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 taxpayer was the operator of an automobile which was involved in an accident when the operator of another vehicle lost control of XXXXXXXXXX vehicle. The taxpayer sustained personal injuries. The taxpayer commenced an action against the owner and the operator of the vehicle. Pursuant to an out-of-court settlement, the insurer of the vehicle has agreed to make periodic payments to the taxpayer.
The issue is the income tax treatment of the periodic payments in the hands of the taxpayer or the respective estate.
Position TAKEN:
We rule that the payments will not be taxable under any provision of the Income Tax Act as it currently reads.
Reasons FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with the Department's position set out in paragraphs 3 and 5 of IT-365R2.
960182
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX
We are replying to your letters of XXXXXXXXXX with enclosures wherein you request an advance income tax ruling on behalf of the above-named taxpayer with respect to a proposed structured settlement for damages arising out of personal injuries suffered by the taxpayer.
You describe the facts and proposed transactions as follows:
Statement of Facts
1. XXXXXXXXXX.
2.On or about XXXXXXXXXX was involved in a motor vehicle accident when the operator (XXXXXXXXXX) of another vehicle lost control of XXXXXXXXXX vehicle. The accident occurred on XXXXXXXXXX As a result of the accident, XXXXXXXXXX sustained permanent injuries.
3.(a) XXXXXXXXXX commenced an action in XXXXXXXXXX against XXXXXXXXXX the operator of the motor vehicle, and XXXXXXXXXX the owner of the motor vehicle, were insured by XXXXXXXXXX at the time of the accident described in 2 above.
(b)XXXXXXXXXX alleges that the operator of an unidentified vehicle played some part in causing XXXXXXXXXX to lose control of XXXXXXXXXX vehicle. On the basis that XXXXXXXXXX was liable to the Plaintiffs for any liability of the owner and/or operator of the unidentified vehicle pursuant to the vehicle insurance policy that was issued in respect of the vehicle being operated by XXXXXXXXXX at the time of the accident described in 2 above, XXXXXXXXXX was named as a defendant in respect of the action in (a) above.
(c) XXXXXXXXXX.
Hereinafter, the insurer in respect of the accident described in 2 above will be regarded as being XXXXXXXXXX (the Insurer).
4.The Plaintiffs have now reached an out-of-court settlement with the Defendants and the Insurer with respect to their claims subject to receipt of a favourable advance income tax ruling with respect to the payments under the settlement described in 5 below.
5.(a)The terms of the settlement provide, among other matters, for the payment to XXXXXXXXXX of the lifetime monthly sum of $XXXXXXXXXX commencing on XXXXXXXXXX with a guarantee period of twenty years.
(b) Should XXXXXXXXXX die prior to the time that all the guaranteed payments have been made, the balance of such payments will be payable to XXXXXXXXXX estate.
6.The obligation to make the payments in 5 above will be met by the Insurer. In consideration of the Insurer making such payments, the Plaintiffs settle their claims against the Defendants and the Insurer. The Insurer will not, however, be released and discharged from making such payments and each payment shall to the extent thereof and only to that extent, operate as a pro tanto release and discharge of the obligation to make such payments.
7.The Insurer proposes to fund its obligations to make the payments in 5 above by the purchase of annuity contracts issued by
XXXXXXXXXX.
Each annuity contract will be non-commutable, non- assignable and non-transferable.
8.The owner and annuitant (beneficiary) under each annuity contract will be the Insurer; however, an irrevocable direction will be executed in respect of each annuity contract directing the issuer to make the payments to XXXXXXXXXX or XXXXXXXXXX estate, as the case may be.
9.You have advised and you confirm to the best of your knowledge that none of the issues involved in this ruling request is being considered by a Tax Services office or a Tax Centre in connection with a tax return already filed and none of the issues is under objection. Further, you have confirmed that no payments will be made until the ruling has been granted.
Proposed Transaction
10.The Plaintiffs propose to execute the terms of the settlement arrangement containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
11.The purpose of the proposed transaction is to settle the claim for damages of the Plaintiffs against the Defendants and the Insurer and to provide for the payment of damages in respect of such claim.
Rulings Requested and Given
Provided that the above-mentioned facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the settlement agreement is substantially the same as the document submitted with your letter of March 5, 1996 and that the transaction is carried out as described herein, we confirm that the payments set forth in paragraph 5 above which will be received by XXXXXXXXXX or XXXXXXXXXX estate, as the case may be, will not be subject to tax in their hands under any provision of the Income Tax Act (Canada), as it presently reads.
This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992 issued by the Department of National Revenue, Taxation and is binding on the Department provided the settlement agreement is executed on or before XXXXXXXXXX.
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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