1999 Ruling 9833183 - 56(1)(D)

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 a passenger in a motor vehicle, which was involved in a single vehicle accident. The Claimant sustained personal injuries as a result of the accident. The Claimant commenced an action against one of the owners and the operator (the “Defendants”) of the vehicle. Pursuant to an out-of-court settlement, the Defendants’ insurer (the “Insurer”) will agree to make periodic payments to the Claimant during the Claimant’s lifetime, and if the Claimant dies within the guarantee period, to the Claimant's estate or named beneficiaries. The obligation to make these payments by the Insurer will be assigned, pursuant to an assignment and assumption agreement, to another casualty insurer who will make the periodic payments to the Claimant. The Claimant will agree to the assignment.

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
XXXXXXXXXX 983318
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant")
XXXXXXXXXX

We are replying to your letter of XXXXXXXXXX and the two letters dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Claimant with respect to a proposed structured settlement for damages arising out of personal injuries suffered by the Claimant.

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. On or about XXXXXXXXXX, the Claimant was a passenger in a motor vehicle, which was involved in a single vehicle accident.

3. The Claimant commenced an action (XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against the persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").

4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to the claim subject to receipt of a favourable advance income tax ruling with respect to the payments under the settlement described in paragraph 5 below.

5. (a) The terms of settlement in respect of damages for personal injury, provide, among other matters, for payment to the Claimant, commencing on XXXXXXXXXX, of lifetime monthly payments of $XXXXXXXXXX with a guarantee period of XXXXXXXXXX years and indexing on January 1 of each following year based on the Consumer Price Index for Canada as published by Statistics Canada for the 12 months ending on September 30 of the preceding year.

(b) 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 or named beneficiaries.

6. The obligation to make the payments described in paragraph 5 above will be met by XXXXXXXXXX (“Casualtyco”) by virtue of an assignment by the Insurer with respect to its obligations to make those payments. The Claimant will consent to the assignment and assumption. In consideration of Casualtyco making such payments, the Claimant settles the claim against the Defendants. Casualtyco will not, however, be released and discharged from making the monthly 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. Casualtyco proposes to fund its obligation to make the monthly 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 Casualtyco. However, an irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make the monthly payments in accordance with paragraph 5 above.

Proposed Transaction

9. 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

10. 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 Settlement Agreement is substantially the same as the document provided to us, and that the transaction is carried out as described herein, we confirm that the monthly payments described in paragraph 5 above, which will be received by the Claimant, or XXXXXXXXXX estate or named beneficiaries, 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.

The above ruling is 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

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