2096 Ruling 9604773 - 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 taxpayer XXXXXXXXXX As a result of these problems and the purported negligence of hospital staff, the taxpayer sustained severe personal injuries. Pursuant to an out-of-court settlement, the defendants have agreed to make certain periodic payments to the legal representative of the taxpayer and the parents of the taxpayer. As a consequence of death, payments might also be made to the estate of the taxpayer and/or the estate of either of her parents. The defendants propose to assign the obligation to make the payments to a casualty insurer.

The issue is the income tax treatment of the periodic payments in the hands of the taxpayer, XXXXXXXXXX parents or the estate of one of these individuals.

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.

		960477
XXXXXXXXXX	

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX with enclosures wherein you request an advance income tax ruling on behalf of the above-named taxpayers with respect to proposed structured settlements for damages arising out of personal injuries.

You describe the facts and proposed transactions as follows:

Statement of Facts

1. XXXXXXXXXX.

2.On or about XXXXXXXXXX As a result of XXXXXXXXXX and the purported negligence of various parties in respect of her medical condition, XXXXXXXXXX suffered permanent injuries, including XXXXXXXXXX will require medical, nursing and hospital care for the rest of XXXXXXXXXX life.

3. XXXXXXXXXX (the Plaintiffs) commenced an action in the XXXXXXXXXX against XXXXXXXXXX (the Defendants).

4.The Plaintiffs have now reached an out-of-court settlement with the Defendants 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.The terms of the settlement provide, among other matters, for the following payments to be made:

(a)Commencing on XXXXXXXXXX monthly payments of $XXXXXXXXXX will be made XXXXXXXXXX The payments will be made during the lifetime of XXXXXXXXXX with indexing at the rate of 3% and a guarantee period of 20 years. These payments are to be made for the sole benefit, care and maintenance of XXXXXXXXXX and are subject to any other order the Court may make.

(b)Commencing on XXXXXXXXXX monthly payments of $XXXXXXXXXX will be made to XXXXXXXXXX for as long as they are both alive. The payments are indexed annually at the rate of 3% and are guaranteed to be made for a period of 25 years. Subsequent to the death of either XXXXXXXXXX the monthly payments will be made to the survivor during the survivor's lifetime.

Should XXXXXXXXXX die prior to the time that all the respective guaranteed payments described in (a) are made, the balance of such payments will be payable to XXXXXXXXXX with right of survivorship between them. In the event that they both predecease XXXXXXXXXX during the guarantee period, then the remaining payments will be made to the estate of XXXXXXXXXX Should XXXXXXXXXX die prior to the time that all the guaranteed payments described in (b) are made, the remaining payments will be payable to the estate of the last survivor.

6.The obligation to make the payments in 5(a) and (b) above will be met by XXXXXXXXXX by virtue of an assignment and assumption of the obligation to make such payments pursuant to an agreement (the Assignment Agreement). In consideration of XXXXXXXXXX making such payments, the Plaintiffs settle their claims against the Defendants. XXXXXXXXXX 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.With respect to the payments in 5(a) above, XXXXXXXXXX proposes to fund its obligation by the purchase of an annuity contract issued by XXXXXXXXXX With respect to the payments in 5(b) above, XXXXXXXXXX proposes to fund its obligations by the purchase of an annuity contract 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 XXXXXXXXXX; however, an irrevocable direction will be executed in respect of each annuity contract directing the issuer to make the respective payments in accordance with 5(a) or (b), 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.

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 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 Minutes of Settlement, the Judgement, and the Assignment Agreement are substantially the same as the documents submitted with your letter of January 31, 1996 and that the transaction is carried out as described herein, our rulings are as follows:

(A) We confirm that, in respect of paragraph 5(a) above, the payments which will be received by the person or persons XXXXXXXXXX or the payments that may be received by the estate of XXXXXXXXXX will not be subject to tax in the hands of XXXXXXXXXX or the estate of XXXXXXXXXX under any provision of the Income Tax Act (Canada), as it currently reads.

(B) We confirm that the payments described in paragraph 5(a) above that may be received by XXXXXXXXXX will not be subject to tax in their hands under any provision of the Income Tax Act (Canada) as it currently reads.

(C) We confirm that the payments described in 5(b) above that will be received by XXXXXXXXXX and the payments that may be received by XXXXXXXXXX or the estate of the last survivor of XXXXXXXXXX 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 Minutes of Settlement, Judgement, and Assignment Agreement are 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