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 (the "Claimant"), a minor, was injured in an auto accident. XXXXXXXXXX father commenced legal action and settled out of court. Pursuant to the Settlement Agreement and Release, the child will begin to receive a monthly payment when he turns XXXXXXXXXX and the funds will be guaranteed for XXXXXXXXXX years.
The issue is the income tax treatment of the payments under the structured settlement.
Position TAKEN
We ruled that the payments will not be taxable under any provision of the Income Tax Act as it presently reads.
REASON FOR POSITION TAKEN
The terms of the settlement are considered consistent with the CCRA's position set out in IT-365R2.
XXXXXXXXXX 2000-006285
Attention: XXXXXXXXXX
XXXXXXXXXX, 2001
Dear Madam:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant")
We are replying to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the Claimant with respect to a proposed structured settlement for damages arising out of personal injuries suffered by the Claimant.
To the best of your knowledge, and that of the taxpayer involved none of the issues contained herein is:
(i) dealt with in an earlier tax return of the Claimant or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Claimant or a related person;
(iii) under objection by the Claimant or a related person;
(iv) before the Courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired; or
(v) subject of a ruling previously issued by the Income Tax Rulings Directorate.
In this letter, unless otherwise expressly stated "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) as amended.
Our understanding of the facts and proposed transaction is as follows:
Statement of Facts
1. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX.
2. On or about XXXXXXXXXX, the Claimant was involved in a motor vehicle accident and sustained serious and permanent personal injuries.
3. The Claimant, an infant by XXXXXXXXXX father and next friend, XXXXXXXXXX, and the said XXXXXXXXXX commenced an action (Action No. XXXXXXXXXX ) in the Court of Queen's Bench of XXXXXXXXXX, Judicial District of XXXXXXXXXX against the persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").
4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to the claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement described in paragraph 5 below.
5. (a) The terms of the settlement in respect of damages for personal injury provide, among other matters, for payment to the Claimant of the following:
i) the sum of $XXXXXXXXXX plus costs and disbursements in the sum of $XXXXXXXXXX;
ii) lifetime monthly payments guaranteed for XXXXXXXXXX years commencing on XXXXXXXXXX at $XXXXXXXXXX a month indexed at the consumer price index.
(b) Should the Claimant die prior to the time that all guaranteed payments are made, the balance of the payments will be payable to the Claimant's estate or named beneficiaries.
6. The obligation to make the payments referred to in paragraph 5 will be met by XXXXXXXXXX ("Second Insurer") by virtue of an assignment and assumption of the obligations of the Insurer to make such payments pursuant to the Assignment and Assumption Agreement. In consideration of the Second Insurer making such payments, the Claimant settles XXXXXXXXXX claims against the Defendants.
7. The Second Insurer proposes to fund its obligation to make the payments referred to in subparagraph 5(a)(ii) by the purchase of an annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contract will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contract will be the Second Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing Lifeco to make such payments directly to the Claimant or XXXXXXXXXX estate, as the case may be.
9. The Second Insurer will not, however, be released and discharged from making the payments referred to in paragraph 5(a) 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.
Proposed Transaction
10. The Claimant proposes to enter into a settlement arrangement containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
11. The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the Defendants in respect of the injuries sustained by the Claimant and to provide for the payment of damages in respect of such claim.
Ruling Given
Provided that the above mentioned facts and proposed transaction are accurate and constitute complete disclosure of all relevant facts and the proposed transaction, that the Settlement Agreement and Release and the Assignment and Assumption Agreement are substantially the same as the documents provided to us, and that the transaction is carried out as described herein, we confirm that the payments described in paragraph 5 above, which will be received by the Claimant or by XXXXXXXXXX estate, as the case may be, will not be subject to tax in their hands under any provision of the Act as it presently reads.
This ruling is given subject to the general limitations and qualifications set forth in Information circular 70-6R3 dated December 30, 1996, issued by the Canada Customs and Revenue Agency (the "CCRA"), and is binding on the CCRA provided the Settlement Agreement and Release and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.
Your truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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