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.
Principal Issues: An individual (Plaintiff) who is a minor, suffered serious permanent injuries as a result of XXXXXXXXXX accident. The mother of the Plaintiff, on her own behalf and next friend to the Plaintiff, commenced an action for damages against XXXXXXXXXX and various other defendants. Pursuant to an out-of-court settlement, the casualty insurer of a certain defendant will assign (pursuant to an Assignment and Assumption Agreement) its rights and obligations to two assignment companies (the "Assignees"), who will each then purchase a single premium annuity contract with a life insurance company to provide the proposed periodic payments to be received under a structured settlement arrangement. The Assignees will direct the respective life insurance companies to pay the periodic payments under the annuity contract to the Plaintiff, such secondary payee(s) as may be directed by the Plaintiff or the Plaintiff's estate, as the case may be. Will such payments be taxable in the hands of the recipients?
Position: No.
Reasons: The terms of the structured settlement are consistent with the CRA's position as set out in paragraph 5 of Interpretation Bulletin IT-365R2.
XXXXXXXXXX
2011-040470
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Plaintiff") XXXXXXXXXX
We are replying to your correspondence of XXXXXXXXXX and XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the Plaintiff with respect to the proposed structured settlement for damages arising out of personal injuries suffered by the Plaintiff.
We understand that, to the best of your knowledge, and that of the Plaintiff, none of the issues described herein is:
a) in an earlier tax return of the Plaintiff or a related person;
b) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Plaintiff or a related person;
c) under objection by the Plaintiff or a related person;
d) before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; nor
e) the subject of a ruling previously issued.
Our understanding of the facts and proposed transaction is as follows:
Facts
1. The Plaintiff was born on XXXXXXXXXX and presently resides in XXXXXXXXXX , in the Province of XXXXXXXXXX . The Plaintiff's mailing address is XXXXXXXXXX . The address of the Plaintiff's tax services office is XXXXXXXXXX and the Plaintiff's taxation centre is in XXXXXXXXXX .
2. On or about XXXXXXXXXX , the Plaintiff was injured in XXXXXXXXXX accident that occurred in XXXXXXXXXX . The Plaintiff suffered serious permanent personal injuries, damages and loss as a result of the accident.
3. XXXXXXXXXX , on her own behalf and as next friend of the Plaintiff (collectively, the "Plaintiffs"), commenced an action by Amended Statement of Claim (the "Statement of Claim") filed XXXXXXXXXX in XXXXXXXXXX against the defendants, XXXXXXXXXX , the true identity and particulars of which are not presently known to the Plaintiffs), and XXXXXXXXXX (collectively, the "Defendants"). The defendant, XXXXXXXXXX (the "Defendant"), is insured by XXXXXXXXXX (the "Insurer").
4. The Plaintiffs have reached a settlement with the Defendant with respect to their claims, subject to the receipt of a favourable income tax ruling with respect to the periodic payments under the settlement, in accordance with the Settlement Agreement And Release (the "Settlement Agreement").
5. The terms of the Settlement Agreement provide for periodic payments to or for the benefit of the Plaintiff, consisting of lifetime monthly payments of $XXXXXXXXXX , without indexation, commencing on XXXXXXXXXX (the "Structure Payments"), and which Structure Payments are guaranteed to be made through XXXXXXXXXX regardless of the Plaintiff's death prior to that date.
6. The Insurer, on behalf of the Defendant, has set aside an amount to fund the Structure Payments. The Insurer, further, has assigned the funds set aside to two third party insurers, in conjunction with an assignment and assumption of the obligation to make the Structure Payments, pursuant to an agreement (the "Assignment and Assumption Agreement", collectively, the "Assignment and Assumption Agreements"). Accordingly, the obligation to make the Structure Payments will be met in part, by XXXXXXXXXX ("Assignee I") and, in part, by XXXXXXXXXX ("Assignee II") (Assignee I and Assignee II collectively, the "Assignees"). The Plaintiff has agreed to consent to the assignment and assumption. In consideration of the Assignees making their respective portions of the Structure Payments (and the other terms of the Settlement Agreement), the Plaintiffs settle their claim against the Defendants. The Assignees will not, however, be released and discharged from making their respective portions of the Structure Payments, and each payment made shall to the extent thereof and only to that extent, operate as a pro tanto release and discharge of the Assignees' obligation to make their respective portions of the Structure Payments.
7. Assignee I proposes to fund its portion of the Structure Payments by the purchase of a single premium annuity contract issued by XXXXXXXXXX ("Issuer I") and Assignee II proposes to fund its portion of the Structure Payments by the purchase of a single premium annuity contract issued by XXXXXXXXXX ("Issuer II") (Issuer I and Issuer II collectively, the "Annuity Issuers"). The annuity contracts will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the Issuer I annuity contract will be Assignee I and the owner and annuitant (beneficiary) under the Issuer II annuity contract will be Assignee II, however, an irrevocable direction will be executed in respect of the annuity contracts directing the Annuity Issuers to make such payments as follows:
i. to the Plaintiff;
ii. in the event of the Plaintiff's death before the end of the guarantee period, to such secondary payee(s) as may be directed by the Plaintiff (upon attaining the age of majority) in writing and in a form acceptable to the Annuity Issuers; and
iii. where there is no secondary payee, to the estate of the Plaintiff.
Proposed Transaction
9. The Plaintiffs propose to enter into the Settlement Agreement containing, among other matters, the provisions set forth in 5 above.
10. Notwithstanding the above, no payments under 5 above shall be made prior to the date of this ruling.
Purpose of the Proposed Transaction
11. The purpose of the proposed transaction is to settle the claims of the Plaintiffs for damages of the Plaintiffs against the Defendants in respect of the injuries to the Plaintiff, and to provide for the payment of damages in respect of such claims.
Ruling Given
Provided that the above-mentioned facts and proposed transaction are accurate and constitute complete disclosure of all the relevant facts and proposed transaction, that the Settlement Agreement and the Assignment and Assumption Agreements are substantially the same as the documents provided to us, as reflected herein, and that the proposed transaction is carried out as described herein, we confirm that the Structure Payments, as set forth in 5 above, which will be received by the Plaintiff, such secondary payee(s) as may be directed by the Plaintiff or the estate of the Plaintiff, as the case may be, as set forth in 8 above, will not be subject to tax in their hands under any provision of the Income Tax Act (the "Act"), as it presently reads.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, and is binding on the Canada Revenue Agency provided the Assignment and Assumption Agreements are executed on or before XXXXXXXXXX .
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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