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.
The taxpayer was a passenger in an automobile which was involved in a single vehicle accident. The taxpayer sustained personal injuries. As a consequence of the accident, the taxpayer commenced an action against the operator and the owner of one of the vehicles and the owner (who was also the operator) of the other vehicle.
Pursuant to an out-of-court settlement, the insurer one of the vehicles and the insurer of XXXXXXXXXX have agreed to make certain periodic payments to the taxpayer or XXXXXXXXXX estate as the case may be.
The issue is the income tax treatment of the periodic payments in the hands of the taxpayer or the respective estate.
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.
Re: Advance Income Tax Ruling
We are replying to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of XXXXXXXXXX with respect to a proposed structured settlement for damages arising out of personal injuries suffered by XXXXXXXXXX.
You describe the facts and proposed transactions as follows:
Statement of Facts
2.On or about XXXXXXXXXX was a passenger in a motor vehicle which was involved in an accident with another vehicle. The vehicle in which XXXXXXXXXX was a passenger was owned and operated by XXXXXXXXXX. The other vehicle was owned by XXXXXXXXXX and was being operated by XXXXXXXXXX. As a result of the accident, XXXXXXXXXX sustained severe personal injuries.
3.(a)XXXXXXXXXX (the Plaintiffs) commenced an action in the XXXXXXXXXX (General Division) against XXXXXXXXXX (the Defendants). XXXXXXXXXX is insured by XXXXXXXXXX and XXXXXXXXXX are insured by XXXXXXXXXX.
(b)The action alleges, inter alia, that,
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.(a)The terms of the settlement provide, among other matters, for direct payment, in respect of damages for personal injury, to XXXXXXXXXX of the following:
(i) Commencing on XXXXXXXXXX lifetime monthly payments of $XXXXXXXXXX with indexing at 2% per annum and guaranteed to be paid for the period to and including XXXXXXXXXX.
(ii) Lump sum guaranteed payments of XXXXXXXXXX and
(iii)During the lifetime of XXXXXXXXXX lump sum payments of XXXXXXXXXX
(b)Should XXXXXXXXXX die prior to the time that all the guaranteed payments in (a) have been made, the balance of such payments will be payable to XXXXXXXXX estate.
(c)The terms of settlement also provide for the payment to XXXXXXXXXX of lifetime monthly payments, commencing on XXXXXXXXXX with indexing at 2% per annum and guaranteed to be paid for the period to and including XXXXXXXXXX. 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(a) and (b) above will be met by XXXXXXXXXX and the obligation to make the payments in 5(c) above will be met by XXXXXXXXXX. In consideration of XXXXXXXXXX making such payments, the Plaintiffs settle their claim 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.XXXXXXXXXX proposes to fund its obligations to make the payments in 5(a) and (b) above by the purchase of annuity contracts issued by XXXXXXXXXX. XXXXXXXXXX proposes to fund its obligations to make the payments in 5(c) above 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 the annuity contracts issued by XXXXXXXXXX in respect of the payments described in 5(a) and (b) above, will be XXXXXXXXXX and the owner and annuitant (beneficiary) under the annuity contract issued by XXXXXXXXXX in respect of the payments described in 5(c) above will be XXXXXXXXXX. However, an irrevocable direction will be executed in respect of each annuity contract directing the issuers to make the payments directly 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.
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 are substantially the same as the document submitted with your letter of XXXXXXXXXX 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 Minutes of Settlement are executed on or before XXXXXXXXXX.
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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