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 he was struck by a motor vehicle. The individual and XXXXXXXXXX guardian commenced an action against the owner of the vehicle. Pursuant to court settlement ( XXXXXXXXXX Court proceedings involved), the defendants' insurer will agree to make periodic payments to the Claimant and XXXXXXXXXX guardian, 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 991683
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Guardian")
XXXXXXXXXX (the "Claimant")
We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Claimant and the Guardian 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 currently resides at XXXXXXXXXX.
2. On or about XXXXXXXXXX, the Claimant XXXXXXXXXX was struck by a motor vehicle. As a result of the accident, the Claimant sustained severe personal injuries.
3. The Claimant and the Guardian commenced an action (action no. XXXXXXXXXX) in the XXXXXXXXXX Court (General Division) against the persons named therein (the "Defendants"). The insurers involved was XXXXXXXXXX (the "Insurer").
4. The Claimant and the Guardian have now reached a settlement with the Defendants in respect of their claims subject to the receipt of a favourable advance income tax ruling with respect to the payments to be made pursuant to the settlement described in paragraph 5 below.
5. (a) The terms of the settlement provide in respect of damages for personal injury, amongst other matters, for the benefit of the Claimant who is a minor, to the Guardian, the monthly sum of $XXXXXXXXXX commencing on the XXXXXXXXXX and payable for XXXXXXXXXX lifetime, guaranteed a minimum of XXXXXXXXXX years to XXXXXXXXXX estate. The monthly payments will continue as long as the Claimant remains alive. On XXXXXXXXXX, the payments will double and continue for the remainder of the Claimant's lifetime. The payments are to be indexed to the annual consumer price index rate ("CPI"), to offset inflation.
(b) The terms of the settlement provide, in respect of aggravated damages due to the injury sustained by the Claimant, for the benefit of the Guardian, the monthly sum of $XXXXXXXXXX commencing XXXXXXXXXX and payable for XXXXXXXXXX, indexed to the CPI, to offset inflation.
6. The obligation to make the payments in paragraph 5(a) and 5(b) will be met by the Insurer. To make such payments, the Claimant and the Guardian agree to settle their claims against the Defendants. The Insurer will not, however, be released and discharged from making such payments 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.
7. The Insurer proposes to fund its obligation to make the foregoing payments under the settlement by purchase and issue of an 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 contract directing Lifeco to make the payments in accordance with paragraph 5 above.
Proposed Transaction
9. The Claimant and the Guardian proposes to execute the terms of the settlement arrangement containing amongst 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 and the Guardian 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 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 and XXXXXXXXXX Guardian or the Claimant's 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 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 Revenue Canada, and is binding on the Department provided the Minutes of Settlement and the Assignment Agreement are executed on or before XXXXXXXXXX.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch