not provided with enough information to resolve that particular issue.
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 A Co, B Co, C Co or a related person;
(ii) being considered by a tax services office or taxation center in connection with a previously filed return of A Co, B Co, C Co or a related person;
(iii) under objection by A Co, B Co, C Co 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 to the taxpayers or a related person.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act") and all defined terms and phrases have the meaning ascribed to them in the Act.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. The address of A Co is XXXXXXXXXX (BN XXXXXXXXXX) and its Tax Services Office is XXXXXXXXXX Tax Services Office.
2. The address of B Co is XXXXXXXXXX (BN XXXXXXXXXX) and its Tax Services Office is XXXXXXXXXX Tax Services Office.
3. The address of C Co is XXXXXXXXXX (BN XXXXXXXXXX) and its Tax Services Office is XXXXXXXXXX Tax Services Office.
4. A Co is a casualty insurance company that is an "insurance corporation", and does not carry on a "life insurance business", as those terms are defined in subsection 248(1) of the Act. A Co and its predecessor, XXXXXXXXXX, was a party to several structured settlement arrangements.
5. Under each of these structured settlement arrangements, a taxpayer (the "Claimant") made a claim for damages against one or more defendant(s) in respect of personal injuries sustained as a result of an accident. A Co was the casualty insurer of one or more defendant(s).
6. Each of the Claimants subsequently entered into a settlement arrangement with the defendant(s) and A Co.
7. The terms of the settlement contained, among other matters, provisions for the payment by A Co (or by A Co and another casualty company, where responsibility for the periodic payments was apportioned on a percentage basis between A Co and the other casualty company on the basis of the liability of their respective insureds) to the Claimant of periodic payments.
8. In order to fund its obligation to make the payments under each settlement, A Co purchased, on its own or in conjunction with another casualty company (where ownership was apportioned on a percentage basis between A Co and the other casualty company on the basis of the liability of their respective insureds), one or more single premium annuity contracts (collectively, "Contracts") issued by either XXXXXXXXXX (collectively, "Lifecos"). Each Lifeco is an "insurance corporation" carrying on a "life insurance business", as those terms are defined in subsection 248(1) of the Act.
9. The terms of each Contract provide that it is non-commutable, non-assignable, and non-transferable. Although A Co is the owner and annuitant (that is, the beneficiary) (outright or on a percentage basis) under each Contract, A Co executed an irrevocable direction in respect of each Contract, directing Lifeco to make the payments (or that portion of the payments attributable to A Co's percentage interest in each Contract) to a Claimant or, in the event of the Claimant's death, to the Claimant's estate (or such other secondary payee related to the Claimant as may be named in the Contract), as the case may be.
10. Each of these arrangements constitutes a "structured settlement" within the meaning of paragraph 5 of Interpretation Bulletin IT-365R2, entitled Damages Settlement, and Similar Receipts. As a result, the payments received by a Claimant or, in the event of the Claimant's death, by the Claimant's estate (or such other secondary payee related to the Claimant as may be named in a Contract) are currently not subject to taxation in the hands of the Claimant or, in the event of the Claimant's death, by the Claimant's estate (or such other secondary payee related to the Claimant as may be named in the Contract) under any provision of the Act.
11. A Co is insolvent and is presently in liquidation, as governed by the Winding-Up and Restructuring Act (Canada).
Proposed Transactions
12. A Co, through its liquidator, XXXXXXXXXX, proposes to assign and transfer all of its rights under the Contracts to B Co and C Co (the "Assignees"), and have the Assignees assume all its obligations under the Contracts, pursuant to assignment and assumption agreements (the "Assignment and Assumption Agreements"). The Assignees are both "insurance corporations" as this term is defined under the Act. All of the Claimants have consented to the Assignment and Assumption Agreements.
13. The following table lists the parties (in addition to A Co) involved for each Assignment and Assumption Agreement:
Assignee CLAIMANT Lifeco
C Co XXXXXXXXXX XXXXXXXXXX
C Co XXXXXXXXXX XXXXXXXXXX
C Co XXXXXXXXXX XXXXXXXXXX
C Co XXXXXXXXXX XXXXXXXXXX
C Co XXXXXXXXXX XXXXXXXXXX
C Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
B Co XXXXXXXXXX XXXXXXXXXX
Purpose of the Proposed Transactions
The purpose of the assignment of rights and assumption of obligations is to ensure that the Claimants continue to receive the amounts to which they are entitled, despite the liquidation of A Co. The assignment of rights and assumption of obligations is also to ensure that A Co and its creditors and other stakeholders are released from their obligations to the Claimants.
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 Assignment and Assumption Agreements are substantially the same as the documents provided to us, that the transaction is carried out as described herein, and that the Assignment and Assumption Agreements for the assignment and assumption of A Co's rights and obligations under the Contracts are executed and assented to by each of the Claimants, A Co and the Assignees, we rule as follows:
Because the Assignment and Assumption Agreements as described in 12, will not be considered to contravene the requirements contained in paragraph 5 of IT-365R2 for structured settlements that an annuity be non-assignable and non-transferable (see comment below), the Assignment and Assumption Agreements, in and by themselves, will not cause the payments received by the Claimants (or their respective estates or such other secondary payees related to Claimants as may be named in the Contracts) under the structured settlements, as described in 10, to be subject to taxation in their hands under any provision of the Act.
Provided that the Claimants have consented to the assignment of the structured settlements as described in the Ruling, in our view, the Assignment and Assumption Agreements, in and by themselves, will not contravene the restriction contained in paragraph 5 of IT-365R2 that an annuity be non-assignable and non-transferable.
The 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 Revenue Agency ("CRA"), and is binding on the CRA provided the Assignment and Assumption Agreements are executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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