25 October 1989 Internal T.I. 58557 F - Damages for Personal Injury Received in U.K.

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.

October 25, 1989

Dear Sir:

Re: 19(1)

This is in reply to your letter of August 16, 1989 concerning compensation to be received in the United Kingdom by the above-named taxpayer arising out of a personal injury claim.

As we understand it, the compensation will be transferred to Ontario.  You wish to know if the compensation will be subject to any form of tax, the intention being to invest it in Canada for the taxpayer's benefit until be attains 18 years of age.

The particular circumstances outlined in your letter on which you have asked for our views are a factual situation involving a specific taxpayer.  As explained in Information Circular 70-6R (copy enclosed), it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling.  Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents.  We are therefore not in a position to give you a definitive answer to your question.  However, we can offer you the following general comments which may be of assistance to you.

In general, amounts received as damages in respect of personal injury or death will be excluded from income under common law principles.  An award of damages payable in periodic instalments is not considered by Revenue Canada, Taxation to be an annuity contract and the periodic payments are not considered to be annuity payments for purposes of the Income Tax Act (the "Act").  However, where an annuity contract is purchased by the claimant with the proceeds of a lump sum award, the annuity contract will give rise to income in the claimant's hands.  If the annuity contract is purchased within the context of a structured settlement, the annuity payments will not be taxable in the claimant's hands.

Income earned on a damage award, such as interest, is included in the taxpayer's income.  There are two exceptions to this.  One is where the interest can be characterized as pre-judgement interest.  The second exception is found in paragraphs 81(1)(g.1) and (g.2) of the Act.  These two paragraphs exempt from tax the income of a taxpayer from particular sources for taxation years during any part of which the taxpayer was under 21 years of age. To qualify for this exemption the income must, during the particular taxation years, be derived from one or more of the following sources:

(a)      property received by or on behalf of a taxpayer who is under 21 years of age as an award of, or pursuant to an action for, damages in respect of the taxpayer's physical or mental injury,

(b)      property substituted for property described in (a),

(c)      a capital gain derived from the disposition of property described in (a) or (b), or

(d)      invested income that was by virtue of paragraph 81(1)(g.1) or (g.2) of the Act not required to be included in the taxpayer's income for a particular taxation year described above.

For the purposes of paragraphs 81(1)(g.1) and (g.2) of the Act, income will include income received and receivable and income accrued (i.e. earned but not received) up to, but not beyond, the end of the taxation year in which the taxpayer attains the age of 21 years.

We have enclosed a copy of IT-365R2 for your reference and would refer you to paragraphs 2 through 7 in particular.

We trust the above is of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch