2007 Ruling 2007-0250671R3 - Structured Settlement

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) was injured when the motor vehicle in which XXXXXXXXXX was a passenger was involved in a collision with another motor vehicle. The Plaintiff commenced an action for damages against the driver of the motor vehicle, in which XXXXXXXXXX was a passenger, and various other defendants. Pursuant to an out of court settlement, the casualty insurer of a certain defendant will purchase a single premium annuity contract with a life insurance company to provide the proposed periodic payments to be received under a structured settlement arrangement. The casualty insurer will direct the life insurance company 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 paragraph 5 of Interpretation Bulletin IT-365R2.

XXXXXXXXXX 							2007-025067

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Plaintiff") SIN 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. We also acknowledge the additional information provided to us during our telephone conversation of XXXXXXXXXX.

We understand that, to the best of your knowledge, and that of the Plaintiff, none of the issues described herein is:

a. in an earlier tax return of the Plaintiff or a related person;

b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Plaintiff or a related person;

c. under objection by the Plaintiff or a related person;

d. before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; nor

e. the subject of a ruling previously issued.

Our understanding of the facts and proposed transaction is as follows:

Facts

1. The Plaintiff was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX in the Province of XXXXXXXXXX within the jurisdiction of the tax services office at XXXXXXXXXX and the client's taxation centre is in XXXXXXXXXX.

2. On or about XXXXXXXXXX, the Plaintiff was injured when the motor vehicle in which XXXXXXXXXX was a passenger, and which was operated by XXXXXXXXXX, was involved in a collision with another motor vehicle.

3. The Plaintiff, a minor, by XXXXXXXXXX Litigation Guardian, XXXXXXXXXX commenced an action by Statement of Claim issued XXXXXXXXXX in the Superior Court of Justice (Action # XXXXXXXXXX) against XXXXXXXXXX, which action was subsequently only pursued against XXXXXXXXXX (the "Defendant"). The Defendant is insured by XXXXXXXXXX (the "Insurer").

4. The Defendant, by the Insurer, paid $XXXXXXXXXX into court in advance of settlement on or about XXXXXXXXXX, which was held and invested by the Accountant of the Superior Court of Justice until the Plaintiff reached the age of majority in XXXXXXXXXX. At that time, the funds as invested had grown to $XXXXXXXXXX and were paid out of court to the Plaintiff, who transferred a significant portion of the funds to XXXXXXXXXX counsel, in trust, pending settlement of XXXXXXXXXX claims.

5. The Plaintiff reached a settlement with the Defendant with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement and subject to judgment (the "Judgment") of the Superior Court of Justice in accordance with the minutes of settlement as filed, including Schedule A as annexed thereto (the "Minutes of Settlement").

6. The terms of the settlement provide, among other matters, for payment to the Plaintiff of guaranteed monthly payments as follows:

a. monthly payments of $XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX and continuing through XXXXXXXXXX;

b. monthly payments of $XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX and continuing through XXXXXXXXXX; and

c. the following lump sum payments:

i. XXXXXXXXXX;

ii. XXXXXXXXXX;

iii. XXXXXXXXXX;

iv. XXXXXXXXXX; and

v. XXXXXXXXXX.

7. The obligation to make the payments referred to in paragraph 6 will be met by the Insurer. In consideration of the Insurer making such payments, the Plaintiff settles XXXXXXXXXX claims against the Defendant. The Insurer will not, however, be released and discharged from making such payments and 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.

8. The Insurer proposes to fund its obligation to make the foregoing payments under the settlement by the purchase and issue of a single premium annuity contract issued by XXXXXXXXXX. The annuity contract will be non-commutable, non-assignable and non-transferable.

9. The owner and annuitant (beneficiary) under the annuity contract will be the Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the issuer to make such payments directly to the Plaintiff or, in the event of XXXXXXXXXX death before the end of the guarantee period, to such secondary payee(s) as XXXXXXXXXX may subsequently direct in writing, from time to time, to XXXXXXXXXX, provided that in the absence of such direction, or if there is no secondary payee living at the time of the Plaintiff's death, to the Estate of the Plaintiff, and provided further that any such direction shall only be effective if it is in writing, and in a form acceptable and delivered to XXXXXXXXXX, as the case may be.

Proposed Transaction

10. The Plaintiff proposes to enter into the Minutes of Settlement arrangement containing, among other matters, the provisions set forth in paragraph 6 above.

11. Notwithstanding the above, no payments under paragraph 6 shall be made prior to the date of this ruling.

Purpose of the Proposed Transaction

12. The purpose of the proposed transaction is to settle the claim for damages of the Plaintiff against the Defendant in respect of 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 Minutes of Settlement and the Judgment are substantially the same as the documents provided to us, and that the transaction is carried out as described herein, we confirm that the payments, as set forth in paragraph 6, which will be received by the Plaintiff, secondary payee(s), or the Estate of the Plaintiff, as the case may be, as set forth in paragraph 9, will not be subject to tax in their hands under any provision of the Income Tax Act (the "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 forth in Information Circular 70-6R5, dated May 17, 2002, issued by the Canada Revenue Agency (the "CRA"), and is binding on the CRA provided the Minutes of Settlement and the Judgment 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