2018-0749691R3 Structured settlement

Principal Issues: Will the payments to be received pursuant to the structured settlement be taxable in the claimant's hands in the circumstances described?

Position: No.

Reasons: The terms of the structured settlement are consistent with the CRA's position as set out in paragraph 5 of IT-365R2.

Author: XXXXXXXXXX
Section: 56(1)(d)

XXXXXXXXXX                                                                                                            2018-074969

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

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

This is in reply to your letter of XXXXXXXXXX, in which you request 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.

We understand that, to the best of your knowledge, and that of the Claimant, none of the issues described herein is:

a)    in a previously filed tax return of the Claimant or a related person;

b)    being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Claimant or a related person;

c)    under objection by the Claimant or a related person;

d)    the subject of a current or completed court process involving the taxpayer or a related person; or

e)    the subject of a Ruling request previously considered by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

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

1.    The Claimant was born on XXXXXXXXXX, and presently resides in XXXXXXXXXX, in the Province of XXXXXXXXXX. The Claimant’s mailing address is XXXXXXXXXX.

2.    The Claimant’s tax services office is the XXXXXXXXXX and his taxation centre is the XXXXXXXXXX.

3.    On or about XXXXXXXXXX, the Claimant was the front seat passenger XXXXXXXXXX, the driver of the motor vehicle, XXXXXXXXXX, lost control of the vehicle causing XXXXXXXXXX (the “Accident”), which Accident resulted in severe, permanent personal injuries, damages and loss to the Claimant including XXXXXXXXXX.

4.    The Claimant requested payout of the policy limits. No Court action was commenced.

5.    XXXXXXXXXX is insured by XXXXXXXXXX.

6.    The Claimant reached a settlement with XXXXXXXXXX and XXXXXXXXXX (collectively, the “Releasees”) with respect to the Claimant’s claims, subject to receipt of a favourable income tax ruling with respect to the Structure Payments (defined in paragraph 7 below) under the settlement.

7.    The terms of the settlement provide, among other consideration, for the periodic payments to the Claimant of monthly payments starting at $XXXXXXXXXX, indexed at XXXXXXXXXX% per annum, compounded, commencing on XXXXXXXXXX and continuing to be made on the XXXXXXXXXX day of XXXXXXXXXX thereafter guaranteed for XXXXXXXXXX. All payments are guaranteed to be made and will cease at the end of the guaranteed term (the “Structure Payments”).

8.    The obligation to make the Structure Payments will be met by XXXXXXXXXX, more specifically identified in paragraph 9 below. In consideration of XXXXXXXXXX making the Structure Payments (and XXXXXXXXXX providing certain non-structure consideration called for in the Structured Settlement Release), the Claimant has agreed to settle the claims against the Releasees. XXXXXXXXXX will not, however, be released and discharged from making the Structure Payments until same are paid. Each payment made by the underwriting Annuity Issuer (identified in paragraph 8 below) shall operate as a pro tanto release and discharge of XXXXXXXXXX corresponding Structure Payment obligation.

9.    The Structure Payments will be funded by the purchase of a single premium annuity contract (the “Annuity Contract”) issued by XXXXXXXXXX (the “Annuity Issuer”) and owned by XXXXXXXXXX. The Annuity Contract will be non-assignable, non-commutable and non-transferable.

10.   XXXXXXXXXX will be the owner and annuitant (beneficiary) of the Annuity Contract.  XXXXXXXXXX will execute an irrevocable direction in respect of the Annuity Contract directing the Annuity Issuer to make the payments thereunder, as follows:

a.    to XXXXXXXXXX, Claimant; or

b.    in the event of the Claimant’s death before the end of the guarantee period, then payments will go to XXXXXXXXXX, and upon XXXXXXXXXX death then equally to XXXXXXXXXX, with right of survivorship or to such secondary payee(s) as XXXXXXXXXX, while he remains alive, may subsequently direct in writing, from time to time, to the Annuity Issuer, provided that in the absence of such direction or if there is no secondary payee living at the time of XXXXXXXXXX death, to the Estate of XXXXXXXXXX, and provided further that any such direction shall only be effective if it is in writing and in a form acceptable and delivered to the Annuity Issuer.

Proposed Transactions

The Claimant proposes to sign the Structured Settlement Release containing, among other matters, the provisions set forth in paragraphs 6, 7, 8, 9 and 10 above.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to settle the claims for damages of the Claimant against the Releasees, 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 Release is substantially the same as the documents provided to us, as reflected herein, and that the proposed transactions are carried out as described herein, we confirm that the Structure Payments, as set forth in paragraph 7 above, which will be received by the Claimant, or, in the event of the Claimant’s death before the end of the guarantee period, by the Claimant’s named secondary payee(s) or the Estate of the Claimant, as the case may be, will not be subject to tax under any provision of the Income Tax Act (Canada), R.S.C., 1985, c.1 (5th Supp.) as it presently reads.

The above advance income tax ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R7 Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016, and are binding on the Canada Revenue Agency provided that the Structured Settlement Release is executed on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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