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's (the Claimant) father, who XXXXXXXXXX was dependant on for support, was killed in an auto accident. The Claimant along with XXXXXXXXXX Guardian commenced legal action against the insurance companies. Pursuant to an out of court settlement reflected in a draft judgement, the defendant insurer will agree to make periodic payments for XXXXXXXXXX years and provide 2 lump sum payments one when the Claimant is XXXXXXXXXX and the other when XXXXXXXXXX turns XXXXXXXXXX .
The issue is the income tax treatment of the payments under the structured settlement.
Position TAKEN
We ruled that the payments will not be taxable under any provision of the Income Tax Act as it currently reads.
REASON FOR POSITION TAKEN
The terms of the settlement are considered consistent with the Department position set out in IT-365R2 .
XXXXXXXXXX 2000-006064
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
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 in accordance with the proposed draft Judgement, with respect to the proposed structured settlement for damages arising out of death.
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 centre 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) before the Courts or, if a judgement 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.
In this letter, unless otherwise expressly stated "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) as amended.
Our understanding of the facts and the 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's father was killed as a result of fatal injuries sustained in a motor vehicle accident which occurred in XXXXXXXXXX.
3. The Claimant, a minor by XXXXXXXXXX Litigation Guardian, commenced an action in the XXXXXXXXXX Court (General Division) against XXXXXXXXXX (collectively the "Defendant Insurer") for payment of death benefits and funeral benefits which had been denied to the Claimant on the death of XXXXXXXXXX father.
4. The Claimant has now reached an out-of-court settlement with the Defendant Insurer with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement. The claim against XXXXXXXXXX is to be dismissed without costs.
5. The terms of the settlement provide, among other matters, for payment to be made to the benefit of the Claimant as follows:
a) Guaranteed monthly payments of $XXXXXXXXXX for XXXXXXXXXX years commencing on XXXXXXXXXX up to and including XXXXXXXXXX;
b) A guaranteed lump sum payment of $XXXXXXXXXX payable on XXXXXXXXXX; and
c) A guaranteed lump sum payment of $XXXXXXXXXX payable on XXXXXXXXXX.
6. The obligation of the Defendant Insurer to make the payments referred to in paragraph 5 will be met by the Defendant Insurer. In consideration of the Defendant Insurer making such payments, the Claimant settles XXXXXXXXXX claims against the Defendant Insurer. The Defendant 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 Defendant Insurer proposes to fund its obligation to make the foregoing payments under the settlement by the purchase and issue of an annuity contract issued by a federally-registered Canadian life insurer ("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 Defendant Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the Lifeco to make such payments directly to the Claimant or XXXXXXXXXX estate, as the case may be.
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 Defendant Insurer in respect of the fatal injuries of the Claimant's father and to provide for the payment of damages in respect of such claim.
Rulings Given
Provided that the above mentioned facts and proposed transactions are accurate and constitute complete disclosure of all relevant facts and proposed transactions, that the draft Judgement 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 by XXXXXXXXXX estate, as the case may be, will not be subject to tax in their hands under any provision of the 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 Judgement is executed on or before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director,
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch