Principal Issues: Whether a casualty insurer is permitted to assign the ownership of a structured settlement without changing the tax-free status of the periodic payments made to the claimant.
Position: The insurer may assign or transfer the obligation, provided the claimant consents.
Reasons: See response.
XXXXXXXXXX 2019-080139 Eric Wirag, CPA, CMA March 28, 2019
Dear Mr. XXXXXXXXXX:
Re: Assignment of structured settlements
This is in reply to your email of March 18, 2019 asking for our comments regarding whether a casualty insurer is permitted to assign the ownership of a structured settlement. More specifically, you are asking whether such an assignment would alter the tax-free status of the payments made to a claimant under a structured settlement.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.
As described in Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts, a “structured settlement” is a means of paying or settling a claim for damages against an “insurer” that provides casualty insurance and insures the defendant who the claimant commenced an action against for damages, in such a way that amounts paid to the claimant as a result of the settlement are free from tax in the claimant’s hands. To create such a structured settlement the following conditions must be met:
(a) a claim for damages must have been made in respect of a personal injury or death,
(b) an agreement must be made between the claimant and the insurer that insured the defendant under which that insurer is committed (except as discussed below) to make at least periodic payments to the claimant for either a fixed term or for the life of the claimant, and
(c) the insurer must
(i) purchase a single premium annuity contract which is non-assignable, non-commutable, non-transferable (except as provided below) and designed to make payments on the dates and in the amounts specified in the agreement in (b);
(ii) make an irrevocable direction to the “issuer” (usually a life insurance company) of the annuity contract to make all payments under the contract directly to the claimant; and
(iii) remain liable to make the payments as required by the settlement agreement (i.e. the payments from the annuity contract).
Provided that all the above noted conditions are met, the insurer must report as income the interest element in the annuity contract because the annuity contract created by a structured settlement causes the insurer to be the owner and annuitant (beneficiary) under the annuity contract.
The insurer may assign or transfer the obligation to make the payments under the structured settlement as provided in the agreement in (b) to another insurer, provided the claimant consents.
An insurer may assign or transfer the ownership and annuitant of the annuity contract in (c)(i) together with its obligations in (c)(ii) and (iii) to another insurer, provided the claimant consents.
An issuer of the annuity contract in (c)(ii) may assign or transfer the annuity contract to another issuer, provided the claimant consents.
We trust our comments will be of assistance.
Yours truly,
Lita Krantz, CPA, CA
Manager, Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate