2012 Ruling 2012-0437891R3 - 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 was a minor at the time of the accident (and, who has attained majority since the commencement of the action described below), suffered personal injuries as a result of a motor vehicle accident. The Plaintiff, by his father and next friend, (collectively, the "Plaintiffs"), commenced an action for damages against the driver and the owner of the other vehicle (Defendants). Pursuant to an out of court settlement, the Defendants’ insurer (pursuant to a Settlement Agreement And Release), will purchase a single-premium annuity contract with two life insurance companies to provide the proposed periodic payments to be received under the settlement agreement. The Defendants’ insurer will direct the life insurance companies to pay the periodic payments under the annuity contracts 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
									2012 043789

XXXXXXXXXX, 2012

Dear XXXXXXXXXX:

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

We are replying to your correspondence 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 presently resides in XXXXXXXXXX. The Plaintiff’s mailing address is 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 injured in a XXXXXXXXXX accident that occurred in XXXXXXXXXX. The Plaintiff suffered serious permanent personal injuries, damages and loss as a result of the accident.

3. XXXXXXXXXX, on his own behalf and as father and next friend of the Plaintiff (collectively, the “Plaintiffs”), commenced an action by Statement of Claim issued XXXXXXXXXX out of the Court XXXXXXXXXX, the driver and the owner, respectively, (collectively, the “Defendants”) of the automobile which struck the Plaintiff. The Defendants are insured by XXXXXXXXXX (the “Insurer”).

4. The Plaintiffs have reached a settlement with the Defendants with respect to their claims, subject to the receipt of a favourable income tax ruling with respect to the periodic payments under the settlement, in accordance with the Settlement Agreement And Release (the “Settlement Agreement”).

5. The terms of the settlement provide, among other consideration, for the payment to the Plaintiff XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX (XXXXXXXXXX are guaranteed to be made through XXXXXXXXXX, regardless of whether the Plaintiff is alive), plus a lump sum payment of $XXXXXXXXXX on XXXXXXXXXX (which lump sum payment is guaranteed to be made XXXXXXXXXX, regardless of whether the Plaintiff is alive).

6. The obligation to make the payments referred to in 5 above (the “Structure Payments”) will be met by the Insurer. In consideration of the Insurer making the Structure Payments, the Plaintiffs settle their claims against the Defendants. The Insurer will not, however, be released and discharged from making the Structure Payments, and each payment made by the Annuity Issuers (defined in 7 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 Structure Payments.

7. The Insurer proposes to fund the Structure Payments by the purchase of two, single premium annuity contracts (collectively, the “Annuity Contracts”), one annuity contract issued by XXXXXXXXXX and the other annuity contract issued by XXXXXXXXXX (collectively, the “Annuity Issuers”). The Annuity Contracts will be non-assignable, non-commutable and non-transferable.

8. The Insurer will be the owner and annuitant (beneficiary) of the Annuity Contracts, however, the Insurer will execute an irrevocable direction in respect of the Annuity Contracts directing the Annuity Issuers to make the payments thereunder, as follows:

i. to the Plaintiff; and

ii. in the event of the Plaintiff’s death before the end of the guarantee period, to such secondary payee(s) as the Plaintiff, while he remains alive, may subsequently direct in writing, from time to time, to the Annuity Issuers, 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 the Annuity Issuers.

Proposed Transaction

9. The Plaintiff proposes to enter into the Settlement Agreement containing, among other matters, the provisions set forth in 5 above.

10. Notwithstanding the above, no payments under 5 above shall be made prior to the date of this ruling.

Purpose of the Proposed Transaction

11. The purpose of the proposed transaction is to settle the claim for damages of the Plaintiff against the Defendants 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 5 above, which will be received by the Plaintiff, or, in the event of his death before the end of the guarantee period, his named secondary payee(s) or Estate, as the case may be, as set forth in 8 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 Canada Revenue Agency provided the Settlement Agreement is executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch