22 April 1996 Internal T.I. 9608007 - STRUCTURED SETTLEMENTS

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 (or his estate in the event of death) became entitled to receive periodic payments pursuant a structured settlement (Paragraph 5 of IT-365R2). The individual died before the payments were made. The individual's parents are the beneficiaries of his estate. We have been requested to comment on the tax consequences in respect of the commutation of the remaining payments in the event that a court would permit such a commutation.

Position:

Comments were not provided.

Reasons:

While a court might not object to a commutation, it does not seem possible for the commutation to occur as the annuity issued to the casualty insurer in connection with the settlement arrangement is non-commutable.

		April 22, 1996

	London Tax Services Office	HEADQUARTERS
Mr. Dave Macpherson	M. Eisner
	Audit Services			(613) 957-8953
		960800

Structured Settlements

This is in reply to your memorandum of February 27, 1996 concerning the above-noted subject.

In your submission you enclosed copies of correspondence relating to a settlement for damages in respect of personal injuries sustained by XXXXXXXXXX. As described in the advance ruling provided by this Directorate dated June 17, 1988 this individual became entitled to receive three payments pursuant to the damages settlement which were to be respectively received by the Plaintiff or his estate on XXXXXXXXXX an arrangement considered to be a "structured settlement", described in paragraph 5 of IT-365R2, with the result that the three periodic payments would be non-taxable. Unfortunately, as indicated by the letter dated March 10, 1995 (XXXXXXXXXX - Barristers and solicitors) which was enclosed with your submission, the Plaintiff had deceased and the assets of his estate, which would include the damages payments, are to be devolved to his parents.

The parents' representative has asked about the tax consequences of the payments as a result of the Plaintiff's death. In addition, the parents' representative has enquired about the tax consequences of the settlement in the event that a court would permit the remaining payments to be commuted.

An important feature of a structured settlement is that the annuity purchased by the casualty insurer be non-commutable. Where payments are made under an arrangement which would otherwise be a structured settlement except that the related payments may be commutable, it is the Department's general position that the settlement involves a lump sum and that an annuity was purchased with the proceeds of the lump sum. It would follow that the related payments would be treated for income tax purposes as being ordinary annuity payments of which the income element, subject to the provisions of paragraphs 81(g.1) and (g.2) of the Income Tax Act (see paragraphs 6 and 7 of IT-365R2), would be taxable.

With respect to the commutation of the remaining payments, we would first mention that while the courts may not have any objection to the payment of a lump sum in respect of the remaining payments, the issue remains as to whether the contractual arrangement for the payment of damages can be commuted. In this regard, the annuity issued by XXXXXXXXXX in respect of the arrangement is non-commutable. In addition, it is clear that it was intended that a structured settlement be put in place at the outset and, in our view, this is in fact the case. We have, accordingly, not proceeded to consider the tax consequences of a commutation of the remaining payments. The following comments are based on the presumption that it is not possible to commute the remaining payments. We would also note that if the parents' representative believes that it is possible to commute the remaining payments, we would only be prepared to confirm the related tax consequences (as discussed in your letter dated February 26, 1996), if an advance income tax ruling request were to be submitted pursuant to Information Circular 70-6R2 and the related Special Release.

In your letter of February 26, 1996, you have made comments (page 2) concerning subsections 70(1) and (5) of the Income Tax Act and the tax treatment of the payments made subsequent to the death of the Plaintiff. We are in agreement with the comments you have made.

An exception to paragraph 5 of IT-365R2 is described in ATR-68 with respect to the part of the annuity contract that was payable to the casualty insurer subsequent to the death of the plaintiff. In the circumstances described, that part of the annuity which represented costs of future care was commutable. This exception is not applicable to the circumstances under consideration.

If you require further technical assistance, we would be pleased to provide our views.

J.A. Szeszycki
for Section Chief
Personal, Property and Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch