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.
XXXXXXXXXX
XXXXXXXXXX 982666
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant")
XXXXXXXXXX
We are replying in respect of your letter of XXXXXXXXXX and your submissions of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Claimant with respect to a proposed transaction related to a structured settlement arrangement entered into by the Claimant in XXXXXXXXXX.
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 Claimant was born on XXXXXXXXXX, and currently resides in XXXXXXXXXX.
2. a) The Claimant sustained personal injuries as a result of a motor vehicle accident. With respect to XXXXXXXXXX claim for the injuries, the Claimant entered into an arrangement (the “Arrangement”) in XXXXXXXXXX. The terms of the Arrangement, in respect of damages for personal injury, provided, among other matters, for payment to the Claimant of the following:
i) Commencing on XXXXXXXXXX, monthly lifetime payments of $XXXXXXXXXX with indexing at 3%; and
ii) Commencing on XXXXXXXXXX, monthly lifetime payments of $XXXXXXXXXX with indexing at 3%.
b) The payments in 2(a)(i) and (ii) above are guaranteed to be made up to and including XXXXXXXXXX. Should the Claimant die prior to the time that all the guaranteed payments are made, the balance of the payments will be payable to the Claimant's estate.
c) The Arrangement is in the nature of a “structured settlement” which is generally described in paragraph 5 of Interpretation Bulletin IT-365R2 “Damages, Settlement, and Similar Receipts”. The payments made under the Arrangement to the Claimant are non-taxable.
3. The obligation to make the payments described in paragraph 2 above is currently being met by the XXXXXXXXXX (the “Insurer”). However, pursuant to the Arrangement, the Insurer was not released and discharged from making the payments described in paragraph 2 above and each payment, to the extent thereof and only to that extent, operated as a pro tanto release and discharge of the obligation to make such payment.
4. The Insurer funded its obligation to make the payments described in paragraph 2 above by the purchase of a single premium annuity contract issued by XXXXXXXXXX (“Lifeco”). The owner and annuitant (beneficiary) under the annuity contract is the Insurer. However, pursuant to a direction executed in respect of the annuity contract, Lifeco is making the payments directly to the Claimant.
Proposed Transaction
5. It is proposed that Lifeco be irrevocably directed to make the remaining payments (the “Remaining Payments”), that would otherwise have been received by the Claimant during XXXXXXXXXX lifetime, to a trust that will be known as the XXXXXXXXXX (the “Trust”). If the Claimant dies during the guarantee period, the balance of the Remaining Payments will be made to the Claimant’s estate, as was the case under the Arrangement. The Trust will be a resident of Canada for the purposes of the Act. Pursuant to the draft copy of the terms of the Trust, the Trust will have the following features:
a) (i) The Trust is being established for the purposes of becoming the recipient of the Remaining Payments that would otherwise have been received by the Claimant during XXXXXXXXXX lifetime and to provide for the Claimant’s financial well-being during XXXXXXXXXX lifetime.
(ii) The Claimant will be described as the Settlor.
b) The Claimant will be the sole beneficiary of the Trust and the Trust will terminate on XXXXXXXXXX death. When the Claimant dies, any property held by the Trust will devolve in accordance with the terms of the Claimant’s will.
c) The Claimant, during XXXXXXXXXX lifetime, may, by deed or deeds, remove any trustee (“Trustee”) of the Trust and appoint a new Trustee. If, following the removal of a Trustee or Trustees, there is no continuing Trustee, then any trust company shall become the Trustee. XXXXXXXXXX, who are the Claimant’s parents, will be the initial Trustees.
d) (i) Subject to the use of income and realized capital gains for the payment of expenses of the Trust, the Trustees of the Trust are, yearly or as otherwise required by the Claimant, to pay to or apply on behalf of the Claimant, either the whole or such lesser amount of the remaining income and realized capital gains as the Claimant may from time to time in writing request and, even in the absence of any such request, such further amounts of income and realized capital gains as the Trustees in their discretion elect.
(ii) For the purposes of (d)(i) above, income of the Trust is its net income calculated without reference to the provisions of the Act. Realized capital gains are capital gains as calculated in accordance with the provisions of the Act.
(iii) Other than the realized capital gains that are subject to d(i) and (ii) above, the Trustees may, at their discretion, release or pay to the Claimant or apply on XXXXXXXXXX behalf any further amounts of capital from the assets of the Trust as the Trustees in their discretion decide.
e) The terms of the Trust may be amended or terminated by the Settlor but only with the consent in writing of the Trustees. However, notwithstanding that the Trust may be amended in this manner, the features described in (a)(i), (b), and (d) above will be retained within the terms of the Trust unless the Trust is terminated by the Settlor prior to XXXXXXXXXX death. In the event that the Trust is terminated, all Trust property will revert to the Claimant.
Purpose of the Proposed Transaction
6. The Claimant, as a result of a motor vehicle accident, has ambulatory problems due to partial paralysis and sustained brain injuries. As a consequence of the brain injuries, the Claimant, at times, is unable to make rational decisions, experiences a speech impairment, and suffers from a lack of short term memory. As a result, the Claimant is susceptible to suggestion and influence from outside parties. In an effort to protect the Claimant from the inappropriate influence of third parties, it is proposed that Lifeco make the Remaining Payments, that would otherwise have been received by the Claimant during XXXXXXXXXX lifetime, to the Trust. Lifeco and the Insurer are prepared to alter the Arrangement so that the Payments will be made to the Trust pursuant to an irrevocable direction.
Rulings Requested and Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
A) Subject to the Claimant being the sole beneficiary of the Trust, the payments made to the Trust by Lifeco in respect of the Remaining Payments will not be subject to tax in the hands of the Trust or the hands of the Claimant under any provision of the Act.
B) Any income or loss from the Remaining Payments or property substituted therefor (within the meaning of paragraph 248(5)(a)of the Act) held by the Trust, and any taxable capital gain or allowable capital loss from the disposition of property substituted for the Remaining Payments by the Trust shall, during the lifetime of the Claimant while XXXXXXXXXX is resident in Canada, be deemed to be income or a loss, as the case may be, or a taxable capital gain or allowable capital loss, as the case may be, of the Claimant pursuant to subparagraph 75(2)(a)(i) of the Act.
C) The Remaining Payments received by the Trust will form part of the capital of the Trust and the provisions of subsection 107(2) of the Act will apply to the distribution of such a payment or portion thereof to the Claimant provided the Trust is a personal trust as defined in subsection 248(1) of the Act at the time of the distribution.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding on the Department provided the proposed transactions are completed on or before XXXXXXXXXX.
The above rulings are 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.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
5
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