Re: Structured Settlements
This is in reply to your letter of February 9, 1990 concerning the above noted subject. We regret that your letter was inadvertently mislaid.
You ask if a structured settlement annuity that contains a component invested in a variable annuity would meet the conditions required for a tax free structured settlement as provided in Interpretation Bulletin IT-365R2. You further ask if this Department would accept a structure that contains a provision for a lump sum to become payable at a future date that may not be known at the date of settlement but could be defined as occurring at a date coincident with a given circumstance.
Our comments
As discussed with you on January 22, 1990, the position outlined in paragraph 5 of IT-365R2 is the result of an administrative policy decision which, if not taken, would have required all annuity payments received for settling claims for damages to be reported as taxable annuities pursuant to the annuity provisions in the income Tax Act.
In order to qualify for the treatment outlined in the Bulletin the structured settlement must conform precisely with the conditions in paragraphs 5(a), (b) and (c) of IT-365R2. Among other things, the claimant and the casualty insurer must have reached an agreement under which the latter is committed to make at least periodic payments to the claimant for either a fixed term or the life of the claimant and the casualty insurer must purchase a single premium annuity contract which must be designed to produce payments equal to the amounts, and at the times specified in the agreement. The word "amounts" suggests dollars and not units, thus payments based on a defined number of units each year would not appear to meet the above condition. A provision for a lump sum to become payable at a future date that is not known at the date of settlement would also not appear to conform to the condition set out in the Bulletin that reads, "and at the times, specified in the agreement".
We trust our comments will prove helpful.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch