30 November 1995 Ruling 9632903 - 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:

An individual, who was a passenger in an automobile, was injured when the vehicle was involved in an accident with another vehicle. The individual sustained personal injuries. The individual commenced an action against the owner of the vehicle in which XXXXXXXXXX was a passenger. Pursuant to an out-of-court settlement, the owner's insurer has agreed to make two lump sum payments and certain periodic payments to the individual.

The issue is the income tax treatment of the payments in the hands of the individual or XXXXXXXXXX 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							963290
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX, wherein you requested 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.

Our understanding of the facts and proposed transactions is as follows:

Statement of Facts

1.XXXXXXXXXX (the Claimant) was born on XXXXXXXXXX and currently resides in XXXXXXXXXX.

2.On or about XXXXXXXXXX, the Claimant sustained personal injuries in an accident.

3.The Claimant commenced an action (XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against XXXXXXXXXX and certain other parties (the Defendants). The insurer of XXXXXXXXXX (the Insurer).

4.The Claimant has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claim 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 settlement in respect of damages for personal injury, provide, among other matters, for payment to the Claimant of the following:

(i) A lump sum payment of $XXXXXXXXXX;

(ii) A lump sum payment of $XXXXXXXXXX in respect of legal costs related to the claim described in 3 above; and

(iii) Effective XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX with indexing at 3% per annum and a guarantee period of 40 years.

(b)Should the Claimant 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 above will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles XXXXXXXXXX claim against the Defendants. The Insurer will not, however, be released and discharged from making the payments in 5(a)(iii) above 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 annuity contracts issued by XXXXXXXXXX (Lifeco A). 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 Lifeco A to make the payments directly to the Claimant 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 Claimant 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 Claimant against the Defendants in respect of the injuries of the Claimant 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 the Claimant or XXXXXXXXXX legal representative, or the estate of the Claimant, 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, and is binding on the Department provided the Minutes of Settlement agreement is executed on or before XXXXXXXXXX.

Yours truly,

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