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 qu1exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
An individual (the Claimant) was a passenger in a motor vehicle, which was involved in an accident. The Claimant sustained personal injuries as a result of the accident. The Claimant commenced an action against the persons (Defendants) named therein. Pursuant to an out-of-court settlement, the insurer will agree to make periodic payments to the Claimant during the Claimant's lifetime, and if the Claimant dies within the guarantee period, to the Claimant's estate or named beneficiaries. The settlement includes the Claimant's entitlement to no fault benefits in respect of income replacement benefits and medical and rehabilitation benefits under the Automobile Insurance Act (XXXXXXXXXX).
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).
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xxxxxxxxxx xxxxxxxxxx 990393 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 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:
i) is in an earlier return of the taxpayer or a related person;
ii) is 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;
iii) is under objection by the taxpayer or a related person; and
iv) is before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.
Unless otherwise stated all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act")
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.
2. On or about XXXXXXXXXX, the Claimant was a passenger in a motor vehicle that was involved in an accident. As a result of the accident, the Claimant sustained severe personal injuries.
3. The Claimant commenced actions (XXXXXXXXXX) in the Court of Queen's Bench for 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 the claim subject to 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 settlement in respect of damages for personal injury, provide, among other matters, for payment to the Claimant or XXXXXXXXXX legal representative of the following:
i) Commencing on XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX with a guarantee period up to and including XXXXXXXXXX, and indexing pursuant to the Consumer Price Index for Canada as published by Statistics Canada ("CPI")
ii) Guaranteed lump sum payments of XXXXXXXXXX;
iii) Commencing on XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX with a guarantee period up to and including XXXXXXXXXX; and
iv) Commencing on XXXXXXXXXX, lifetime monthly payments of $XXXXXXXXXX with a guarantee period up to and including XXXXXXXXXX and indexing pursuant to the CPI.
(b) Should the Claimant die prior to the time that all the 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 described in paragraph 5 above will be met by the Insurer. In consideration of the Insurer making such payments, the Claimant settles the claim against the Defendants. The Insurer will not, however, be released and discharged from making the payments described in paragraph 5 above 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 payments described in paragraph 5 above by the purchase of single premium annuity contracts issued by the XXXXXXXXXX ("Lifeco A"), XXXXXXXXXX ("Lifeco B") and XXXXXXXXXX ("Lifeco C"). The annuity contracts will be non-commutable, non-assignable and non-transferable.
8. The owner and annuitant (beneficiary) under the annuity contracts will be the Insurer. However, irrevocable directions will be executed in respect of the annuity contracts directing the life insurance companies (Lifeco A, Lifeco B and Lifeco C) to make the payments in accordance with paragraph 5 above.
Proposed Transaction
9. The Claimant proposes to execute the terms of the settlement arrangement containing, among other matters, the provisions set forth in paragraph 5 above.
Purpose of the Proposed Transaction
1O.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 Memorandum 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 legal representative, 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 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 Revenue Canada, Taxation and is binding on the Department provided the Memorandum of Settlement and Release is executed on or before XXXXXXXXXX.
The above ruling is based on the law as it presently reads and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch