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
An individual (Claimant) sustained personal injuries as a pedestrian while involved in an auto accident. The Claimant commenced an action against the vehicle owner/driver (Defendants). Pursuant to an out of court settlement, the Defendants insurer will assign its rights and obligations to another insurance carrier who will agree to make periodic payments to the Claimant and if the Claimant dies, within a guarantee period, to the Claimant's estate.
The issue is the tax treatment of the periodic payments.
Position TAKEN
We rule that the payments will not be taxable under any provision of the Income Tax Act as it presently reads.
REASON FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with CCRA's position set out in IT-365R2.
XXXXXXXXXX 2002-011812
XXXXXXXXXX, 2002
Dear Sir:
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 taxpayer involved, none of the issues contained 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 return of the Claimant or a related person;
(iii) under objection by the Claimant or a related person;
(iv) before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) subject of a ruling previously issued by the Income Tax Rulings Directorate.
Our understanding of the facts and proposed transactions is as follows:
Statement of Facts:
1. The Claimant was born on XXXXXXXXXX and currently resides in XXXXXXXXXX within the jurisdiction of the XXXXXXXXXX District Tax Office.
2. On or about XXXXXXXXXX, the Claimant was a pedestrian and was involved in a motor vehicle accident. The Claimant was severely injured as a result of this accident.
3. The Claimant commenced an action (Action No. XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX, against persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").
4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement described in paragraph 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) the sum of $XXXXXXXXXX together with costs and disbursements in the sum of $XXXXXXXXXX;
ii) commencing XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX increasing by XXXXXXXXXX% compounded annually, with a guarantee period of XXXXXXXXXX years.
(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 Insurer will assign its rights and obligations to provide the periodic payments in paragraph 5. The obligation to make the payments in paragraph 5 will be met by XXXXXXXXXX (the "Second Insurer"). In consideration of the Second Insurer to make such payments, the Claimant agrees to settle XXXXXXXXXX claims against the Defendants.
7. The Second Insurer will fund its obligation to make the foregoing payments described in paragraph 5(a)(ii) above by purchasing a single premium annuity contract issued by 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 Second Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the Lifeco to make the payments in accordance with paragraph 5(a) above.
9. The Second Insurer will not, however, be released and discharged from making such payments and 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.
Proposed Transaction
10. The Claimant proposes to enter into a settlement agreement containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
11. The purpose of the proposed transaction is to settle the claim for damages of 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 transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the Settlement Agreement and Release and the Assignment and Assumption Agreement are substantially the same as the documents 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 XXXXXXXXXX estate, 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.
This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R4, dated January 29, 2001, issued by the Canada Customs and Revenue Agency ("CCRA"), and is binding on the CCRA provided the Settlement Agreement and Release and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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