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 (the Plaintiff) was a passenger in an automobile when it was involved in an accident with another vehicle. The Plaintiff sustained personal injuries. The Plaintiff commenced an action against the owner of the other vehicle. However, the owner of the other vehicle was underinsured and a vehicle insurance policy (it included an S.E.F. 44 endorsement) had been issued by a casualty insurer (the Insurer) in respect of the vehicle in which the Plaintiff was a passenger. As a consequence of the endorsement, the Plaintiff is entitled to compensation in respect of XXXXXXXXXX damages and loss sustained as a result of the accident. Pursuant to an out-of-court settlement, the Insurer has agreed to make certain periodic payments to the Plaintiff or the Plaintiff's estate.
The issue is the income tax treatment of the periodic payments in the hands of the Plaintiff or the Plaintiff's 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 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 was born on XXXXXXXXXX and currently resides within the jurisdiction of the XXXXXXXXXX Tax Services Office.
2.On or about XXXXXXXXXX was a passenger in XXXXXXXXXX which was involved in an accident with another vehicle. The vehicle in which XXXXXXXXXX was a passenger was owned by XXXXXXXXXX and being operated by XXXXXXXXXX. The other vehicle was being operated by XXXXXXXXXX and was owned by XXXXXXXXXX. As a result of the accident, XXXXXXXXXX sustained severe personal injuries.
3.(a)XXXXXXXXXX (the Plaintiffs) commenced an action (Action No. XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against XXXXXXXXXX insurer is XXXXXXXXXX.
(b)XXXXXXXXXX were underinsured in relation to the injuries sustained by XXXXXXXXXX. However, a vehicle insurance policy had been issued by XXXXXXXXXX included an S.E.F. 44 Family Protection Endorsement. Pursuant to the endorsement, XXXXXXXXXX is entitled to compensation in respect of XXXXXXXXXX damages and loss sustained as a result of the accident.
(c)As indicated in 4 and 5 below, XXXXXXXXXX wish to proceed with a settlement arrangement with respect to the injuries sustained by XXXXXXXXXX.
4.The Plaintiffs have now reached an out-of-court settlement with XXXXXXXXXX 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 settlement provide, among other matters, for payment to XXXXXXXXXX legal representative, of lifetime monthly payments, commencing on XXXXXXXXXX with indexing at 3% per annum and a guarantee period of 40 years. 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. The payments will be in respect of damages for personal injury sustained by XXXXXXXXXX.
6.The obligation to make the payment in 5 above will be met by XXXXXXXXXX. In consideration of XXXXXXXXXX making such payments, the Plaintiffs settle their claims against 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 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 XXXXXXXXXX; however, an irrevocable direction will be executed in respect of the annuity contract directing the issuer to make the payments directly to XXXXXXXXXX legal representative, 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 requested ruling is given.
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 XXXXXXXXXX in respect of the injuries of XXXXXXXXXX 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 monthly payments described in paragraph 5 above, which will be received by XXXXXXXXXX legal representative, or the estate of XXXXXXXXXX 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.
John F. Oulton
Business and Publications Division
Income Tax Rulings and
Policy and Legislation Branch
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