30 November 1996 Ruling 9639843 - 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 was injured when the vehicle in which XXXXXXXXXX was a passenger, was involved in an accident. The individual sustained personal injuries. The individual commenced an action against the owner of the other vehicle. Pursuant to an out-of-court settlement, the defendant has agreed to make certain periodic payments to the individual. As a result of an assignment to which the claimant will consent, the payments will be made by a life insurance company.

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 position is considered to be consistent with the Department's position in paragraph 3 which indicates that damages paid in the form of periodic payments are not taxable.

XXXXXXXXXX							963984
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX and subsequent submissions, 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 which occurred in XXXXXXXXXX.

3.The Claimant, by XXXXXXXXXX Parent and Natural Guardian, XXXXXXXXXX, commenced an action against XXXXXXXXXX (the Defendant).

4.The Claimant has now reached an out-of-court settlement with the Defendant 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)In respect of damages for personal injury, the terms of settlement provide, among other matters, for payment to the Claimant or XXXXXXXXXX legal representative of lifetime monthly payments, commencing effective on XXXXXXXXXX, of $XXXXXXXXXX with indexing at 3% per annum and a guarantee period of 40 years. 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.

(b)The payments in (a) above cannot be accelerated, deferred, increased, or decreased by the Claimant or a payee; nor shall the Claimant or any payee be entitled to sell, mortgage, encumber, or anticipate those payments by assignment or otherwise.

6.The obligation to make the payment in 5 above will be met by XXXXXXXXXX (the Assignee) by virtue of an assignment by the Defendant and/or its insurers with respect to its obligations to make those payments. The Claimant will consent to the assignment and assumption. The Assignee will not, however, be released and discharged from making the payments in 5 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 Assignee proposes to fund its obligation to make the payments in 5 above by the purchase of an annuity contract issued by XXXXXXXXXX. The owner and annuitant (beneficiary) under the annuity contract will be the Assignee. The annuity contract will be non-commutable, non-assignable and non-transferable.

8.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 has been given.

Proposed Transaction

9.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

10.The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the Defendant 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 Settlement Agreement and Release are substantially the same as the document submitted to us, and that the transaction is carried out as described herein, we confirm that the payments described in paragraph 5 above, which will be received by the Claimant or XXXXXXXXXX legal representative, or by 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 70-6R3 dated December 30, 1996, issued by Revenue Canada, and is binding on the Department provided the Minutes of Settlement and Release 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