Principal Issues: An individual (Claimant) suffered personal injuries as a result of a motorcycle accident. The Claimant commenced an action for damages against the driver (Defendant). Pursuant to an out of court settlement, the Defendant's Insurer will purchase a single-premium annuity contract with a life insurance company (Lifeco) to provide the proposed periodic payments to be received under a structured settlement arrangement. The Insurer will direct Lifeco to pay the periodic payments under the annuity contract to the Claimant. Will such payments be taxable in the hands of the recipient?
Position: No.
Reasons: The terms of the structured settlement are consistent with the CRA's position as set out in Interpretation Bulletin IT-365R2.
XXXXXXXXXX 2006-021832
XXXXXXXXXX, 2007
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 the proposed structured settlement for damages arising out of personal injuries suffered by the Claimant.
To the best of your knowledge, and that of the Claimant, none of the issues described 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 tax return of the Claimant or a related person;
(iii) under objection by the Claimant or a related person;
(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") to the Claimant or to a related person; nor
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.
Our understanding of the facts and proposed transaction is as follows:
Facts
1. The Claimant was born on XXXXXXXXXX and currently resides in the City of XXXXXXXXXX in the Province of XXXXXXXXXX within the jurisdiction of the XXXXXXXXXX Tax Services Office.
2. The Claimant was injured in a motorcycle accident which occurred on or about the XXXXXXXXXX day of XXXXXXXXXX. As a result of the accident, the Claimant sustained catastrophic personal injuries.
3. The Claimant commenced Action No. XXXXXXXXXX (the "Action") in the Court of Queen's Bench of XXXXXXXXXX, claiming damages against the persons named therein. On the XXXXXXXXXX of XXXXXXXXXX, the Claimant discontinued her claim against all of the persons initially named in the Action, with the exception of the driver of the motorcycle (the "Defendant"). XXXXXXXXXX (the "Insurer") was, at all material times, the liability insurer of the Defendant.
4 The Claimant has now reached an out-of-court settlement with the Defendant with respect to her claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement described in 5 below.
5. (a) The terms of the settlement in respect of damages for personal injury provide, among other matters, for payment to the Claimant of the following:
i) commencing XXXXXXXXXX, lifetime annual payments of $XXXXXXXXXX, with a guarantee period of XXXXXXXXXX years, and
ii) guaranteed lump sum payments of $XXXXXXXXXX payable XXXXXXXXXX and $XXXXXXXXXX payable XXXXXXXXXX.
(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 obligation to make the payments in 5 will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant agrees to settle her claims against the Defendant. The Insurer will be responsible for making, or causing to be made, all payments described in 5 above. Each payment 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.
7. In support of the payments described in 5(a)(i) and (ii) above, the Insurer will apply for and purchase a single premium annuity contract issued by the XXXXXXXXXX ("Lifeco"). The annuity contract will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the contract will be the Insurer, however, the Insurer will give an irrevocable direction for Lifeco to make the payments in accordance with 5(a)(i) and (ii) above to the Claimant or, in the event of the death of the Claimant, to the estate or named beneficiaries of the Claimant.
Proposed Transaction
9. The Claimant proposes to enter into a settlement agreement (the "Structured Settlement Agreement and Release") containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
10. The purpose of the proposed transaction is to settle the claim for damages made by the Claimant in respect to the 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 Structured Settlement Agreement and Release are 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 her estate or named beneficiaries, 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.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the Structured Settlement Agreement and Release is executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch