2004 Ruling 2004-0074331R3 - Structured settlement

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Are the payments to be received from a structured settlement tax free?

Position: YES, in accordance with IT-365R2

Reasons: Personal injury award - auto accident

XXXXXXXXXX 							2004-007433

XXXXXXXXXX, 2004

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
Structured Settlement
XXXXXXXXXX (the "Claimant")

We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the Claimant with respect to the 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:

(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 return of the Claimant or a related person;

(ii) under objection by the Claimant or a related person;

(iii) before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(iv) subject of a ruling previously issued by the Income Tax Rulings Directorate.

Our understanding of the facts and proposed transactions is as follows:

Statement of Facts

1. The Claimant was born on XXXXXXXXXX, and presently resides in the City of XXXXXXXXXX, in the Province of XXXXXXXXXX within the jurisdiction of the XXXXXXXXXX Tax Services Office.

2. On or about XXXXXXXXXX, the Claimant was injured when XXXXXXXXXX vehicle was in collision with another motor vehicle. As a result of this accident, the Claimant sustained serious personal injuries.

3. The Claimant commenced an action (Action No. XXXXXXXXXX) in the Court of Queen's Bench of XXXXXXXXXX, against persons named therein (the "Defendants"). The insurer involved is XXXXXXXXXX (the "Insurer").

4. The Claimant has now reached an out-of-court settlement with the Defendants with respect to XXXXXXXXXX claims, subject to receipt of a favourable income tax ruling with respect to the payments under the settlement described in paragraph 5 below.

5. The terms of the settlement provide, among other matters, for payment to the Claimant of:

(a) The sum of $XXXXXXXXXX together with costs and disbursements in the sum of $XXXXXXXXXX and

(b) Monthly payments in the amount of $XXXXXXXXXX per month commencing on XXXXXXXXXX, for the lifetime of the Claimant guaranteed to be payable for XXXXXXXXXX years.

Should the Claimant die prior to the time that all guaranteed payments are made, the balance of the payments will be payable to the Claimant's estate or named beneficiaries.

6. The Insurer proposes to fund its obligation to make the foregoing payments referred to in paragraph 5 under the settlement by the purchase and issue of a single premium annuity contract issued by XXXXXXXXXX ("Lifeco"). The annuity contracts will be non-commutable, non-assignable and non-transferable.

7. In consideration of the Insurer making such payments, the Claimant settles XXXXXXXXXX claims against the Defendants. The Insurer will not, however, be released and discharged from making such payment 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.

8. The owner and annuitant (beneficiary) under the annuity contract issued by Lifeco will be the Insurer, however, an irrevocable direction will be executed in respect of the annuity contract directing the issuers 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 Defendants in respect of the injuries of the Claimant and to provide for the payment of damages in respect of such claim.

Ruling 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 Structured Settlement Agreement and Release is substantially the same as the documents provided to us, and that the transaction is carried out as described herein, we confirm that the payments which will be received by the Claimant or XXXXXXXXXX estate, as the case may be, as set forth in paragraph 5 above, 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 70-6R5, dated May 17, 2002, issued by the Canada Revenue Agency ("CRA"), and is binding on the CRA provided the Structured Settlement Agreement and Release is executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch