30 October 1998 External T.I. E9824385 - PERSONAL INJURY (DAMAGES)

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 sustained an injury and is entitled to non-taxable benefits under a long-term disability (LTD) policy. If the periodic payments are made by the insurer in a manner that is similar to a structured settlement (paragraph 5 of IT-365R2), would the payments still be regarded as being non-taxable? (The query has been raised as a result of an excerpt in a publication)

Position: No. On the basis that the payments will not be made in accordance with written terms in the LTD policy, the payments will give rise to income in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

Reasons: Paragraph 5 of IT-365R2 only applies in respect of payments made in respect of personal injury or death.

XXXXXXXXXX 982438
M. Eisner
Attention: XXXXXXXXXX

October 29, 1998

Dear Sir:

Re: Structured Settlements and Long Term Disability Claims

This is in reply to your letter of September 17, 1998, concerning the above subject.

You have made reference to a letter issued by this Directorate on December 16, 1997 (File # 971924). In that letter you referred to a situation where an individual had paid all the premiums under a long-term disability (LTD) policy and that any benefits received by the individual under the policy would be non-taxable. The individual sustained an injury and was entitled to benefits from the insurer pursuant to the LTD policy. With respect to these circumstances, you referred to paragraph 5 of IT-365R2 “Damages, Settlement, and Similar Receipts” which describes a “structured settlement” arrangement under which periodic payments received are not regarded as being taxable. You indicated that the insurer in your situation wished to fund the payment of the benefits by making periodic payments to the individual in the same manner as that set out in paragraph 5 of IT-365R2 for structured settlements.

We indicated that the resulting “structured” periodic payments would not be made in respect of damages for personal injury as contemplated by paragraph 3 of IT-365R2. Accordingly, the periodic payments would not be regarded as being non-taxable on the basis that the arrangement is similar to a structured settlement. We also set out the view that, on the basis that the periodic payments would not be made to the individual in respect of amounts that that are due in accordance with the LTD policy, the payments would give rise to an income inclusion in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

In relation to the above comments, you have attached an excerpt from a publication commenting on structured settlements, which indicates that, for the first time, this Department has taken the position that the periodic payments in respect of a LTD claim are non-taxable.

You have asked us for our comments.

Our Comments

It appears that the excerpt has made reference to a ruling (File # 971585) that was issued by this Directorate on April 24, 1997.

A brief summary of the circumstances of that ruling is that a self-employed individual purchased an insurance policy (the Policy) that included coverage if the individual were to become totally disabled. Following a dispute with the insurer concerning whether the individual was totally disabled (it was determined that the individual suffered from a terminal illness), the insurer conceded that the individual was at all relevant times totally disabled and agreed to make payments pursuant to the Policy until the earlier of the time that the individual died or reached the age of 65. In order to ensure that the matter was finalized, the individual and the insurer entered into an agreement that was similar to a structured settlement described in paragraph 5 of IT-365R2 that would provide the individual with the payments under the Policy that were not yet due. In addition, the agreement provided that a lump sum was to be paid to the individual in respect of the entitlement under the Policy to payments relating to a prior period of time.

Pursuant to the Department’s longstanding position in paragraph 3 of Interpretation Bulletin IT-223 (copy enclosed), it was our position that the lump sum payment and the periodic payments would be non-taxable. The ultimate stream of payments that would be received by the individual in the aforementioned ruling would equal the stream of payments that the individual was entitled to under the Policy. Paragraph 3 of IT-223 has always indicated that such benefits are non-taxable, regardless of whether such benefits, under the terms of the policy, are lump sum or periodic payments. We also note that if payments had not been made to the individual in accordance with the Policy, it would have been our view, consistent with the view set out in our letter of December 16, 1997 sent to you, that the payments would give rise to an income inclusion in the hands of the individual to the extent provided for in respect of annuity contracts under the Income Tax Act.

We trust that these comments will be of assistance to you.

Yours truly,

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