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. Can funds held in trust be structured and
2. Can proceeds from a life insurance policy be structured?
Position: 1. Yes 2. No
Reasons: Paragraph 5 of IT-365R2
2004-010076
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
November 10, 2004
Dear XXXXXXXXXX,
Re: Structured Settlements
This is in reply to your letter of October 28, 2004, concerning trust accounts and proceeds of a life insurance policy.
The particular circumstance in your letter on which you have asked for our views concerns factual situations involving specific taxpayers. As explained in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "CRA"), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Although we are unable to provide any binding assurance with respect to the interpretations requested, we do provide the following general comments for your information.
Trust Accounts
In our view, the investment of funds in a temporary trust account awaiting the placement of a structured settlement annuity contract would not, in and by itself, jeopardize the tax-free status of a structured settlement provided the claimant cannot access any of the funds in the trust account. However, if the funds in the trust account were considered to be constructively received, a structured settlement would not be possible. Generally, in our view, constructive receipt is considered to occur in situations where an amount is credited to an individual's account, set apart for the individual, or otherwise available to the individual without being subject to any restriction concerning its use.
Further, since the trust account funds arise from funds that have been awarded in a court or from an out of court settlement to which a personal injury or a death claim resulted and are placed in a interest bearing trust account in anticipation of entering into a structured settlement, the interest earned on the trust account would be considered post-judgment interest. In our view, post-judgment interest is considered interest for all purposes of the Income Tax Act (the "Act") and is taxable income to the claimant. Accordingly, any portion of the trust account that represents post-judgment interest cannot be included in the structured settlement.
Proceeds of a Life Insurance Policy
The conditions that must be complied with in order to create a structured settlement are stated in paragraph 5 of Interpretation Bulletin IT-365R2 and would not be met when the proceeds are from a life insurance policy. One of the conditions listed in paragraph 5 of IT-365R2 requires that there must be a claim for damages in respect of personal injury or death. That would not be the case, where an individual is simply entitled as a beneficiary to the proceeds of a life insurance policy after the death of the person whose life was insured.
We hope that our comments are of assistance, but would caution you that they do not constitute an advance income tax ruling, and accordingly, are not binding on the CRA with respect to any particular transaction.
Yours truly,
Steve Tevlin
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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