2009 Ruling 2009-0342011R3 - 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) who is a minor, suffered serious permanent injuries at the time of birth. The plaintiff, XXXXXXXXXX , commenced an action against the defendant. Pursuant to an out-of-court settlement, the casualty insurer of the defendant will assign its rights and obligations to an assignment company who 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 assignment company will direct the life insurance company to pay the periodic payments under the annuity contract to the Plaintiff or the Plaintiff's estate. 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 							2009-034201

XXXXXXXXXX , 2009

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Plaintiff")

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 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 his current address is XXXXXXXXXX . The address of the Plaintiff's tax services office is XXXXXXXXXX and his taxation centre is XXXXXXXXXX .

2. The Plaintiff was born prematurely and his condition deteriorated after his birth and he underwent a number of medical procedures XXXXXXXXXX As a result, the Plaintiff has suffered serious permanent injuries XXXXXXXXXX .

3. The Plaintiff, a minor, by his guardians, XXXXXXXXXX , in their personal capacities commenced an action, as amended, dated XXXXXXXXXX , against XXXXXXXXXX (the "Defendant") as file number XXXXXXXXXX . The Defendant is insured by XXXXXXXXXX (the "Insurer").

4. The Plaintiff, XXXXXXXXXX , has reached a settlement with the Defendant with respect to his claim, subject to receipt of a favourable income tax ruling with respect to the periodic payments under the settlement, in accordance with the "XXXXXXXXXX " (the "Minutes of Settlement").

5. The terms of the Minutes of Settlement provide for periodic payments to or for the benefit of the Plaintiff, consisting of lifetime monthly payments, starting at $XXXXXXXXXX per month and indexed at a rate of XXXXXXXXXX % per year. The monthly payments are guaranteed to be made, if the Plaintiff dies before receiving them, for a XXXXXXXXXX -year period. The monthly payments will be approximately equal to those, and will be paid approximately on the dates, set out in the attachment to the Minutes of Settlement. The final payments that will be set out will be confirmed once the settlement is finalized.

6. The obligation to make the payments referred to in paragraph 5 above, will be met by a third party insurer as assignee (the "Assignee") of the Insurer by virtue of an assignment and assumption of the obligation to make such payments pursuant to an agreement (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 settles his claims against the Defendant. The Assignee 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.

7. The Insurer on behalf of the Defendant has set aside an amount (which has been deposited at the XXXXXXXXXX ) to fund the payments referred to in paragraph 5, however, the amount will not be used to fund the payments until tax rulings are obtained from the Canada Revenue Agency (the "CRA") XXXXXXXXXX

8. The Assignee proposes to fund its obligation to make the payments referred to in 5 above under the settlement by the purchase and issue of an annuity contract issued by a XXXXXXXXXX ("Issuer"), using the funds set aside by the Insurer in 7 above. 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 Assignee, however, an irrevocable direction will be executed in respect of the annuity contract directing the Issuer to make such payments as follows:

a) during the Plaintiff's minority, XXXXXXXXXX , in their capacity as guardians of the Plaintiff, for the benefit of the Plaintiff;
b) upon the Plaintiff attaining his majority, to the Plaintiff in his own right; or
c) in the event of the Plaintiff's death before the end of the XXXXXXXXXX -year guarantee period, to the estate of the Plaintiff.

Proposed Transaction

10. The Plaintiff, XXXXXXXXXX , proposes to enter into a settlement arrangement containing, among other matters, the provisions set forth in 5 above.

11. Notwithstanding the above, no payments under 5 above 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 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 Assignment and Assumption Agreement are substantially the same as the documents provided to us, as reflected herein, and that the transaction is carried out as described herein, we confirm that the payments, as set forth in 5 above, which will be received by the XXXXXXXXXX , Plaintiff or the estate of the Plaintiff, as the case may be, as set forth in 9 above, 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, and is binding on the CRA provided the Assignment and Assumption Agreement 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