2096 Ruling 9606693 - 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 which was involved in an accident with another vehicle. The taxpayer sustained personal injuries. As a consequence of the accident, the taxpayer commenced an action against the operator and the owner (the Defendants) of the motor vehicle. Pursuant to an out-of-court settlement, the Defendants' insurer has agreed to make certain payments to the taxpayer or the taxpayer's estate.

The issue is the income tax treatment of the periodic payments in the hands of the taxpayer or the 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.

									960669
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 when it was struck by a vehicle owned by XXXXXXXXXX and operated by XXXXXXXXXX. As a result of the accident, XXXXXXXXXX sustained severe personal injuries.

3.(a)XXXXXXXXXX (the Plaintiff) commenced an action (Action number XXXXXXXXXX) in the XXXXXXXXXX against XXXXXXXXXX (the Defendants). The insurer involved is XXXXXXXXXX (the Insurer).

(b)Pursuant to the out-of-court settlement referred to in 4 below, XXXXXXXXXX will not be parties thereto. However, the action in 3(a) above will be discontinued once the settlement arrangement in 4 below has been executed. Hereinafter, the remaining defendants (XXXXXXXXXX) in respect of that action will be referred to as "the Defendants".

4.The Plaintiff has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claim subject to receipt of a favourable 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 payment to the Plaintiff of lifetime monthly payments, commencing on XXXXXXXXXX of $XXXXXXXXXX with indexing at 2% per annum and a guarantee period of 35 years. Should the Plaintiff 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 Plaintiff settles XXXXXXXXXX claim against the Defendants. 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 obligation to make the payments in 5 above by the purchase of an annuity contract issued by XXXXXXXXXX. The annuity contract will be non-commutable, non-assignable and non-transferable.

8.The owner and annuitant (beneficiary) under the annuity contract will be the Insurer; however, an irrevocable direction will be executed in respect of the annuity contract directing the issuer to make the payments directly to the Plaintiff 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.

Proposed Transaction

10.The Plaintiff proposes 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 Plaintiff against the Defendants in respect of XXXXXXXXXX injuries 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 and Release is substantially the same as the document submitted with your letter of February 19, 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 the Plaintiff 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 Minutes of Settlement and Release 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