3 November 1994 External T.I. 9424095 - STRUCTURED SETTLEMENTS

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:

The issue concerns the tax consequences of an insurance settlement.

Position TAKEN:

No position was taken. Rather, general comments consistent with the Department's general position in IT-365R2 was provided.

Reasons FOR POSITION TAKEN:

Insufficient information was provided.

		942409
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

November 3, 1994

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letter of September 12, 1994 in which you requested an advance income ruling concerning a proposed insurance settlement.

In the situation outlined in your letter, reference has been made to

XXXXXXXXXX

As discussed in our telephone conversation on October 7, 1994 (Eisner/XXXXXXXXXX), it is not possible to issue an advance income ruling at this time as it appears that the parties may be at a stage of negotiation rather than at a stage near finalization. However, we are providing general comments, although, as indicated in our telephone conversation, the comments do not take into account that the taxpayers involved are status Indians. Our comments are as follows:

(a) Paragraph 2 of Interpretation Bulletin IT-365R2 "Damages, settlement and similar receipts" indicates that all amounts received by a recipient that qualify as special or general damages described therein are considered to be non-taxable regardless of the fact that the amount of such damages may have been determined with reference to the loss of earnings of the taxpayer in respect of whom the damages are awarded. However, whether this is the case in an actual fact situation can only be determined following a review of all the relevant facts and documentation. Similarly, it is not possible to determine the income tax consequences of amounts that may be paid to those persons who cared for the children in respect of whom the claim was made without such a review.

(b)An award of special and general damages described in paragraph 2 of IT-365R2 which are decreed to be paid in periodic payments is not considered to be an annuity contract for the purposes of sections 12.2 and subsection 56(1) of the Income Tax Act (the Act) and the periodic payments are not considered to be annuity payments for the purposes of the Act (see paragraph 3 of IT-365R2). Accordingly, such periodic payments are considered to be non-taxable. We also refer you to the comments in paragraph 5 of IT-365R2 concerning a "structured settlement". On the other hand, where an annuity contract can be considered to have been purchased with the proceeds of a lump sum award, the annuity payments will give rise to income on the assumption that paragraphs 81(1)(g.1) and (g.2) of the Act are not relevant.

In any future request for an advance income tax ruling in respect of the tax consequences of the insurance settlement, it is necessary to consider all the relevant facts and documentation. Such information would normally include the following:

(i)The date of birth and an authorization in respect of each taxpayer for whom the advance income tax ruling is being requested (in the case of a minor child, the authorization should be signed by his or her representative; if the estate of a deceased individual is involved, an authorization from the legal representative also needs to be obtained);

(ii)Other than a minor child who does not have a social insurance number, the social insurance number of each taxpayer in respect of whom the advance income tax ruling is being requested;

(iii)A copy of the statement of claim;

(iv)A brief description of the incident which gave rise to the claim;

(v)A brief description of the role of the insurer in respect of the claim;

(vi)A copy of the documentation relating to the proposed settlement of the claim (normally, such documentation would involve a proposed settlement agreement).

We note that pursuant to our telephone conversation, (i) to (vi) have been set out above in relation to the Department's general position in IT-365R2 rather than relating to the status of the taxpayer as an Indian. As a further comment, we are mentioning that if a ruling is requested in respect of amounts that may be paid to XXXXXXXXXX wife, information (including documentation) concerning the circumstances of the payment would need to be provided.

If you require further clarification, you may contact M. Eisner by telephone (613) 957-2138.

Your deposit of $481.50 will be returned to you under separate cover.

We trust you will find the foregoing satisfactory.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch