2016-0628941E5 interest income of a minor

Principal Issues: Do paragraphs 81(1)(g.1) and (g.2) apply to income earned on an amount paid under a structured settlement for a personal injury award?

Position: If a claimant could not make full use of a structured settlement payment and chose to invest, paragraphs 81(1)(g.1) and 81(1)(g.2) of the Act, as applicable, could apply.

Reasons: The legislation.

Author: Shea-Farrow, Nancy
Section: 56(1)(d), 81(1)(g.1) & (g.2)

XXXXXXXXXX                                                                                           2016-062894
                                                                                                                   N. Shea-Farrow

April 8, 2016

Dear Mr. XXXXXXXXXX:

Re:  Income Earned on Payments from a Structured Settlement

This is in reply to your correspondence of January 22, 2016, and our telephone conversations (XXXXXXXXXX/Shea-Farrow) in February 2016, wherein you requested our comments on whether the interest earned on amounts received under a structured settlement are taxable.

It is our understanding that a minor, who is now XXXXXXXXXX years old, received a structured settlement as a result of a personal injury award.  The amounts paid to the minor under the structured settlement are currently being held in a fund by the XXXXXXXXXX on behalf of the minor and in 2015, earned interest income.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “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 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

If a structured settlement complies with all the conditions in paragraph 5 of archived Interpretation Bulletin, IT-365R2, Damages, Settlements and Similar Receipts, the casualty insurer is the owner of, and the annuitant (beneficiary) under, the annuity contract and must report as income the interest element inherent in the annuity contract.  The payments received by the claimant (the injured taxpayer) under the structured settlement represent non-taxable payments.

However, where an amount that has been awarded for damages is held on deposit, the amount of interest earned will be included in the income of the injured taxpayer unless paragraph 81(1)(g.1) or (g.2) of the Act applies.  Paragraphs 81(1)(g.1) and (g.2) exempt from tax the income of a taxpayer from particular sources for tax years during any part of which the taxpayer was under 21 years of age. To qualify for the exemption, the income must, during the particular tax years, be derived from one or more of the following sources:

(a)   property received by or on behalf of a taxpayer who is under 21 years of age as an award of, or pursuant to an action for, damages in respect of the taxpayer’s physical or mental injury,

(b)   property substituted for property described in (a),

(c)   a capital gain derived from the disposition of property described in (a) or (b), or

(d)   invested income that was, by virtue of paragraph 81(1)(g.1) or (g.2), not required to be included in the taxpayer’s income for a particular tax year.

For the purposes of paragraphs 81(1)(g.1) and (g.2) of the Act, income will include income received and receivable and income accrued (that is, earned but not received) up to, but not beyond, the end of the tax year in which the taxpayer attains the age of 21 years.

In summary, non-taxable payments made under a structured settlement arrangement to a claimant would constitute “property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages” under paragraph 81(1)(g.1) of the Act. Therefore, if a claimant could not make full use of a structured settlement payment and chose to invest, paragraphs 81(1)(g.1) and 81(1)(g.2) of the Act, as applicable, could apply.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

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