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: An individual (Plaintiff) suffered personal injuries as a result of a motor vehicle accident. The Plaintiff commenced an action for damages against the driver (Defendant). Pursuant to an out of court settlement, the Assignee of the Defendant's Insurer (pursuant to an Assignment and Assumption Agreement) will purchase a single-premium annuity contract with a life insurance company (Lifeco) to provide the proposed periodic payments to be received under a settlement agreement. The Assignee will direct Lifeco to pay the periodic payments under the annuity contract to the Plaintiff. Will such payments be taxable in the hands of the recipient?
Position: No.
Reasons: The terms of the structured settlement are consistent with the CRA's position as set out in Interpretation Bulletin IT-365R2.
XXXXXXXXXX 2006-021707
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
Structured Settlement - XXXXXXXXXX (the "Plaintiff") XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Plaintiff with respect to the proposed structured settlement for damages arising out of personal injuries suffered by the Plaintiff.
To the best of your knowledge, and that of the Plaintiff, none of the issues described herein is:
(i) dealt with in an earlier tax return of the Plaintiff or a related person;
(ii) being considered by a tax services office or taxation center in connection with a previously filed tax return of the Plaintiff or a related person;
(iii) under objection by the Plaintiff or a related person;
(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") to the Plaintiff or to a related person; nor
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Our understanding of the facts and proposed transaction is as follows:
Facts
1. The Plaintiff was born on XXXXXXXXXX and presently resides in the City of XXXXXXXXXX in the province of XXXXXXXXXX.
2. On or about XXXXXXXXXX, the Plaintiff was involved in a motor vehicle accident when she was hit by a motor vehicle as she was walking across XXXXXXXXXX. As a result of this accident, the Plaintiff has sustained serious personal injuries.
3. The Plaintiff commenced Action No. XXXXXXXXXX (the "Action") in the Court of Queen's Bench of XXXXXXXXXX, claiming damages against the owner and operator of the vehicle involved in the accident (the "Defendant"). The Defendant is insured by XXXXXXXXXX (the "Insurer").
4 The Plaintiff has now reached an out-of-court settlement with the Defendant and the Insurer with respect to her claims, subject to receipt of a favourable income tax ruling with respect to the structured payments under the settlement, as described in 5 below.
5. The terms of the settlement provide, among other matters, for the payment to or for the benefit of the Plaintiff of monthly lifetime payments of $XXXXXXXXXX commencing on XXXXXXXXXX, indexed and compounded at XXXXXXXXXX% annually. These payments are guaranteed to be made through XXXXXXXXXX, should the Plaintiff die before that date. Notwithstanding the above commencement date, no such payments will be made prior to the date of this ruling.
6. The obligation to make the payments in 5 will be met by XXXXXXXXXX (the "Assignee"), to whom the Insurer will assign its obligation and by whom it will be assumed pursuant to the Assignment and Assumption Agreement. The Plaintiff has agreed to consent to the assignment and assumption. In consideration of the Assignee making such payments, the Plaintiff agrees to settle her claims against the Defendant. The Assignee will be responsible for making, or causing to be made, all payments described in 5 above. 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 Assignee proposes to fund its obligation to make the payments in 5 above by the purchase and issue of a single premium annuity contract issued by the XXXXXXXXXX ("Lifeco"). The annuity contract will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contract will be the Assignee, however, an irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make the payments, in accordance with 5 above, directly to or for the benefit of the Plaintiff or, in the event of the death of the Plaintiff before the end of the guarantee period, to such secondary payee as the Plaintiff may subsequently direct in writing to Lifeco, from time to time, or in the absence of such direction or if such secondary payee is not living at the time of the Plaintiff's death, to the estate of the Plaintiff, and provided that any such direction shall only be effective if it is in writing and in a form acceptable and delivered to Lifeco.
Proposed Transaction
9. The Plaintiff proposes to enter into a settlement agreement (the "Settlement Agreement and Release") containing, among other matters, the provisions set forth in 5 above.
Purpose of the Proposed Transaction
10. The purpose of the proposed transaction is to settle the claim for damages made by the Plaintiff against the Defendant in respect to the injuries of the Plaintiff and to provide for the payment of damages in respect of such claim.
Ruling Given
Provided that the above mentioned facts and proposed transaction are accurate and constitute complete disclosure of all the relevant facts and proposed transaction, that the Settlement Agreement and Release are substantially the same as the document provided to us, and that the transaction is carried out as described herein, we confirm that the payments described in 5 above, which will be received by the Plaintiff or her estate or secondary payees, as the case may be, will not be subject to tax in their hands under any provision of the Income Tax Act, as it presently reads.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Settlement Agreement and Release is 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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