2017 Ruling 2016-0676001R3 - 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 be taxable in the claimant's hands in 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 IT-365R2.

XXXXXXXXXX							2016-067600

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

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

We are replying to your letter of XXXXXXXXXX, and the additional information received on 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 a previously filed 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) the subject of a current or completed court process involving the Plaintiff or a related person; or

e) the subject of a Ruling previously considered by the Directorate.

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

1. The Plaintiff was born on XXXXXXXXXX, and presently resides in the Town of XXXXXXXXXX, in the Province of XXXXXXXXXX. The Plaintiff’s mailing address is XXXXXXXXXX. The Plaintiff’s tax services office is the XXXXXXXXXX Taxation Services Office and his taxation centre is the XXXXXXXXXX Taxation Centre.

2. On XXXXXXXXXX, the Plaintiff was XXXXXXXXXX (the “Accident”). As a direct result of the Accident, the Plaintiff sustained serious and permanent personal injuries which are catastrophic in nature. XXXXXXXXXX.

3. The Plaintiff commenced an action on XXXXXXXXXX, against XXXXXXXXXX (the “Insurer”) XXXXXXXXXX.

4. The Plaintiff has reached a partial settlement (“Partial Settlement Agreement and Release”) with the Insurer with respect to the Plaintiff’s claims as outlined in paragraph 5 of this ruling, subject to receipt of a favourable income tax ruling with respect to the Structured Payments (described in paragraph 6 of this ruling) under the settlement.

5. The terms of the Partial Settlement Agreement and Release provide for the payment to the Plaintiff of the following:

• A partial settlement in the sum of $XXXXXXXXXX, of which $XXXXXXXXXX represents unpaid Attendant Care benefits from the date of the Plaintiff’s Accident until XXXXXXXXXX, and interest in the amount of $XXXXXXXXXX representing the time value of those unpaid benefits pursuant to the Statutory Accident Benefits Schedule (“SABS”) in effect at the time of the Plaintiff’s Accident; and
• The unpaid Attendant Care benefits of $XXXXXXXXXX, as well as $XXXXXXXXXX of the SABS interest on those benefits will be paid in Structured Payments.

6. The terms of the Partial Settlement Agreement and Release provide among other consideration, for the payment to the Plaintiff of:

• XXXXXXXXXX monthly payments of $XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX, and continuing on the XXXXXXXXXX day of XXXXXXXXXX thereafter through XXXXXXXXXX, plus
• XXXXXXXXXX monthly payments of $XXXXXXXXXX, without indexation, commencing on XXXXXXXXXX, and continuing on the XXXXXXXXXX day of XXXXXXXXXX thereafter through XXXXXXXXXX.

(collectively, the “Structured Payments”)

All of the monthly payments are guaranteed to be made regardless of whether the Plaintiff is alive. These terms are included in the Partial Settlement Agreement and Release.

7. The obligation to make the Structured Payments will be met by the Insurer. In consideration of the Insurer making the Structured Payments (and the Insurer providing certain non-structure consideration called for in the Partial Settlement Agreement and Release), the Plaintiff has agreed to settle the past Attendant Care claims against the Insurer. The Insurer will not, however, be released and discharged from making the Structured Payments until same are paid. [Each payment made by the Annuity Issuer (identified in paragraph 8 of this ruling) shall to the extent thereof and only to that extent, operate as a pro tanto release and discharge of the Insurer’s corresponding Structured Payments obligation.]

8. The Insurer proposes to fund the Structured Payments by the purchase of two single premium annuity contracts (collectively the “Annuity Contracts”) issued by XXXXXXXXXX (the “Annuity Issuer”). The Annuity Contracts will be non-assignable, non-commutable and non-transferable.

9. 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 Issuer to make the payments thereunder, as follows:

(i) to 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 he 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 proposes to enter into the Partial Settlement Agreement and Release containing, among other matters, the provisions set forth in paragraph 5, 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

12. The purpose of the proposed transaction is to settle the claims for damages of the Plaintiff against the Insurer for past Attendant Care benefits and the interest on those past Attendant Care benefits 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 Partial 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 of the ruling, which will be received by the Plaintiff, or, in the event of the Plaintiff’s death 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 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 70-6R7 Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016, and are binding on the Canada Revenue Agency provided that the Partial Settlement Agreement and Release is executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch