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: Can a structured settlement annuity be transferred to another insurance company. The insurance company has not consented to the transfer.
Position: Cannot rule until there is consent.
Reasons: Casualty insurer is the owner of the annuity and can probably transfer that annuity where the claimant and the casualty insurer agree (as well in cases of bankruptcy of the casualty insurer). Short of a court order, once annuity is purchased from an issuer it would be difficult, if not impossible to fund the personal injury liability again without tax consequences. If the claimant wishes to withdraw any funds, the new annuity would be considered a regular annuity.
XXXXXXXXXX 2001-009615
C. Tremblay, CMA
September 10, 2001
Dear XXXXXXXXXX:
Re: Structured Settlement - (XXXXXXXXXX)
This is in reply to your letter of July 16, 2001 and further to our letter of July 2, 2001, and to a telephone conversation of August 7, 2001 (XXXXXXXXXX/Tremblay) concerning your request for an advanced income tax ruling on behalf of the above-noted taxpayer.
You asked whether we could rule on a proposed transaction that involves an annuity contract that is payable as a structured settlement. You proposed to have the structured settlement transferred from one casualty insurer to another casualty insurer without tax consequences. You included a copy of the annuity policy and a letter from the insurance company. However, the insurance company does not consent to such a transaction. As advised in our August 7, 2001 conversation, we cannot rule unless the policy owner, the policy issuer and the claimant all consent to the transaction. You further advised us that your client is considering application to the court to allow him to transfer the structured settlement annuity to a different insurer. Should the court rule favourably on such a motion, we invite you to resubmit the advance income tax ruling request at that later time subject to our comments below.
Generally, at the outset, in a situation involving a personal injury, a claimant is given a choice between a structured settlement annuity and a lump-sum cash amount. If the claimant chooses a structured settlement, as described in paragraph 5 of IT-365R2, designed to produce periodic payments as agreed by the parties, the payments received by the claimant are not subject to tax provided the annuity contract, among other things, is non-commutable and non-assignable. The insurer who is the owner and annuitant under the annuity contract reports as income the interest element inherent in the annuity contract. If, however, the claimant chooses the lump-sum cash amount, and then he or she decides to invest some funds in an annuity contract, the amount invested in the annuity contract is subject to tax under subsection 12.2(1) or paragraph 56(1)(d) of the Income Tax Act.
As we mentioned in our letter of July 2, 2001, we have concerns with your proposal, as it appears that the claimant intends to receive part of the settlement in cash and re-invest the remaining funds in an annuity. We caution that we will only consider an income tax ruling request where the claimant's rights under the original settlement have not been altered in any way other than a change in the payer (i.e. the casualty insurer). Further, since your proposal appears to involve a new annuity contract with a new issuer, it is our view that the terms and conditions of the new annuity contract should be identical to the one it is replacing. Accordingly, if our general understanding of your proposal is correct, it would not comply with the requirements of IT-365R2, and we would not rule favourably.
We trust that our comments are of assistance.
Yours truly,
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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