16 December 1997 External T.I. 9719245 - 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 sustained an injury and is entitled to non-taxable benefits under an long-term disability (LTD) policy. If the periodic payments are made by the insurer in a manner that is similar to a structured settlement (paragraph 5 of IT-365R2), would the payments still be regarded as being non-taxable?

Position:

No. On the basis that the payments will not be made in accordance with written terms in the LTD policy, the payments will give rise to income in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

Reasons:

Paragraph 5 of IT-365R2 only applies in respect of payments made in respect of personal injury or death.

									971924
XXXXXXXXXX							M. Eisner

Attention: XXXXXXXXXX

December 16, 1997

Dear Sirs:

Re: Structured Settlements

This is in reply to your letter of July 16, 1997, concerning the use of a "structured settlement" in relation to a long-term disability (LTD) contract with an insurer. We apologize for the delay in replying.

You have outlined a situation where an individual is insured under a LTD policy with an insurer. The individual paid all the premiums in respect of the LTD policy and any benefits paid to the individual under the LTD policy are non-taxable. The individual sustained an injury and is entitled to benefits from the insurer pursuant to the LTD policy.

You have referred to paragraph 5 of Interpretation Bulletin IT-365R2, "Damages Settlements and Similar Receipts." It describes a "structured settlement" arrangement under which, among other things, a casualty insurer agrees to make periodic payments to a claimant in respect of personal injury or death by purchasing an annuity contract, and irrevocably directs that the annuity payments be made to the claimant. The periodic payments received by the claimant are not regarded as being taxable. In relation to the above situation, you have indicated that the insurer wishes to fund the payment of the benefits by making periodic payments to the individual in the same manner as that set out in paragraph 5 of IT-365R2 for structured settlements. You have asked whether such an arrangement would result in the same tax treatment as a structured settlement, with the result that the periodic payments made to the individual would be non-taxable.

Our Comments

It is our general view that the resulting "structured" periodic payments will not be made in respect of damages for personal injury as contemplated by paragraph 3 of IT-365R2. Accordingly, the periodic payments would not be regarded as being non-taxable on the basis that the arrangement is similar to a structured settlement. Furthermore, there is no indication that the periodic payments will be made to the individual in respect of amounts that are due in accordance with the written terms of the LTD policy. On the basis that that is the case, it is our view that the payments will give rise to an income inclusion in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

The above comments are of a general nature and do not constitute a binding advance income tax ruling.

We trust that our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch