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.
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:
As a result of an automobile accident in respect of which an individual became entitled to worker's compensation, the worker's compensation board (the Board) became subrogated in respect of the individual's rights to claim damages. A settlement has now been received by the Board of which the Board is entitled to a part thereof. The remainder relates to rights of the individual with respect to personal injuries that the individual sustained.
The issue is whether the remainder can be received by the individual in the form of periodic payments which are non-taxable pursuant to paragraph 5 of IT-365R2.
Position TAKEN:
The amount may be treated as annuity payments rather than being non-taxable.
Reasons FOR POSITION TAKEN:
Pursuant to the Worker's compensation Act of New Brunswick, it appears that the worker is legally entitled to the remainder. Accordingly, the periodic payments, consistent with paragraph 2 of IT-365R2 cannot be received on a tax free basis.
950066
XXXXXXXXXX M. Eisner
Attention: XXXXXXXXXX
May 10, 1995
Dear Sirs:
Re: Structured Settlements
This is in reply to your letter of December 30, 1994 concerning a damages settlement in respect of personal injury. We apologize for the delay in responding.
You have outlined a set of circumstances in your letter that relate to an actual fact situation. In order to obtain the Department's position thereon, you should submit the relevant details to your local Tax Services Office. We are, however, providing you with the following general comments.
You are concerned with the type of situation where an individual (a pedestrian) was involved in an accident with an automobile. As a result of the circumstances of the accident, the individual received worker's compensation from the provincial worker's compensation board (the Board).
As worker's compensation was paid to the individual, the Board become subrogated in respect of the individual's rights to claim damages in respect of the accident. Since the driver of the automobile was uninsured, the claim was settled between the Board and the individual's casualty insurer as the related insurance policy included coverage for the individual in respect of the circumstances of the accident.
The Board has now received the amount of the lump sum settlement and placed it in a trust fund. The Board is entitled to a part of the lump sum settlement and the balance relates to the rights of the individual with respect to personal injuries that the individual sustained.
It is proposed that annuity payments be made to the individual under an arrangement with respect to the relevant part of the settlement amount.
The Department's general position on damages awards is set out in Interpretation Bulletin IT-365R2 "Damages, Settlement, and Similar Receipts". As indicated in paragraph 3 of IT-365R2, an award of damages that is payable to a claimant in periodic payments is not considered, with respect to the claimant, to involve an annuity contract and the related payments are not considered to be annuity payments for the purposes of the Income Tax Act. Such payments are considered to be non-taxable in the hands of the claimant. Consistent with these comments, where an award of damages is payable in periodic payments to the claimant (a lump sum damages award is not involved in relation to the periodic instalments) under an arrangement described in paragraph 5 of IT-365R2, the periodic payments are also considered to be non-taxable. On the other hand, where a claimant becomes entitled to a lump sum in respect of a damages claim and the amount is used with respect to an arrangement under which the claimant will receive periodic payments, the resulting payments received by the claimant will be regarded as being annuity payments. These payments would be subject to the provisions of section 12.2 and paragraphs 56(1)(d) and 60(a) of the Income Tax Act.
Accordingly, since the individual in the above situation is entitled to a part of the lump sum and that part of the lump sum will used with respect to an arrangement under which periodic payments will be made to the individual, the related periodic payments would be regarded as being annuity payments that are subject to the provisions of section 12.2 and paragraph 56(1)(d) of the Income Tax Act. However, a deduction for the capital element of each annuity payment would be available to the extent permitted under paragraph 60(a) of the Income Tax Act.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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