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:
Acceptability of annuities issued under a structured settlement to be issued on behalf of the injured party. Two of the annuities had possible commutation terms as part of the structure because of Article 1616 of the Quebec Civil Code which provides that a minor "may demand immediate and discounted payment" of an annuity within 3 months of reaching full age.
Position TAKEN:
Advised that the two structures and the package was not acceptable for a favourable opinion
Reasons FOR POSITION TAKEN:
IT 365R2 requires that the annuities be non-commutable which is not possible under the above-noted article.
940913
XXXXXXXXXX A. Larochelle
Attention: XXXXXXXXXX
May 17, 1994
Dear Sirs:
Re: Income Tax Opinion
Structured Settlements
We are replying to your letter of April 11, 1994 and subsequent correspondence with enclosures wherein you request our opinion on behalf of certain parties concerning proposed structured settlements for damages arising out of personal injuries suffered by an infant.
Before commenting on the matter at hand, and as explained in our telephone conversation of April 25, 1994 (Larochelle/XXXXXXXXXX), we would emphasize that in responding to an enquiry such as yours we are unable to provide comments that would be binding on the Department. As pointed out in our coversation we suggest that, where you have a situation involving proposed transactions of named taxpayers, you proceed by way of a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is fully described in Information Circular 70-6R2 and the special release thereto. We would draw your attention to paragraph 14 which deals with situations on which the Department will not rule.
Notwithstanding the above comments, we are, however, prepared to provide you with some general comments relating to the subject matter of your enquiry.
Our understanding of the circumstances involved in your enquiry is as follows:
1. XXXXXXXXXX.
2.A lawsuit is now in progress and the damages issue in respect to this accident is being addressed.
3.Amendments to the Quebec Civil Code, which came into force at the beginning of this year, include a new provision, Article 1616, which reads as follows:
"Damages awarded for injury are exigible in the form of capital payable in cash, unless otherwise agreed by the parties.
Where the injury sustained is bodily injury and where the creditor is a minor, however, the court may order payment, in whole or in part, in the form of an annuity or by periodic instalments on the terms and conditions it fixes and indexed according to a fixed rate. Within three months of the date on which the minor becomes of full age, the creditor may demand immediate and discounted payment of any amount still receivable."
4.You are prepared to propose to the Court that, should it come to the conclusion that your client is liable, the Court could consider ordering the purchase of a structured settlement to compensate the victim for the cost of future care and loss of future revenue.
You have indicated your awareness that the stipulation in Article 1616 to the effect that the victim may "cash out" the structure during the three month period following his 18th birthday presents a serious obstacle to doing so, since this provision is contrary to the position of Revenue Canada making the structure itself unacceptable from a fiscal standpoint, and resulting in the income stream being taxable in the hands of the victim.
5.In order to resolve the obstacle created by Article 1616 and to provide structured settlements for the injured party, you are proposing the purchase of three structured settlement contracts, as follows:
i)Contract Number 1: provides an income stream equal to the cost of future care which terminates three months after the victim's 18th birthday;
ii)Contract Number 2: provides for a "cash out" option which may be exercised by the victim during the three month period following his 18th birthday. If this "cash out" option remains unexercised at the end of the three month period, the contract then provides an income stream equal to the cost of future care for the remainder of his life;
iii)Contract Number 3: again provides for a "cash out" option to be exercised by the victim not later than three months after his 18th birthday. If the "cash out" option is not exercised, the victim then receives an income stream equal to the loss of future revenue which begins at age 21 or possibly later, as determined according to the expert evidence.
Accordingly, you have requested that we approve the above arrangement in its entirety notwithstanding the guidelines set out by the Department in IT 365R2, and further elaborated on in the subsequent correspondence of which we understand you are aware, wherein the Department further explains its position on the commutation of annuity contracts and that such limited action can only take place on the death of the injured party.
As explained in our telephone conversation, the guidelines laid down in IT-365R2 in order for for a "structured settlement" to be acceptable to the Department are very specific in that the annuity to be issued must be non-commutable, non-transferable, and non-assignable. If these criteria are not satisfied then the income portion of the annuity would be taxable in the hands of the injured party.
You have indicated in your letter that the three contract concept was designed for the specific purpose of creating a "package" of which all components would be acceptable to Revenue Canada, and from the point of view of your client there would be no point in suggesting to the Court that it order the purchase of the three contracts if the eventual income streams under any one of the contracts were to be taxable. In other words, if the "package" does not permit the creation of three tax exempt income streams, the proposed structure does not represent any substantial costs saving for your client.
While we could probably accept contract #1 as meeting the guidelines laid down in IT-365R2, we cannot agree that contracts #2 and # 3 so qualify as these contracts are both commutable if the child or his guardians decide to take this course of action which is provided for in Article 1616 of the Quebec Civil Code.
We regret that our comments cannot be more favourable.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1994
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1994
Email this Content