CRA indicates that a damages annuity to a child for a parent’s death would generally need to be under a structured settlement to be exempt

Ss. 81(1)(g.1) and (g.2) generally provide that income earned from any property acquired by or on behalf of a person, for damages in respect of physical or mental injury to that person, is exempt in computing their income until the end of the year in which that person turns 21.

Regarding damages received on behalf of a child of parents killed in an accident, CRA indicated that where the amount received was not awarded as damages in respect of mental injury suffered by the child, ss. 81(1)(g.1) and (g.2) would not apply and the investment income would be taxable. Where an annuity contract was purchased by a taxpayer or taxpayer’s representative with the proceeds of a lump-sum award received for damages for personal injury or death, the income component of the annuity could only be exempted under ss. 81(1)(g.1) and (g.2) on the same basis.

The lump-sum award could also be organized as a structured settlement, which would entail the casualty insurer being the owner of an annuity contract and reporting the interest element inherent in the annuity contract in its income. Provided the conditions in IT-365R2, para. 5 were met, the payments received by the claimant would be non-taxable.

Neal Armstrong. Summary 20 June 2023 STEP Roundtable, Q.16 under s. 81(1)(g.1).