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 is whether payments made as a result of a damages award pursuant to clause 116(1)(b) and subsection 116(4) of the Court of Justice Act (Ontario) will be non-taxable.
Position TAKEN:
General comments were provided.
Reasons FOR POSITION TAKEN:
Because of the broad wording of the legislation, a lump sum could be involved. Also, various arrangements are possible, some of which may not qualify as a structured settlement as contemplated by IT-365R2.
952262
XXXXXXXXXX M. Eisner
Attention: XXXXXXXXXX
October 26, 1995
Dear Sirs:
Re: Structured Settlements
This is in reply to your letter of August 22, 1995 concerning the above-noted subject. We also acknowledge our telephone conversations on September 29, 1995 and October 4, 1995 (Eisner/XXXXXXXXXX) in which we obtained clarification of the information set out in your letter.
The comments set out below are general in nature and should not be construed as relating to an actual situation. We also note that the comments set out below have been made on the basis that paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act are not applicable.
Section 116 of the Courts of Justice Act of Ontario, amongst other things, concerns a damages award made by the court to a plaintiff in respect of the plaintiff's personal injuries. With respect to such an award,
(a)part of paragraph 116(1)(b) of the Courts of Justice Act provides that if all the affected parties agree, "the court ... may order the defendant to pay all or part of the award for damages periodically on such terms as the court considers just", and
(b)part of subsection 116(4) of the Courts of Justice Act provides that "the court may, with the consent of all the affected parties, order that the award be subject to future review and revision in such circumstances and on such terms as the court considers just".
It is our understanding that your concern relates to the type of situation where the court, in respect of personal injuries sustained by a plaintiff, has made a damages award to a plaintiff pursuant to the above excerpts from the Justice Act. The award relates to the future costs of caring for the plaintiff. Your concern is whether the payments made both before and after a revision would be non-taxable in the hands of the plaintiff.
The Department's general position on amounts received as damages in respect of personal injuries is set out in Interpretation Bulletin IT-365R2 "Damages, Settlements, and Similar Receipts". As indicated in paragraph 3 of IT-365R2, it is the Department's general position that where an annuity contract can be considered to have been purchased with the proceeds of a lump sum damages award, the contract will give rise to income in the hands of the plaintiff. In relation to these comments, it seems to us that the possibility exists that the damages award would involve a lump sum. In addition, an award for damages which included an order subjecting the award to future review and revision as provided for in subsection 116(4) of the Courts of Justice Act would not qualify as a structured settlement as contemplated in IT-365R2. Such an order would be broad in scope and could include arrangements which would not be in keeping with the intent of the guidelines in the bulletin on structured settlements. Accordingly, the payments in question might be taxable.
The determination of the tax consequences of any particular situation would be considered if a request for an advance income tax ruling were to be made. As you are aware, the procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 and the related Special Release dated September 30, 1992.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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