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:
The taxpayer was a passenger in an automobile which was involved in a single vehicle accident. The taxpayer sustained personal injuries. As a consequence of the accident, the taxpayer commenced an action against the operator of the vehicle and the insurer (the Insurer) Pursuant to an out-of-court settlement, the Insurer of the vehicle has agreed to make a lump sum payment and certain periodic payments to the taxpayer, XXXXXXXXXX estate, or named beneficiaries, as the case may be.
The issue is the income tax treatment of the payments in the hands of the Plaintiffs or the respective estate.
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 paragraphs 3 and 5 of IT-365R2.
960562
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1996
Dear Sirs:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX with enclosures wherein you request an advance income tax ruling on behalf of the above-named taxpayer with respect to a proposed structured settlement for damages arising out of personal injuries suffered by the taxpayer.
You describe the facts and proposed transactions as follows:
Statement of Facts
1. XXXXXXXXXX.
2.On or about XXXXXXXXXX was a passenger in a motor vehicle which was involved in a single vehicle accident. The vehicle in which XXXXXXXXXX was a passenger was being operated by XXXXXXXXXX The accident occurred at XXXXXXXXXX in the XXXXXXXXXX when the vehicle XXXXXXXXXX As a consequence of the accident, XXXXXXXXXX sustained severe personal injuries XXXXXXXXXX.
3.(a) XXXXXXXXXX (the Plaintiff) commenced an action (Action Number XXXXXXXXXX) in XXXXXXXXXX against XXXXXXXXXX This action related to monetary damages with respect to the injuries suffered by the Plaintiff as a result of the accident. At the time of the accident, XXXXXXXXXX was insured by XXXXXXXXXX.
(b) The Plaintiff commenced a second action in XXXXXXXXXX (Action number XXXXXXXXXX) and filed therewith a Writ of Summons against XXXXXXXXXX with respect to benefits under XXXXXXXXXX.
4.By court order, XXXXXXXXXX the parents of the Plaintiff, have been appointed as Committees of the estate and affairs of the Plaintiff.
5.The Plaintiff has now reached an out-of-court settlement with XXXXXXXXXX with respect to XXXXXXXXXX claim subject to receipt of a favourable advance income tax ruling with respect to the payments under the settlement described in 6 below.
6.(a) The terms of the settlement provide, among other matters, for payment to the Plaintiff or XXXXXXXXXX legal representative of the following:
(i) A lump sum payment of $XXXXXXXXXX upon the execution of the settlement agreement;
(ii) Monthly guaranteed payments of $XXXXXXXXXX commencing on XXXXXXXXXX and ending on XXXXXXXXXX
(iii) Monthly guaranteed payments of $XXXXXXXXXX commencing on XXXXXXXXXX and ending on XXXXXXXXXX
(iv) Monthly guaranteed payments of $XXXXXXXXXX commencing on XXXXXXXXXX and ending on XXXXXXXXXX
(v) Commencing on XXXXXXXXXX lifetime monthly payments of $XXXXXXXXXX with indexing at 3% and a guarantee period up to and including XXXXXXXXXX and
(vi) Four lump sum guaranteed payments of $XXXXXXXXXX each on XXXXXXXXXX
(b) Should the Plaintiff die prior to the time that all the guaranteed payments have been made, the balance of such payments will be payable to XXXXXXXXXX estate or named beneficiaries, as the case may be.
7.The obligation to make the payments in 6 above will be met by XXXXXXXXXX In consideration of XXXXXXXXXX making such payments, the Plaintiff settles XXXXXXXXXX claims against XXXXXXXXXX will not, however, be released and discharged from making such payments 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.
8.XXXXXXXXXX proposes to fund its obligations to make the payments in 6 above by the purchase of annuity contracts issued by XXXXXXXXXX Each annuity contract will be non-commutable, non-assignable and non-transferable.
8.The owner and annuitant (beneficiary) under each annuity contract will be the XXXXXXXXXX; however, an irrevocable direction will be executed in respect of each annuity contract directing the issuer to make the payments to the Plaintiff or XXXXXXXXXX legal representative, or XXXXXXXXXX estate or named beneficiaries, as the case may be.
9.You have advised and you confirm to the best of your knowledge that none of the issues involved in this ruling request is being considered by a Tax Services office or a Tax Centre in connection with a tax return already filed and none of the issues is under objection. Further, you have confirmed that no payments will be made until the ruling has been granted.
Proposed Transaction
10.The Plaintiff proposes to execute the terms of the settlement arrangement containing, among other matters, the provisions set forth in paragraph 6 above.
Purpose of the Proposed Transaction
11.The purpose of the proposed transaction is to settle the claims for damages of the Plaintiff against XXXXXXXXXX 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 Structured Settlement Agreement and Release is substantially the same as the document submitted with your letter of February 8, 1996 and that the transaction is carried out as described herein, our rulings are as follows:
(A) We confirm that the payments set forth in paragraph 6 above which will be received by the Plaintiff or XXXXXXXXXX legal representative, XXXXXXXXXX estate, or named beneficiaries, as the case may be, will not be subject to tax in their hands under any provision of the Income Tax Act (Canada), as it presently reads.
(B) If the Plaintiff dies prior to the time that all the guaranteed payments set out in 6 above have been made, no amount in respect of the settlement arrangement referred to in 6 above will be required to be included in the Plaintiff's income by virtue of subsection 70(5) of the Income Tax Act (Canada), as it presently reads.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992 issued by the Department of National Revenue, Taxation and is binding on the Department provided the Structured Settlement Agreement and Release are executed on or before XXXXXXXXXX.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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