2003 Ruling 2003-0013413 - STRUCTURED SETTLEMENT

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

A taxpayer suffers from a condition diagnosed as XXXXXXXXXX . The taxpayer is totally disabled and filed a disability claim with XXXXXXXXXX employer's disability insurer. The disability insurer denied liability under the insurance plan and the taxpayer commenced an action against the insurer. Pursuant to a proposed "periodic payment and release" agreement to be entered into by the taxpayer and the insurer, the taxpayer will receive a lump-sum payment and periodic payments. The insurer will assign its rights and obligations to provide for periodic payments to another insurer who will purchase a single premium annuity contract and make periodic payments to the taxpayer. Will any portion of these annuity payments be included in computing income, for income tax purposes, of the taxpayer?

Position: No.

Reasons: The terms of the settlement are consistent with the CCRA's views on amounts received as "Damages, Settlements and Similar Receipts" as discussed in IT-365R2. The assignee will be the annuitant under the annuity contract, not the taxpayer.

XXXXXXXXXX 2003-001341
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayer.

We understand that, to the best of your knowledge and that of the above taxpayer, none of the issues involved in the ruling request:

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

(a) The "Agreement" is the proposed "Periodic Payment Agreement and Release" to be entered into by the Taxpayer, the Insurer and the Assignee;

(b) The "Annuity Contract" will be the annuity contract acquired by the Assignee from the Contractor;

(c) The "Assignee" is XXXXXXXXXX;

(d) The "Contractor" is XXXXXXXXXX;

(e) The "Corporation" is a reference to XXXXXXXXXX and any of its subsidiaries and affiliates;

(f) The "Employer" is XXXXXXXXXX;

(g) The "Insurer" is XXXXXXXXXX;

(h) The "Policy" is the group disability insurance policy issued by the Insurer to the Corporation; and

(i) The "Taxpayer" is XXXXXXXXXX.

Facts

1. The Taxpayer was born in XXXXXXXXXX and currently resides in the Province of XXXXXXXXXX. The Taxpayer deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Center.

2. The Taxpayer is insured under the Policy issued by the Insurer to XXXXXXXXXX Employer. At all material times, the Taxpayer paid 100% of the premiums applicable to the Policy. The Policy, among other things, provides for long-term disability benefits.

3. In the late XXXXXXXXXX's, the Taxpayer began developing a chronic condition which was diagnosed in XXXXXXXXXX as XXXXXXXXXX associated with:

XXXXXXXXXX.

4. On or about XXXXXXXXXX, due to a continuation of the conditions outlined above, the Taxpayer was unable to perform the duties associated with XXXXXXXXXX job and was forced to cease XXXXXXXXXX full-time work. The Taxpayer was considered to be totally disabled and unable to engage in the pre-disability employment or any other gainful employment. Consequently, the Taxpayer applied for disability benefits under the Policy. The Taxpayer received payments up to and including XXXXXXXXXX. The Taxpayer was then informed that the Insurer would no longer be paying any disability benefits.

5. The disability benefits received by the Taxpayer were not included in the Taxpayer's income since the Taxpayer had paid all of the premiums ascribed to the Policy.

6. The Taxpayer commenced an action against the Insurer and filed an "Amended Statement of Claim" in XXXXXXXXXX to recover benefits wrongfully withheld, interest pursuant to the provisions of the Judgment Interest Act and costs related to the action.

Proposed Transactions

7. The Taxpayer and the Insurer wish to settle this action. Accordingly, the Insurer and the Taxpayer propose to enter into the Agreement. The Agreement includes a provision that the Insurer will pay an up-front lump sum and a provision that the Insurer will pay periodic payments.

8. In partial settlement of XXXXXXXXXX claims, the Insurer proposes to pay to the Taxpayer's solicitors, in trust for the Taxpayer, the sum of $XXXXXXXXXX. This amount will be in respect of fees and disbursements and includes the $XXXXXXXXXX payment that was paid to the Taxpayer on or about XXXXXXXXXX. Since there is no judgment, none of the lump-sum amount relates to interest under the Judgment Interest Act.

9. In addition to the lump sum described in paragraph 8 above, the Agreement will provide for guaranteed monthly payments of $XXXXXXXXXX to be paid to the Taxpayer commencing on XXXXXXXXXX and continuing for XXXXXXXXXX years and 1 month until the Taxpayer reaches the age of XXXXXXXXXX years.

10. The Insurer proposes to assign its obligation to provide for the periodic payments described in paragraph 9 above to the Assignee and the Assignee proposes to assume such obligations.

11. In support of the periodic payments, the Assignee will apply for and purchase a single premium non-commutable, non-transferable and non-assignable annuity contract from the Contractor who will provide the periodic payments described in paragraph 9 above. The Assignee will be the applicant and owner (beneficiary) under the said annuity contract.

12. The Taxpayer will be the measuring life under the Annuity Contract and the Assignee will direct irrevocably all payments under the annuity to the Taxpayer or, in the event of the death of the Taxpayer, to the Estate of the Taxpayer.

13. The Assignee will be responsible for making, or cause to be made, all payments as described in the Agreement and will make an irrevocable direction to the Contractor to make the annuity payments to the Taxpayer. The Assignee will be released from its obligations on a pro tanto basis as each payment is made. The Assignee will be responsible for reporting any interest income earned or accrued on the annuity contract.

14. None of the proposed transactions will be entered into until such time as an advance income tax ruling is provided to the Taxpayer.

Purpose of the Proposed Transactions

The Taxpayer and the Insurer wish to settle the action of the Taxpayer. The Insurer proposes to compensate the Taxpayer for XXXXXXXXXX loss by paying a lump-sum amount and agreeing to pay periodic payments until the Taxpayer reaches the age of XXXXXXXXXX. However, the Insurer wishes to transfer any obligation to make the periodic payments to the Assignee. The structuring of the proposed transactions in the manner outlined herein will ensure that the Taxpayer will receive the compensation from the Insurer on a tax-free basis, consistent with the tax treatment of the long-term disability payments had they been made pursuant to the Policy. Furthermore, the duration of the periodic payments to be paid under the Agreement will be equal to the duration of the benefits that would have been paid under the Policy. The Assignee will fund the periodic payments by purchasing the Annuity Contract.

Ruling

Provided that:

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;

(b) the proposed transactions are completed in the manner described above; and

(c) there are no other transactions which may be relevant to the rulings requested,

our ruling is as follows:

No amount received by or for the benefit of the Taxpayer pursuant to the Agreement, including the lump-sum amount described in paragraph 8 above and the periodic payments described in paragraph 9 above, will be required to be included in computing the Taxpayer's income for income tax purposes under any provision of the Income Tax Act.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Customs and Revenue Agency ("CCRA") on May 17, 2002, and are binding on the CCRA provided that the proposed transactions are initiated on or before XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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