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 of the vehicle (Defendant). Pursuant to an out of court settlement, the Defendant's insurer (pursuant to a Settlement Agreement And Release), will purchase a single-premium annuity contract with a life insurance company to provide the proposed periodic payments to be received under the settlement agreement. The Defendant's 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
2010-038251
XXXXXXXXXX, 2010
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
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.
Facts
Our understanding of the facts and proposed transaction is as follows:
1. The Plaintiff was born on XXXXXXXXXX. The Plaintiff resides at XXXXXXXXXX. The address of the Plaintiff's tax services office is XXXXXXXXXX and the Plaintiff's taxation centre is in XXXXXXXXXX.
2. On or about XXXXXXXXXX, the Plaintiff was a XXXXXXXXXX passenger in a motor vehicle accident. The driver, XXXXXXXXXX (the "Defendant"), lost control of the vehicle and XXXXXXXXXX where the Plaintiff was seated.
3. As a result of the accident, the Plaintiff suffered a severe XXXXXXXXXX injuries and will continue to suffer serious and permanent injuries. The Plaintiff's life expectancy and ability to earn an income have been reduced due to the severity of these injuries.
4. Proceedings were commenced against the Defendant in the Court of Queen's Bench of XXXXXXXXXX, in the city of XXXXXXXXXX, under action no. XXXXXXXXXX (the "Statement of Claim"). The Defendant is insured by the XXXXXXXXXX (the "Insurer").
5. The Plaintiff has reached a settlement with the Defendant with respect to the Statement of Claim, subject to receipt of a favourable income tax ruling with respect to the periodic payments under the settlement, in accordance with the Minutes of Settlement And Release (the "Settlement Agreement").
6. The terms of the Settlement Agreement provide, amongst other matters, for the benefit of the Plaintiff, the monthly sum of $XXXXXXXXXX commencing on XXXXXXXXXX and payable for XXXXXXXXXX years. The monthly payments are to be indexed at XXXXXXXXXX% compounded annually to offset inflation. In addition, there are XXXXXXXXXX lump sum payments of $XXXXXXXXXX to be made on XXXXXXXXXX, respectively.
7. The obligation to make the payments referred to in 6 above (the "Structured Payments") will be met by the Insurer. In consideration of the Insurer making the Structured Payments, the Plaintiff settles the Statement of Claim against the Defendant. The Insurer will not, however, be released and discharged from making the Structured Payments, and each payment made by the Annuity Issuer (defined in 8 below) shall to the extent thereof and only to that extent, operate as a pro tanto release and discharge of the Insurer's obligation to make the Structured Payments.
8. The Insurer proposes to fund its obligation to make the Structured Payments by the purchase of single premium annuity contract issued by XXXXXXXXXX (the "Annuity Issuer"). The annuity contract will be non-commutable, non-assignable and non-transferable.
9. The owner and annuitant (beneficiary) under the contract will be the Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the Annuity Issuer to make such payments directly to the Plaintiff or to the Estate of the Plaintiff, as the case may.
Proposed Transaction
10. The Plaintiff proposes to enter into the Settlement Agreement containing, among other matters, the provisions set forth in 6 above.
Purpose of the Proposed Transaction
11. 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 Settlement Agreement is substantially the same as the documents provided to us, as reflected herein, and that the proposed transaction is carried out as described herein, we confirm that the payments, as set forth in 6 above, which will be received by the Plaintiff, or, in the event of the death of the Plaintiff before the end of the guarantee period, to 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, issued by the Canada Revenue Agency (the "CRA"), and is binding on the CRA provided the Settlement 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
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