30 November 1997 Ruling 9715853 - INSURANCE CLAIM - SETTLEMENT

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 Claimant), in connection with the Claimant’s XXXXXXXXXX business, purchased an insurance policy (the Policy) that provided the Claimant with coverage while the Claimant was totally disabled. Following a dispute with the insurer concerning whether the Claimant was totally disabled during a period of time (it was determined that the Claimant has a terminal illness), the insurer conceded that the Claimant was at all relevant times totally disabled and agreed to make payments pursuant to the Policy until the earlier of the time that the Claimant died or reached the age of 65. The issue is the income tax treatment of the periodic payments in the hands of the Claimant.

Position TAKEN:

We rule that the periodic payments will not be taxable.

Reasons FOR POSITION TAKEN:

The position is consistent with the Department’s position in paragraph 3 of Interpretation Bulletin IT-223

XXXXXXXXXX 			971585
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Policyholder")
XXXXXXXXXX

We are replying to your letters of XXXXXXXXXX, concerning an advance income tax ruling request made on behalf of the Policyholder.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person; and

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act")

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

Statement of Facts

1. The Policyholder became a XXXXXXXXXX.

2. On XXXXXXXXXX (the "Insurer") issued an insurance policy (the "Policy") to the Policyholder under which the Policyholder would be entitled to benefits in the event of the loss of income earning capacity (disability) by the Policyholder. The Policy, inter alia, provided for the payment of a monthly benefit of $XXXXXXXXXX until the age of 65 with annual increases of $XXXXXXXXXX while the Policyholder was totally disabled. The premiums paid by the Policyholder were not deducted for income tax purposes.

3. In XXXXXXXXXX, the Policyholder suffered from a medical condition, which, a number of years later, was determined to be multiple sclerosis.

4. Due to the Policyholder’s deteriorating condition, the Policyholder was forced to close the XXXXXXXXXX practice in XXXXXXXXXX. Since that time, the Policyholder has not worked as an XXXXXXXXXX and is not expected to ever resume the practice.

5. After having closed the XXXXXXXXXX practice, the Policyholder proceeded to submit a claim to the Insurer for benefits under the Policy. The Insurer proceeded to make monthly payments of $XXXXXXXXXX to the Policyholder from XXXXXXXXXX. The Insurer then ceased to make further payments on the basis that the Policyholder was not totally disabled.

6. On XXXXXXXXXX, the Policyholder commenced an action in the XXXXXXXXXX Court (General Division) (the "Court") against the Insurer. While extensive pre-trial procedures and negotiations were carried out, no judgment was issued by the Court as the Insurer and the Policyholder decided to proceed with an out-of-court settlement. In connection with the out-of-court settlement, the Insurer conceded that the Policyholder was totally disabled in XXXXXXXXXX and subsequent to that time.

Proposed Transactions

7. The Policyholder and the Insurer propose to enter into an out-of-court settlement. The terms of settlement will provide, among other matters, for payment to the Policyholder, effective XXXXXXXXXX, of monthly payments of $XXXXXXXXXX increasing in XXXXXXXXXX of that year and each subsequent year by the amount of $XXXXXXXXXX. The monthly payments will be made to the Policyholder until the Policyholder reaches the age of 65 or the Policyholder dies. In addition, the Insurer will pay the Policyholder the sum of $XXXXXXXXXX which represents payments of $XXXXXXXXXX for each of the months of XXXXXXXXXX and payments for the months of XXXXXXXXXX with the monthly payments increasing by $XXXXXXXXXX in each year commencing in XXXXXXXXXX.

8. The obligation to make the monthly payments in paragraph 7 above, will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles the claim against the Insurer in respect of the Policy. The Insurer will not be released and discharged from making the monthly payments in paragraph 7 above, and each payment shall to the extent thereof and only to that extent, operate as a release and discharge of the obligation to make such payments.

9. The Insurer proposes to fund its obligation to make the monthly payments in paragraph 7 above that will be effective from XXXXXXXXXX, by the purchase of an annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contract will be non-commutable, non-assignable and non-transferable.

10. 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 to make the payments to the Policyholder in accordance with paragraph 5 above.

Purpose of the Proposed Transaction

11. The purpose of the proposed transaction is to settle the Policyholder’s claim with respect to the Policy.

Ruling 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 Final Release is substantially the same as the document included with the submission of XXXXXXXXXX, and that the transaction is carried out as described herein, we confirm that the payments described in paragraph 7 above, which will be received by the Policyholder will not be subject to tax in the hands of the Policyholder under any provision of the Act.

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 Final Release is executed on or before XXXXXXXXXX.

The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Comments

In addition to the sum of $XXXXXXXXXX that will be paid to the Claimant pursuant to paragraph 7 above, the Insurer will pay the Claimant the sums of $XXXXXXXXXX and $XXXXXXXXXX. The ruling given does not apply to these two amounts.

Yours truly,

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