29 January 1993 Income Tax Severed Letter 9227855 - Commutation of Annuity Contract

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.

XXXXXXXXXX 922785
A.W. Larochelle
(613) 952-1361
Attention: XXXXXXXXXX

January 29, 1993

Dear XXXXXXXXXX

Re: Structured Settlements

This is in reply to your letter of September 24, 1992, concerning the commutation of annuity contracts purchased by an insurer to fund its liability under a "structured settlement" as contemplated in Interpretation Bulletin IT-365R2. We regret the delay in responding which was caused by extensive consultations and review of the issue.

Paragraph 5. of IT-365R2 states that, in order to be considered a structured settlement, the casualty insurer must fund its obligation under the arrangement through the purchase of "...a single premium annuity contract which must be non-assignable, non-commutable, non- transferable and designed to produce payments equal to the amounts, and at the times, specified in the agreement..." (emphasis added).

It is our understanding that most settlements involving personal injuries have two elements: 1) periodic payments to produce an income stream which is intended to compensate the injured party (the claimant) for loss of ability to earn income as a result of the injuries suffered (hereinafter referred to as the "loss of income element") and, 2) periodic and lump sum payments to provide the claimant with sufficient funds to provide the future care (both medical and personal) that is required resulting from such injuries (hereinafter referred to as the "care element"). Under a structured settlement, a casualty insurer will, in such a situation, sometimes purchase two separate annuity contracts, with the claimant as the measuring life, to fund each of these elements. Such contracts normally have guarantee periods and specified beneficiaries to whom payments will be made in the event of the death of the claimant during the guarantee period. The beneficiaries under the annuity contract to provide for the payments for the loss of income element is normally the estate of the claimant or named heirs. Since the payments for the care element would no longer be required after the death of the claimant, the beneficiary under the annuity contract to provide for this element is, in some situations, the casualty insurer.

We have been asked whether a settlement arrangement will still be considered a structured settlement, as contemplated in IT-365R2, if the annuity contracts referred to above were commutable after the death of the claimant.

OUR COMMENTS

It is the Department's position that the annuity contract to fund the loss of income element as described above or any other annuity contract to fund periodic payments under a settlement arrangement under which the claimant's estate or individuals are named beneficiaries must be non- commutable for the entire length of the guarantee period and thereafter for the life of the claimant. Accordingly, under such an arrangement, the payments remaining under the guarantee period must not be capable of commutation in the event of the death of the claimant during such guarantee period in order for the arrangement to be considered a structured settlement as contemplated in IT-365R2.

With respect to the annuity contract to fund the care element under a settlement arrangement, such contract must be non-commutable during the life of the claimant in order for the arrangement to be considered a structured settlement as contemplated in IT-365R2. However, such an annuity contract may be commutable after the death of the claimant provided that the beneficiary under the contract is the casualty insurer funding its obligations under the settlement arrangement.

We trust the foregoing is the information you require.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Specialty Rulings Directorate
Legislative and Intergovernmental
Affairs Branch