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 (the Claimant ) sustained personal injuries when XXXXXXXXXX was a passenger in a motorcycle. The individual commenced an action against the driver owner of the XXXXXXXXXX (who sustained a fatal injury) and the driver of the second vehicle involved in the collision. Pursuant to proposed minutes of settlement, the defendants' insurer will agree to make a lump-sum payment and monthly periodic payments as well as XXXXXXXXXX periodic payments (every XXXXXXXXXX years) to the Claimant, and if the Claimant dies to the Claimant's estate.
The issue is the income 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 currently reads.
Reasons FOR POSITION TAKEN:
The terms of the settlement are considered to be consistent with the Department's position set out in IT-365R2 (in particular paragraphs 3 and 5).
XXXXXXXXXX
XXXXXXXXXX 993113
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Madam:
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, in an earlier return of the taxpayer or a related person, being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person or is under objection by the taxpayer or a related person and is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
Our understanding of the facts and proposed transactions is as follows:
Statement of Facts
1. The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX.
2. On or about the XXXXXXXXXX, the Claimant was a passenger on a motorcycle that was involved in an 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 the 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 indexed at the Consumer Price Index, with a guarantee period of 25 years and
iii) guaranteed lump sum payments of XXXXXXXXXX. If the Claimant is alive on these dates, the following lump sum payments will be made; $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 referred to in paragraph 5 will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles XXXXXXXXXX claims against the Defendants. The 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.
7. The Insurer proposes to fund its obligation to make the foregoing payments described in paragraph 5(a)(ii) and (iii) above by the purchase of 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 annuity contract will be the Insurer, however, an irrevocable direction will be executed in respect of the annuity contracts directing Lifeco to make such payments in accordance with paragraph 5(a)(ii) and (iii) above.
Proposed Transaction
9. The Claimant proposes to enter into a settlement arrangement 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 of the Claimant against the Defendants in respect of the injuries of the Claimant and to provide for the payment of damages in respect of such claim.
Rulings Requested and 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 Minutes of Settlement and Release is 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 XXXXXXXXXX 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.
This ruling is given subject to the general limitations and qualifications set forth in Information circular 70-6R3 dated December 30, 1996, issued by The Canada Customs and Revenue Agency (the "Agency") and is binding on the Agency provided the Minutes of Settlement and Release are executed on or before XXXXXXXXXX.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch