30 November 1997 Ruling 9802853 - 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:

The Claimant sustained severe personal injuries in the course of being born as a result of the purported negligence of hospital staff. Pursuant to an out-of-court settlement, the defendants agree to pay periodic payments to the Claimant, and if the Claimant dies within the guarantee period, to the Claimant's estate, the Claimant's parents, the survivor of the parents, or the estate of the last surviving parent, as the case may be. The obligation to make the payments will be made by an assignee by virtue of an assignment by the defendants of their obligations to make the payments.

The issue is the income tax treatment of the periodic payments.

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 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 980285
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above individuals 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 with the Parents. The Claimant's mother and father, who are the Parents, were respectively born on XXXXXXXXXX.

2. In the course of the Claimant's birth, the Claimant sustained personal injuries (including intellectual and physical impairment) on or about XXXXXXXXXX at a hospital.

3. The Claimant commenced an action XXXXXXXXXX against various individuals and XXXXXXXXXX (the "Defendants").

4. The Claimant has now reached an out-of-court settlement with the Defendants 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) The terms of settlement in respect of damages for personal injury, provide, among other matters, for payment, commencing on XXXXXXXXXX, to the Guardians of the Claimant's property (the Parents jointly) until the Claimant reaches the age of 18 and subsequently to the Claimant (subject to any other order the court may make), of lifetime monthly payments of $XXXXXXXXXX with a guarantee period of 25 years and indexing on XXXXXXXXXX of each year based on the Consumer Price Index for Canada as published by Statistics Canada for the 12 month period ending on XXXXXXXXXX of the preceding year.

(b) Should the Claimant die prior to the time that all the respective guaranteed payments described in (a) are made and the Claimant is predeceased by the Parents, the balance of the payments will be made to the estate of the Claimant. Should the Claimant die prior to the time that all the respective guaranteed payments described in (a) are made and the Claimant is survived by either or both Parents, the balance of the guaranteed payments will be made jointly to the Parents with right of survivorship between them, or if only one of the Parents survives the death of the Claimant, the balance of the guaranteed payments will be made to that survivor of the Parents. Should the Parents die prior to the time that all the guaranteed payments have been made, the balance of the guaranteed payments will be made to the estate of the last survivor.

6. The obligation to make the payments described in paragraph 5 above will be met by XXXXXXXXXX (the "Assignee") by virtue of an assignment and assumption of the obligation to make such payments pursuant to an agreement (the "Assignment Agreement"). The Claimant, by his legal representative, will consent to the assignment and assumption. In consideration of the Assignee making such payments, the Claimant settles his claim against the Defendants. The Assignee will not, however, be released and discharged from making the payments described in paragraph 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 described in paragraph 5 above by the purchase of a single premium 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 Assignee. However, an irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make the payments in accordance with paragraph 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 Minutes of Settlement and the Assignment Agreement are substantially the same as the document submitted with your 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 person or persons in their capacity of the legal representative(s) of the Claimant, the Claimant, the Claimant's estate, the Parents or either of them, or the estate of the last survivor of the Parents, as the case may be, will not be subject to tax in their hands or the hands of the Claimant under any provision of the Income Tax Act, 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 the Assignment Agreement are executed on or before XXXXXXXXXX.

Yours truly,

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