Principal Issues: Whether investment income earned on amounts received under a structured settlement for a minor and deposited in a trust account is taxable.
Position: General comments only. 81(1)(g.1) and (g.2) may apply.
Reasons: 81(1)(g.1), 81(1)(g.2)
XXXXXXXXXX 2015-062031 Sandro D’Angelo April 11, 2016
Dear Mr. XXXXXXXXXX:
Re: Income Earned on Payments from a Structured Settlement
This is in reply to your correspondence of November 23, 2015, wherein you requested our comments on whether the investment income earned on amounts received under a structured settlement for a minor and deposited in a trust account are taxable.
You have indicated that XXXXXXXXXX (the “Minor”), who is now XXXXXXXXXX years old, received a personal injury award from a court settlement. The award was paid partly into a structured settlement, and the balance to a trust. Upon turning 18 years old, the Minor will start to receive monthly payments under the structured settlement. A portion of these monthly payments will be deposited in a trust account. We have not been provided with details with respect to the trust and we have been unable to reach you by phone, therefore, we can only provide general comments which we hope will be of assistance.
Our Comments:
This technical interpretation provides general comments about the provisions of the Income Tax Act (“Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.
If a structured settlement complies with all of the conditions in paragraph 5 of archived Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts, the casualty insurer is the owner of, and the annuitant (beneficiary) under, the annuity contract and must report as income the interest element inherent in the annuity contract. The payments received by the claimant (the injured party) represent non-taxable payments for damages.
However, where an amount that has been awarded for damages is held on deposit, the amount of interest earned will be included in the income of the injured taxpayer unless paragraph 81(1)(g.1) or (g.2) of the Act applies. Paragraphs 81(1)(g.1) and (g.2) exempt from tax the income of a taxpayer from particular sources for tax years during any part of which the taxpayer was under 21 years of age. To qualify for the exemption the income must, during the particular tax 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), not required to be included in the taxpayer’s income for a particular tax year.
In summary, non-taxable payments made under a structured settlement arrangement to a claimant would constitute “property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages” under paragraph 81(1)(g.1) of the Act. Therefore, generally, if a claimant could not make full use of a structured settlement payment and chose to invest the unused portion, paragraphs 81(1)(g.1) and 81(1)(g.2) of the Act, as applicable, could apply in respect of a period before the end of the year in which the claimant reached the age of 21.
We trust our comments will be of assistance.
Yours truly,
Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate