22 April 1994 External T.I. 9408475 - ASSIGNMENT UNDER A 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

In an assignment to a property and casualty insurer of obligations for the payment of damages in a structured settlement, is the insurer entitled to a reserve under 20(7)(c) and Reg. 1401(e)(iii)?

Position TAKEN:

It is possible.

Reasons FOR POSITION TAKEN:

Several criteria must be satisfied, particularly that the assignment agreement must constitute an insurance policy.

			940847

XXXXXXXXXX B.G. Dodd

Attention: XXXXXXXXXX

April 22, 1994

Dear Sirs:

Re: Assignment under a Structured Settlement

This is in reply to your letter dated April 4, 1994 in which you request our opinion on the deductibility of a reserve for income tax purposes with respect to a proposed assignment of obligations under a proposed structured settlement.

In view of the fact that the assignment is an integral part of specific proposed transactions which are the subject of the Department's recent advance income tax ruling, identified as file #940520, dated April 14, 1994, the application for the ruling should have been extended to seek confirmation with respect to the reserve issue. We understand that there are severe time constraints for implementing the structured settlement in question, so that it is not possible to allow the Department sufficient time to consider the reserve issue in the context of the specific facts of your situation with a view to issuing a supplementary advance ruling.

Because the Department will comment on proposed transactions only by way of an advance ruling, we are unable to provide you with the opinion you are now requesting. We are, however, prepared to provide general comments on the issue as follows, but ask you to note that these are not to be construed as binding on the Department in connection with any particular situation.

The Department's general views on structured settlements are set out in Interpretation Bulletin IT-365R2, particularly paragraph 5 thereof. Our understanding of an assignment in the context of such an arrangement is that the arrangement differs from that described in paragraph 5 of IT-365R2 only to the extent that the obligations of the party directly responsible for paying the damages to the claimant are assigned to, and assumed by, an insurance corporation, in respect of which that insurance corporation is paid an amount equal to the amount necessary to acquire the requisite annuity contract, plus a fee.

It would be a question of fact whether or not an assignee insurance corporation which does not carry on a life insurance business would be entitled to claim a reserve under paragraph 20)(7)(c) of the Income Tax Act and subparagraph 1400(e)(iii) of the Income Tax Regulations (the "Regulations") in respect of the assignment. In general, we would think that the assignee insurance corporation could be entitled to claim such a reserve provided:

-the assignment agreement constitutes an insurance policy;

-there is a claim under that insurance policy in respect of the structured settlement;

-a reserve in respect of that claim is reported by the assignee insurance corporation in its annual report for the year to the "relevant authority", as that term is defined in subsection 1404(2) of the Regulations, (or reported in its financial statements for the year where the corporation was subject to the supervision of the relevant authority but was not required to file an annual report with the relevant authority for the year); and

-the assignee insurance corporation is permitted by the relevant authority to enter into such assignment agreements.

While we hope the foregoing will be of assistance, we reiterate that our comments are general in nature and may not necessarily be applicable in any particular situation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate