2015 Ruling 2015-0581271R3 - 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: Will the payments to be received pursuant to the structured settlement agreement be taxable in the claimant's hands under the circumstances described?

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
2015-058127

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
Structured Settlement
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 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:

1. The Plaintiff was born on XXXXXXXXXX and presently resides in XXXXXXXXXX. The address of the Plaintiff's tax services office is XXXXXXXXXX and the Plaintiff's taxation centre is in XXXXXXXXXX.

2. On XXXXXXXXXX, the Plaintiff, while driving in XXXXXXXXXX, was struck XXXXXXXXXX by a vehicle owned, operated and driven by XXXXXXXXXX (hereinafter referred to as the "Accident"), which Accident resulted in severe, permanent personal injuries, damages and loss to the Plaintiff and derivative damages to XXXXXXXXXX (the "Derivative Plaintiff"). The Derivative Plaintiff is also the Plaintiff's legal representative in these proceedings (the "Litigation Representative").

3. The Plaintiff, by her Litigation Representative, and the Derivative Plaintiff commenced an action in the Court of XXXXXXXXXX bearing Court File Number XXXXXXXXXX (the "Action"), against XXXXXXXXXX (the "Defendant").

4. XXXXXXXXXX is insured by XXXXXXXXXX (the "Insurer").

5. The Plaintiff and the Derivative Plaintiff have reached a settlement with the Defendant and the Insurer (collectively, the "Releasees") with respect to the Plaintiff's and the Derivative Plaintiff's claims, subject to receipt of a favourable income tax ruling with respect to the Structure Payments (defined in paragraph 6 below) under the settlement.

6. The terms of the settlement provide, among other consideration, for the payment for the benefit of the Plaintiff of XXXXXXXXXX monthly payments of $XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX and continuing on the first day of each and every month thereafter through XXXXXXXXXX, plus annual payments of $XXXXXXXXXX each due on XXXXXXXXXX for XXXXXXXXXX years, beginning on XXXXXXXXXX and continuing through XXXXXXXXXX, plus XXXXXXXXXX lump sum payments of $XXXXXXXXXX each due on XXXXXXXXXX at XXXXXXXXXX year intervals beginning on XXXXXXXXXX and continuing through XXXXXXXXXX (all of which monthly, annual and lump sum payments are guaranteed to be made on their due dates, regardless of whether the Plaintiff is alive) (collectively, the "Structure Payments"). These terms are included in the Settlement Agreement and Release.

7. The obligation to make the Structure Payments will be met by the Insurer. In consideration of the Insurer making the Structure Payments (and the Insurer providing certain non-structure consideration called for in the Settlement Agreement and Release), the Plaintiff, by her Litigation Representative, and the Derivative Plaintiff have agreed to settle their claims against the Releasees. The Insurer will not, however, be released and discharged from making the Structure Payments until same are paid. [Each payment made by the underwriting Annuity Issuer (identified in paragraph 8 below) shall operate as a pro tanto release and discharge of the Insurer's corresponding Structure Payment obligation.]

8. The Insurer proposes to fund the Structure Payments by the purchase of XXXXXXXXXX (the "Annuity Contract") issued by XXXXXXXXXX (the "Annuity Issuer"). The Annuity Contract will be non-assignable, non-commutable and non-transferable.

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

(i) to the Trustee of the Estate of the Plaintiff, for the benefit of the Plaintiff; or

(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 she remains alive, may subsequently direct in writing, from time to time, to the Annuity Issuer, 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 Plaintiff's Estate, 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 Issuer.

Proposed Transaction

10. The Plaintiff, by her Litigation Representative, proposes to enter into the Settlement Agreement and Release containing, among other matters, the provisions set forth in paragraphs 6, 7, 8 and 9 above.

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

Purpose of the Proposed Transaction

The purpose of the proposed transaction is to settle the claims for damages of the Plaintiff and the Derivative Plaintiff against the Releasees, and to provide for the payment of damages in respect of such claims.

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 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 paragraph 6 above, which will be received by the Trustee of the Estate of the Plaintiff for the benefit of the Plaintiff, or, in the event of the death of the Plaintiff before the end of the guarantee period, by the Plaintiff's named secondary payee(s) or the Estate of the Plaintiff, as the case may be, will not be subject to tax in their hands under any provision of the Income Tax Act (Canada), R.S.C., 1985, c.1 (5th Supp.) (the "Act") as it presently reads.

The above advance income tax ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R6 Advance Income Tax Rulings, dated August 29, 2014, and are binding on the Canada Revenue Agency provided that the Settlement Agreement and Release is executed on or before XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Yours truly,

XXXXXXXXXX
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch