7 July 1996 Income Tax Severed Letter 9619943 - 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:

XXXXXXXXXX the taxpayer XXXXXXXXXX and sustained severe personal injuries XXXXXXXXXX. An action was commenced by the taxpayer, the taxpayer's wife, and the taxpayer's children. As part of the negotiations in respect of Plaintiffs' claims, the Plaintiffs' legal counsel made an offer (a total lump sum amount) to the Defendants

XXXXXXXXXX

Pursuant to the settlement arrangement, the defendant has agreed to make periodic payments to the taxpayer's wife and children (the Plaintiffs). With the consent of the taxpayer's wife and children, the obligation to make the payments will be assigned to two casualty insurers.

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

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:

Until the settlement is approved by the XXXXXXXXXX the taxpayer's wife and children are not considered to have a legal right to receive any amount.

The assignment of the obligations from one casualty insurer to another casualty insurer is consistent with previous favourable rulings that were granted.

The terms of the settlement arrangement are considered to be consistent with the Department's position set out in paragraphs 3 and 5 of IT-365R2.

XXXXXXXXXX961994 XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling Structured Settlement XXXXXXXXXX

We are replying to your letters of XXXXXXXXXX submitted by XXXXXXXXXX concerning your request for an advance income tax ruling on behalf of the above-named taxpayers with respect to a structured settlement for damages arising out of personal injuries suffered by XXXXXXXXXX (Individual D).

You describe the facts and proposed transactions as follows:

Statement of Facts

1. Individuals A, B, and C were respectively born on XXXXXXXXXX and presently reside in XXXXXXXXXX Individual D is the father of Individuals B and C, and the husband of Individual A.

2. On or about XXXXXXXXXX Individual D was XXXXXXXXXX As a result of this incident, Individual D sustained permanent disabling injuries and XXXXXXXXXX.

3. Individual D, by his Committee, Individual A, Individual A personally, Individual B and Individual C, by their Litigation Guardian, Individual A, XXXXXXXXXX commenced an action in the Supreme Court of XXXXXXXXXX against Company X and XXXXXXXXXX (Individual M) (the Defendants).

4. The Plaintiff and Defendants have agreed to a settlement of the action, 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, in respect of damages for personal injury, provide, among other matters, for the following payments to be made:

(i)XXXXXXXXXX lifetime monthly payments of $XXXXXXXXXX and a guaranteed period of XXXXXXXXXX (ii)XXXXXXXXXX annual guaranteed payments of $XXXXXXXXXX

(iii)XXXXXXXXXX annual guaranteed payments of $XXXXXXXXXX

(b)Should Individual A, B, or C die prior to the time that all the respective guaranteed payments have been made, the balance of such payments will be payable to their estates.

6. The obligation to make the payments to Individual A in 5 above, will be met by XXXXXXXXXX (Casualty Co. Y) by virtue of an assignment by Company X with respect to its obligations to make those payments. Individual A will consent to the assignment and assumption. The obligation to make the payments to each of Individuals B and C in 5 above, will be met by XXXXXXXXXX (Casualty Co. Z) by virtue of an assignment by Company X with respect to its obligations to make the payments. Each of Individuals B and C, by Individual A, will consent to the assignment and assumption. In consideration of Casualty Co. Y and Casualty Co. Z making such payments, the Plaintiffs settle their claims against the Defendants. Casualty Co. Y and Casualty Co. Z 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. Casualty Co. Y proposes to fund its obligations to make the payments to Individual A in 5 above by the purchase of an annuity contract issued by XXXXXXXXXX (Insurance Co. A). Casualty Co. Z proposes to fund its obligations to make the payments to Individuals B and C in 5 above by the purchase of annuity contracts issued by XXXXXXXXXX (Insurance Co. B). Each annuity contract will be non-commutable, non-assignable and non- transferable.

8. The owner and annuitant (beneficiary) under the annuity contract issued by Insurance Co. A will be Casualty Co. Y and the owner and annuitant (beneficiary) under the annuity contracts issued by Insurance Co. B will be Casualty Co. Z.. However, irrevocable directions will be executed in respect of the annuity contracts directing the issuers to make the payments directly to the Plaintiffs or their estates, 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. It is proposed that a Judgement be issued by the XXXXXXXXXX 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 transaction are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, 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 Individuals A, B and C or their estates, 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 Judgement is executed on or before XXXXXXXXXX

Yours truly,

for Director Business and Publications Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch