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 XXXXXXXXXX. The individual commenced an action XXXXXXXXXX. Pursuant to court settlement, the defendants' insurers will agree to make periodic payments to the Claimant and if the Claimant dies within the guarantee period, 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 2000-001455
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
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 a 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 XXXXXXXXXX, the Claimant XXXXXXXXXX sustained serious and permanent personal injuries. The Claimant is considered an incomplete quadriplegic.
3. The Claimant commenced an action (XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX against the persons named therein (the "Defendants"). The insurer involved is the XXXXXXXXXX (the "Insurer").
4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claims, subject to the receipt of a favourable advance 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, amongst other matters, for payment to the Claimant of the following:
The monthly sum of $XXXXXXXXXX commencing on the XXXXXXXXXX and payable for XXXXXXXXXX years, the monthly sum of $XXXXXXXXXX commencing on the XXXXXXXXXX and payable for XXXXXXXXXX years, the monthly sum of $XXXXXXXXXX commencing on the XXXXXXXXXX, payable for XXXXXXXXXX lifetime, guaranteed a minimum of XXXXXXXXXX years, for a total guarantee period of XXXXXXXXXX years. The monthly payments will continue to the Claimant as long as XXXXXXXXXX remains alive.
(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 paragraph 5 will be met by XXXXXXXXXX ("Second Insurers") as the Insurer will be assigning it's rights and obligations to provide for the periodic payments. In consideration of the Second Insurers making such payments, the Claimant agrees to settle XXXXXXXXXX claims against the Defendants.
7. The Second Insurers will fund their obligations to make the payments referred to in paragraph 5(a) by purchasing XXXXXXXXXX single premium annuity contracts issued by XXXXXXXXXX ("Lifecos").
8. The owner and annuitant (beneficiary) under the contracts will be the Second Insurers, however, an irrevocable direction will be executed in respect of the annuity contracts directing the Lifecos to make the payments in accordance with paragraph 5(a) above. The annuity contracts will be non-commutable, non-assignable and non-transferable.
9. The Second Insurers will not, however, be released and discharged from making the payments referred to in paragraph 5(a) and each payment made 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 against the Defendants, in respect to the injuries sustained by 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 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 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 Canada Customs and Revenue Agency (the "Agency"), and is binding on the Agency provided the Minutes of Settlement and the Assignment and Assumption Agreement are executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch