1997 Ruling 9719203 - 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 (the Claimant) was injured when the vehicle, in which he was a passenger, was involved in an accident. The Claimant sustained personal injuries. The Claimant commenced an action against certain persons (the Defendants). The XXXXXXXXXX Court (General Division) rendered a decision which involved a jury. Initially, the jury awarded the Claimant lump sums. However, pursuant to XXXXXXXXXX, the judge decided that the amount awarded to the Plaintiff for future care be paid to the Claimant by way of periodic payments. One of the Defendants then appealed the decision to the XXXXXXXXXX of Appeal. Following subsequent negotiations between the legal representatives of the Defendants and the Claimant, agreement was reached on an out-of-court settlement. In relation to the decision rendered by the XXXXXXXXXX Court (General Division), the cost of the settlement to the insurer (the Insurer) was considerably less and the cost of providing periodic payments to the Claimant (by way of a structured settlement) under the out-of-court settlement is reduced by about $XXXXXXXXXX. As a result of the out-of-court settlement, the appeal to the Court of Appeal for XXXXXXXXXX will be discontinued.

The issue is the income tax treatment of the periodic payments in the hands of the Claimant, his estate, or the named beneficiary (or beneficiaries).

Position TAKEN:

We rule that the periodic payments will not be taxable under any provision of the Income Tax Act as it currently reads.

Reasons FOR POSITION TAKEN:

The Claimant was not considered to have been awarded periodic payments by the XXXXXXXXXX Court (General Division) as the judge, contrary to the wishes of the Claimant, awarded the cost of future care damages in the form of periodic payments. In addition, under the out-of-court settlement, the cost of the periodic payments to the Insurer is considerable less that the periodic scheme ordered by the XXXXXXXXXX Court (General Division). The terms of the settlement are considered to be consistent with the Department's position set out in IT-365R2 (in particular paragraphs 3 and 5).

XXXXXXXXXX							971920
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX, and the letters of XXXXXXXXXX, submitted by XXXXXXXXXX, concerning an advance income tax ruling request made on behalf of the Claimant with respect to a proposed structured settlement for damages arising out of personal injuries suffered by the Claimant.

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

Statement of Facts

1. The Claimant was born on XXXXXXXXXX, and currently resides in the XXXXXXXXXX.

2. On or about XXXXXXXXXX, the Claimant sustained personal injuries in a motor vehicle accident.

3. (a) The Claimant filed an amended statement of claim (Court File no. XXXXXXXXXX) on XXXXXXXXXX in the XXXXXXXXXX Court (General Division) against certain persons named therein (herein referred to as the Defendants). The insurer involved is XXXXXXXXXX (the Insurer).

(b) Action no. XXXXXXXXXX was heard by the XXXXXXXXXX Court (General Division) in XXXXXXXXXX with a jury which awarded lump sum amounts to the Claimant. However, pursuant to XXXXXXXXXX, the judge decided that the amount awarded to the Plaintiff for future care must be paid to the Claimant by way of periodic payments.

(c) One of the results of the decision rendered by the XXXXXXXXXX Court (General Division) was that XXXXXXXXXX (Corporation A) was held to be one of the parties that was jointly and severally liable with respect to the injuries sustained by the Claimant in circumstances where the Insurer (the Insurer insured Corporation A) was responsible for most of the damages. On XXXXXXXXXX, Corporation A appealed the decision of the XXXXXXXXXX Court (General Division) to the XXXXXXXXXX Court of Appeal on the basis that it may not be liable for any of the damages. In addition, Corporation A appealed the decision with respect to the quantum of some of the damages. Following subsequent negotiations between the legal representatives of the Defendants and the Claimant, agreement was reached on an out-of-court settlement. In relation to the decision rendered by the XXXXXXXXXX Court (General Division), the cost of the out-of-court settlement to the Insurer is approximately $XXXXXXXXXX less and the cost of providing periodic payments to the Claimant under the out-of-court settlement is reduced by about $XXXXXXXXXX. As a result of the out-of-court settlement, Corporation A will not proceed with their appeal to the Court of Appeal for XXXXXXXXXX.

4. The out-of-court settlement is subject to the receipt of a favourable advance income tax ruling with respect to the payments 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, effective XXXXXXXXXX, of lifetime monthly payments of $XXXXXXXXXX with a guarantee period of XXXXXXXXXX years and indexing in XXXXXXXXXX of each year pursuant to the Consumer Price Index for Canada as published by Statistics Canada for the 12 month period ending XXXXXXXXXX of the preceding year.

(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 the Claimant's estate or named beneficiaries. You have confirmed that no payments will be made prior to the date of this ruling.

6. The obligation to make the payments in 5 above, will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles the claim against the Defendants. The Insurer will not 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 Insurer proposes to fund its obligation to make the payments in 5 above, by the purchase of an annuity contract issued by XXXXXXXXXX (Lifeco). 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 to make the payments in accordance with 5 above.

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 Judgment is substantially the same as the document submitted with the letter of XXXXXXXXXX, 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 his legal representative, or the Claimant's estate or named beneficiaries, 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 Judgment is executed on or before XXXXXXXXXX.

Yours truly,

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

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