13 November 1997 External T.I. 9719195 - 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:

1. Paragraph 5(c) of IT-365R2 (one of the conditions of a structured settlement) states that "the claimant and the casualty insurer must have reached agreement under which the latter is committed to make at least periodic payments to the claimant for either a fixed term or the life of the claimant." When a court, pursuant to the Courts of Justice Act, orders that damages in respect of personal injury or death be paid in periodic payments and the arrangement otherwise satisfies the conditions in paragraph 5 of IT-365R2, will the arrangement qualify as a structured settlement?

2. Can an arrangement qualify as a structured settlement when the related periodic payments are indexed to a fluctuating percentage rate that is linked to the Consumer Price Index published by Statistics Canada?

Position:

1. Yes. However, as is the case with all structured settlements, there is the concern that the claimant may be entitled to a lump sum which is then used to purchase the related annuity contract. The relevant circumstances can be considered on an advance income tax rulings basis.

2. Yes.

Reasons:

1. This position is consistent with the Department's position that damages in respect of personal injury or death can be paid in the form of periodic payments. However, it is a question of fact whether the arrangement described in paragraph 5 of IT-365R2. This is particularly the case with a court ordered arrangement as the court process can involve lump sum payments.

2. The use of such indexing can be consistent with a structured settlement arrangement.

								971919
XXXXXXXXXX							M. Eisner

Attention: XXXXXXXXXX

November 13, 1997

Dear XXXXXXXXXX:

Re: Income from Personal Damages Awards - Structured Settlements

This is in reply to your letter of July 10, 1997 concerning the above-noted subject. We apologize for the delay in replying.

First Concern - Court Ordered Periodic Payment of Damages

You have referred to paragraph 5 of Interpretation Bulletin IT-365R2, "Damages Settlements and Similar Payments." This paragraph describes a "structured settlement" arrangement under which damages are non-taxable in the hands of a claimant. Your concern relates to the condition set out in paragraph 5(b) of the bulletin, which states that "the claimant and the casualty insurer must have reached agreement under which the latter is committed to make at least periodic payments to the claimant for either a fixed term or the life of the claimant," (emphasis added). In relation to this condition, you have indicated that a structured payment scheme can also be the result of an Order, other than a consent order, by a court as an award of damages for personal injury or death pursuant to section 116(1)(a) of the Courts of Justice Act (Ontario), R.S.O 1990, Chap. C. 43, which you enclosed. Where the parties to such an action have not "reached an agreement" and did not settle the issue out-of-court, an award of damages, structured in the same way and following all of the other conditions set out in paragraph 5 for "structured settlements," can be ordered by a court.

It is your view that, notwithstanding that the payments will not be the result of an agreement reached by the parties by a consent order in the usual sense, the court ordered arrangement should still qualify for treatment as a structured settlement.

Our Comments on the First Concern

Generally, we agree with your view. We note that it is based on the premise that the arrangement otherwise meets the criteria described in paragraph 5 of Interpretation Bulletin IT-365R2. As in all structured settlements, there is concern that the claimant may factually be entitled to a lump sum, which is then used to purchase the related annuity contract. If this were the case, the Department's position would be determined in accordance with paragraph 3 of IT-365R2. Pursuant to Information Circular 70-6R3, we are prepared to consider a specific fact situation on an advance income tax rulings basis.

Second Concern - Structured Settlements and CPI-Linked Indexing

With respect to your second concern, you have indicated that, generally, periodic payments made to claimant under a structured settlement are indexed to a fixed percentage rate. It is your view that periodic payments made to a claimant under a structured settlement could also be indexed to a fluctuating percentage rate that is linked to the Consumer Price Index published by Statistics Canada.

Our Comments on the Second Concern

We agree with your view.

We hope that our comments are of assistance, but would caution you that they do not constitute an advance income tax ruling, and accordingly, are not binding on the Department with respect to any particular transaction.

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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