30 August 1999 External T.I. 9917085 - STRUCTURED SETTLEMENTS - LUMP SUM/ANNUITY

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:

Can XXXXXXXXXX convert a lump sum indemnity (on application of a dependant) to periodic instalments that could be paid out as a structured settlement and be non-taxable payments to the dependant.

Position TAKEN:

No

Reasons FOR POSITION TAKEN:

Does not comply with IT-365R2.

	XXXXXXXXXX 	5-991708
D.  Miller
August 30, 1999

Dear XXXXXXXXXX:

Re: Structured Settlement - xxxxxxxxxx

This is in reply to your letter of June 15, 1999, wherein you enquire whether lump sum indemnity payments due to dependants (i.e. death benefits as a result of vehicle accidents) can be made by the XXXXXXXXXX on a periodic basis under a structured settlement that would be non-taxable payments to the dependants.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this directorate only when the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. Also, it should be noted that section 241 of the Income Tax Act (the "Act") prohibits the Department from discussing specific taxpayer information without written authorization from the taxpayer. However, we can offer the following general comments.

The Department's general position on personal damages is set out in Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts (copy attached). As indicated in paragraph 3 of IT-365R2, an award of damages for personal injury or death, that is payable in periodic payments, is not considered to be an annuity contract and the related payments are not considered to be annuity payments for the purposes of the Act. Such payments are considered to be non-taxable in the hands of the claimant. Consistent with these comments, when an award of damages is payable in periodic payments (a lump sum damages payment with respect to the periodic payments is not involved) under an arrangement described in paragraph 5 of IT-365R2 that is a structured settlement, the periodic payments are also considered to be non-taxable. On the other hand, where a taxpayer becomes entitled to a lump sum in respect of a damage claim (such as the lump sum indemnities described in the pamphlet you submitted) and the amount is used with respect to an arrangement under which the taxpayer will receive periodic payments, the resulting payments received by the taxpayer will generally be regarded as being annuity payments for the purposes of the Act, rather than being non-taxable. However, an exception to these comments is set out in paragraphs 81(1)(g.1) and (g.2) of the Act, which are discussed in paragraphs 6 and 7 of IT-365R2.

We trust that these comments will be of assistance.

Yours truly,

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