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:
1) Can a structured settlement be designed over a 10 year term where at the end of the term, the principal is rolled over to a new structured settlement if interest rates have increased. If interest rates have not increased, the Claimant can wait to receive the funds and later purchase a life annuity.
2) As part of a settlement can the purchase of a life insurance on the parent caregiver be paid from the annuity and if death of the parent occurs, the life insurance proceeds would be paid to an annuity insurer to purchase a structured settlement to cover future caregiver costs?
Position TAKEN:
1) No, must be specified in the original agreement.
2) Not considered before, and we will review if submitted in the form of an advance tax ruling request.
Reasons FOR POSITION TAKEN:
920363, IT365R2
XXXXXXXXXX 2000-003209
C. Tremblay
Attention: XXXXXXXXXX
September 29, 2000
Dear Sirs:
Re: Structured Settlement
We are replying to your letter of June 7, 2000, wherein you requested our opinion on two structured settlement concepts. You ask whether the concepts you propose are workable under the requirements of Interpretation Bulletin IT-365R2.
In your first proposed concept, you hope to alleviate a financial burden in the future that may come from insufficient funding, low interest rates, an infant or a very young claimant. In order to meet current financial needs, you propose a short term structured settlement be designed, for example over a 10 year period of time and at the end of that time, if there is a sharper increase in annuity rates, it could be rolled back into another structured settlement of the same or different design. The increase in interest/annuity rates would generate a higher payment stream to meet needs. If annuity rates remain the same or have lowered, then the structured settlement at that point in time would be paid out and at some point in the future, an amount would be used to purchase a lifetime annuity for the claimant. The claimant may be 10, 20 or 30 years older and the life annuity might generate sufficient payments to better meet continuing future needs. To meet the ownership requirements of paragraph 5 of IT-365R2, an agreement at the time of settlement would be drafted in which the payor (i.e. the casualty insurance company) would agree to continue ownership of the annuity contract and the contingent liability of the ongoing settlement. At the time of the rollover into the new structured settlement, the funds would not be payable to the claimant unless a new structured settlement is not attractive.
In the second proposed concept, you consider situations that involve a brain damaged young person or quadriplegic which require long term personal care. In many of those cases the caregiver is a parent. With the death of the parent/caregiver, a professional service would be required to look after the claimant but in many cases there is no money available to pay for this service. The need for additional funds only arises upon the death of the parent/caregiver. As part of the settlement, the purchase of a life insurance policy on the parents(s)/caregiver would be made. The cost of the life insurance would be paid from an annuity, assuring the policy will never lapse. When the death of the parent(s)/caregiver occurs, the life insurance proceeds would be paid to an annuity issuer to purchase a structured settlement that will provide a stream of payments which would sufficiently cover the cost of future care of the claimant.
With respect to your first proposal, we would need to review all the relevant agreements before we can give a definitive opinion with respect to the income tax consequences of a particular arrangement. Furthermore, in the brief outline you provided there are missing details and, consequently, it is difficult for us to get a clear understanding of the arrangement you are contemplating. For example, it appears that the claimant will have physically received the full settlement by the end of the first 10 year period. Therefore, it is not clear how the casualty insurer can be considered to have retained ownership of those funds. Secondly, we were not provided with details as to how the actual settlement agreement would be worded with respect to the amount of damages actually being awarded. It appears that you are contemplating a settlement that would be worded in a manner that the exact amount of the future stream of periodic payments is not known at the time of settlement, which generally would be a concern to us. It sounds like the true nature of this arrangement is to obtain the same flexibility, without the tax consequences, as a claimant who is entitled to a lump sum settlement and thus has total control over the investment of that settlement. If our general understanding of your proposal is correct, our initial reaction is that it would not comply with the requirements of IT-365R2.
With respect to your second proposal, we would be prepared to give consideration to such an arrangement if it was received in the form of a request for an advance income tax ruling. At this stage, we are not in a position to give definitive comments regarding the tax consequences of this particular arrangement without the opportunity of reviewing all documentation. However, our initial reaction is that the life insurance policy appears to be part of the casualty insurer's funding arrangement with respect to an award of damages that may increase upon a possible future event (i.e. the death of a parent/caregiver). We would point out, however, there would likely be issues that would need to be resolved once we had the opportunity to review the "draft" contracts. For example, and not intending to limit our concern to just this one issue, the life insurance policy would likely have to be worded in a manner that it terminates immediately upon the death of the claimant in the event that the claimant pre-deceases his parent/caregiver and that no proceeds would be payable to any party from that policy.
We trust our comments are of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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