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
An individual (Claimant) sustained personal injuries in a vehicle accident in the state of XXXXXXXXXX on XXXXXXXXXX . The Claimant commenced an action against the vehicle manufacturers. Pursuant to an out of court settlement, the Defendants will assign their rights and obligations to an assignment company who will purchase an annuity and agree to make periodic payments to the Claimant and if the Claimant dies, within a guarantee period, to the Claimant's estate.
The issue is the tax treatment of the periodic payments.
Position TAKEN
We rule 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 to be consistent with CCRA's position set out in IT-365R2.
XXXXXXXXXX 2002-012283
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant") XXXXXXXXXX
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 center in connection with a previously filed 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.
Our understanding of the facts and proposed transactions is as follows:
Statement of Facts:
1. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX.
2. The Claimant sustained serious personal injuries in an automobile accident, which occurred on XXXXXXXXXX in the United States of America.
3. The Claimant commenced an action in the State of XXXXXXXXXX against XXXXXXXXXX (collectively referred to as the "Defendants") seeking damages for injuries XXXXXXXXXX sustained in the accident.
4. The Claimant has now reached an out-of court settlement with the Defendants with respect to XXXXXXXXXX claims, and has agreed to settle the action on terms set out in a Settlement Agreement and Release.
5. (a) The terms of the settlement in respect of damages for personal injury provide, amongst other matters, for payment to the Claimant of the following:
i. a lump sum payment of (U.S.) $XXXXXXXXXX ; and
ii. the monthly sum of (U.S.) $XXXXXXXXXX per month commencing on XXXXXXXXXX and increasing at XXXXXXXXXX% compounded annually, payable and guaranteed for a term of XXXXXXXXXX years.
(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 payments in paragraph 5(a)(ii) above cannot be accelerated, deferred, increased or decreased; nor shall the Claimant have any power to sell, mortgage, encumber, or anticipate the payments by assignment or otherwise.
7. The obligation to make the payments in paragraph 5 will be made by XXXXXXXXXX (the "Assignee") as the Defendants will assign their rights and obligations to provide for the periodic payments described in paragraph 5(a)(ii) pursuant to a Qualified Assignment Release and Pledge Agreement. In consideration for the Assignee making such payments, the Claimant agrees to settle XXXXXXXXXX claims against the Defendants.
8. The Assignee will fund its obligation to make the payments described in paragraph 5(a)(ii) by purchasing a single premium annuity contract from XXXXXXXXXX ("Lifeco"), which annuity shall be non-assignable, non-commutable and non-transferable.
9. Lifeco will be the owner and the annuitant under the terms of the annuity contract; however, the Assignee will make a direction to Lifeco to make the payments described in paragraph 5(a)(ii) above directly to the Claimant.
10. While the Claimant will not be the owner of, nor will XXXXXXXXXX have ownership rights in, the annuity contract and may not assign it or otherwise use it as any form of collateral, XXXXXXXXXX will be granted a security interest in the annuity contract to the extent permitted by law in order to secure the promise of the Assignee to make the periodic payments. Further, if the Assignee failed, due to insolvency or bankruptcy, to make any of the payments described in paragraph 5(a)(ii), its ownership and control rights in the annuity will cease and shall vest in the Claimant, if any such failure to make the periodic payments is not cured by Insurer within 90 days after receiving notice of such failure from the Claimant.
11. The Assignee will not be released and discharged from making the payments described in paragraph 5(a)(ii) and each payment made 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.
12. Lifeco will provide an Irrevocable Guarantee of the Periodic Payments to be made by the Assignee to the Claimant. Assignment Company is a wholly owned subsidiary of Lifeco.
13. The Settlement Agreement and Release will be subject to the laws of the State of XXXXXXXXXX. The Qualified Assignment Release and Pledge Agreement will be subject to the laws of the State of XXXXXXXXXX . The annuity contract to be provided by the Assignee will not be a Canadian annuity contract; rather, it will be purchased in the United States and payments under the annuity contract will be made in U.S. dollars.
PROPOSED TRANSACTION:
The Claimant proposes to enter into a Settlement Agreement containing, among other matters, the provisions set forth in paragraph 5 above.
PURPOSE OF PROPOSED TRANSACTION:
The purpose of the proposed transaction is to settle the claim for damages of the Claimant against the Defendants in respect of the personal 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 the relevant facts and proposed transaction, that the Settlement Agreement and Release is substantially the same as the document 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 XXXXXXXXXX estate, as the case may be, will not be subject to tax in their hands under any provision of the Income Tax Act, as it presently reads.
This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R4, dated January 29, 2001, issued by the Canada Customs and Revenue Agency ("CCRA"), and is binding on the CCRA provided the Settlement Agreement and Release and the Qualified Assignment Release and Pledge Agreement are executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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