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:
An individual (the Plaintiff) was a passenger in an automobile when it was involved in an accident with two other vehicles. The Plaintiff sustained personal injuries. As a consequence of the accident, the Plaintiff commenced an action against the owner and the operator of one of the vehicles and the operator (who was also the owner) of the second vehicle (Defendants). Pursuant to an out-of-court settlement, the Defendants' insurers have agreed to make two lump sum payments as well as certain periodic payments.
The issue is the income tax treatment of the 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.
XXXXXXXXXX 961316
XXXXXXXXXX, 1996
Dear Sir:
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 a passenger in a motor vehicle which was involved in an accident with two other vehicles. The vehicle in which XXXXXXXXXX was a passenger was being operated by XXXXXXXXXX and was owned by XXXXXXXXXX. One of the two other vehicles was owned and was being operated by XXXXXXXXXX and the remaining vehicle was owned 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 (Action number XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against XXXXXXXXXX (the Defendants) and XXXXXXXXXX is the insurer of XXXXXXXXXX.
(b)In XXXXXXXXXX discontinued the action in (a) above in respect of XXXXXXXXXX.
(c)XXXXXXXXXX was the name used in the action in (a) above, in the event that the vehicle owner of the vehicle being operated by XXXXXXXXXX was unknown. XXXXXXXXXX was the name used in the action in (a) above, in the event that the owner of the vehicle being operated by XXXXXXXXXX was unknown.
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 payment to XXXXXXXXXX of the following in respect of damages for personal injury:
(i) A lump sum payment of $XXXXXXXXXX;
(ii) A lump sum payment of $XXXXXXXXXX in respect of legal costs related to the claim in 3 above; and
(iii) Effective XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX with indexing at 3% per annum and a guarantee period of 25 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 payment in 5(a)(i) and (ii) above will be met by XXXXXXXXXX. The obligation to make the payments in 5(a)(iii) above will be met by XXXXXXXXXX. 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 the payments in 5(a)(iii) above and each such 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 (a)(iii) 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 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 is given.
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 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 and Release is 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 estate, as the case may be, will not be subject to tax in the hands of XXXXXXXXXX estate, 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,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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