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: What are the tax consequences of an out of court settlement payment made in connection with a segregated fund annuity?
Position: None, other than the fact that the "surrogatum principle" may be relevant.
Reasons: A meaningful response cannot be provided without the opportunity to review the annuity contract and the settlement documentation.
XXXXXXXXXX 2005-012526
A. Campbell
May 30, 2005
Dear XXXXXXXXXX:
Re: Taxation of Out of Court Settlement - Segregated Fund Annuity
This is in reply to your letter of April 9, 2005, wherein you requested our views on the taxation of a payment out of an out of court settlement involving an annuity issued by a life insurance company that permits the policyholder to invest in various segregated funds. You have posed your questions to us in the context of a hypothetical set of facts. However, our views on the tax implications would depend upon the specific terms of the annuity policy and settlement agreement that would be involved in such a situation.
The only comment we can provide you with at this time, is that you may wish to consider the potential application to your situation of the common law concept referred to as the surrogatum principle. The surrogatum principle is frequently referred to by the Canadian courts in determining the taxation of damage and settlement payments received by a taxpayer. Paragraph 11 of the decision by the Supreme Court of Canada in Tsiaprailis v. The Queen (2005 DTC 5119), explained the principle as follows:
"...in assessing whether the monies will be taxable, we must look to the nature and purpose of the payment to determine what it is intended to replace. The inquiry is a factual one. The tax consequences of the damage or settlement payment is then determined according to this characterization. In other words, the tax treatment of the item will depend on what the amount is intended to replace."
Other references to the application of the surrogatum principle by Canadian courts may be found in such cases as: Schwartz v. The Queen (96 DTC 6103), The Queen v. Manley (85 DTC 5150), Au v. Canada (2005 TCC 303), Transocean Offshore Ltd. v. The Queen (2005 DTC 5201).
Absent a specific proposed transaction and a request for an advance income tax ruling, submitted in accordance with Information Circular IC 70-6R5, which includes copies of the annuity policy and the draft settlement agreement, we are not in a position to provide you with a response to your questions. If such a transaction has been completed, a request for the CRA's views on the tax consequences can be made to our insurance industry specialist, Margaret McCreery.
Yours truly,
F. Lee Workman
Section Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Policy and Planning Branch
c.c.: Margaret McCreery,
Insurance Industry Specialist,
Kitchener Taxation Services Office
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