2018-0761771R3 Structured settlement

Principal Issues: Will the lump-sum payments along with the payments to be received pursuant to the structured settlement be taxable in the claimant's hands under the circumstances described?

Position: No.

Reasons: The lump sum payments are general damages as described in Interpretation Bulletin IT-365R2, and 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                                                                       2018-076177

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
        Structured Settlement
        XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, which we received on 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 acknowledge the amended Final Structured Settlement Plan provided on XXXXXXXXXX.

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 Claimant 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 transaction and the purpose of the proposed transaction is as follows:

1.    The Claimant was born on XXXXXXXXXX.

2.    The Claimant is currently residing in XXXXXXXXXX and receiving medical care at XXXXXXXXXX.

3.    The Claimant’s parents, XXXXXXXXXX and XXXXXXXXXX (the “Parents”), are currently resident in XXXXXXXXXX for tax purposes.

4.    On XXXXXXXXXX, the Claimant became ill and was seen by XXXXXXXXXX (“Dr. XXXXXXXXXX”) at the XXXXXXXXXX (“XXXXXXXXXX Hospital”) who misdiagnosed him with XXXXXXXXXX and discharged him from the XXXXXXXXXX Hospital.

5.    On the Claimant’s plane ride to return back to his home in XXXXXXXXXX, his condition worsened.

6.    On XXXXXXXXXX, the Claimant was seen at the XXXXXXXXXX, where he was immediately given antibiotics and diagnosed with XXXXXXXXXX.  The Claimant remained in the XXXXXXXXXX until XXXXXXXXXX and required XXXXXXXXXX.

7.    On XXXXXXXXXX, the Parents, on behalf of the Claimant filed a law suit in the XXXXXXXXXX, against XXXXXXXXXX, a XXXXXXXXXX corporation doing business as XXXXXXXXXX Hospital doing business as XXXXXXXXXX., a XXXXXXXXXX corporation (collectively the “Defendants”), for damages arising from the medical negligence of Dr. XXXXXXXXXX and XXXXXXXXXX Hospital (the “Claim”).

8.    The Defendants are self-insured.

9.    The Claim was settled and pursuant to the terms of the Settlement Agreement and Release, the General Release and the Second General Release, the Defendants agreed to pay amounts for damages on account of the Claimant’s personal injuries. 

10.   After deducting legal costs, amounts to be withheld for future costs and health care liens, the net settlement proceeds for the Claimant will be XXXXXXXXXX$XXXXXXXXXX (the “Settlement Proceeds”).  The Settlement Proceeds are to be distributed in accordance with the XXXXXXXXXX, issued on XXXXXXXXXX (the “Court Order”).

11.   Of the Settlement Proceeds, the amount of XXXXXXXXXX$XXXXXXXXXX has already been transferred by the Defendants into the trust account of the Claimant’s XXXXXXXXXX law firm of XXXXXXXXXX.

12.   The Court Order approved the following settlement plan:

*     the amount of XXXXXXXXXX$XXXXXXXXXX of the Settlement Proceeds will be paid by the Defendants, as a self-insurer, to purchase a “Structured Settlement” for the Claimant following receipt of obtaining a favourable Ruling from the Canada Revenue Agency (the “CRA”); and

*     the amount of XXXXXXXXXX$XXXXXXXXXX of the Settlement Proceeds will be paid by the Defendants into the trust account of XXXXXXXXXX to be held in trust for the Claimant (together with the XXXXXXXXXX$XXXXXXXXXX already held in trust at XXXXXXXXXX).  This amount, being XXXXXXXXXX$XXXXXXXXXX in the aggregate (the “Trust Settlement Proceeds”), shall be transferred by the Claimant (or his guardians on his behalf) into XXXXXXXXXX settlement protection trust named the XXXXXXXXXX (the “Trust”), upon receipt of obtaining a favourable Ruling from the CRA.

13.   The Claimant will be the sole beneficiary of the Trust during his lifetime.

14.   The Division Date (as defined in the Trust Deed) of the Trust is the earliest of:

(i) the first anniversary date of the date of death of the Claimant;
(ii) the date on which the Claimant attains the age of XXXXXXXXXX; and
(iii) any earlier date after the Claimant attains the age of XXXXXXXXXX that the Protector (as defined in the Trust Deed) may, by instrument in writing delivered to the Claimant and the Trustees, determine.

15.   The Claimant, by his Parents, reached the Structured Settlement with the Defendants under which the Defendants are required to make periodic payments (the “Periodic Payments”) to the Trust, and then to the Claimant after the Division Date of the Trust.

16.   The Defendants will assign the obligation to make the Periodic Payments to XXXXXXXXXX through XXXXXXXXXX (the “Qualified Assignment”).  To fund the Periodic Payments, and in exchange for XXXXXXXXXX acceptance of the Periodic Payment obligation, Defendants will pay a lump sum of XXXXXXXXXX$XXXXXXXXXX to XXXXXXXXXX.  Once the Qualified Assignment is consummated, XXXXXXXXXX will be liable to make the Periodic Payments required by the Structured Settlement.

17.   The terms of the settlement provide, among other consideration, for Periodic Payments commencing XXXXXXXXXX, in the amount of XXXXXXXXXX$XXXXXXXXXX per month, increasing by XXXXXXXXXX% annually, guaranteed until the later of XXXXXXXXXX (when the Claimant would turn age XXXXXXXXXX if he dies prior to that date) and the Claimant’s death (XXXXXXXXXX Certain Monthly Payments).

18.   To fund its obligation assumed under the Qualified Assignment, XXXXXXXXXX will purchase an annuity contract from XXXXXXXXXX.  XXXXXXXXXX will be the annuity owner and hold all rights of ownership and control, including the right to designate the payee to whom benefits are payable under the annuity.  XXXXXXXXXX will direct XXXXXXXXXX to make annuity payments directly to the Trust.  The annuity contract will be non-assignable, non-commutable, non-transferable and designed to produce payments equal to the amounts and at the times specified in the Structured Settlement.

19.   The XXXXXXXXXX Insurance Company is the parent corporation of XXXXXXXXXX and the XXXXXXXXXX Company is an affiliate of XXXXXXXXXX. The XXXXXXXXXX Insurance Company will enter into the XXXXXXXXXX Guarantee and XXXXXXXXXX will enter into the XXXXXXXXXX Guarantee, in both cases with the Claimant and with the Trust, guaranteeing the obligations of XXXXXXXXXX under the Qualified Assignment.

20.   As part of the Qualified Assignment, XXXXXXXXXX will pledge its right, title and interest in the Annuity to secure its obligation to make the Periodic Payments.

21.   Such an assignment shall be accepted by the Parents without right of rejection and shall completely release and discharge the Defendants from the Periodic Payments obligation assigned to XXXXXXXXXX.  The Parents recognize that upon execution of such assignment, XXXXXXXXXX shall be the sole obligor with respect to the Periodic Payments obligation, and that all other releases with respect to the Periodic Payments obligation that pertain to the liability of the Defendants shall thereupon become final, irrevocable and absolute.

22.   Periodic Payments cannot be accelerated, deferred, increased or decreased by the Claimant or his Parents, nor shall the Claimant or his Parents have the power to sell, mortgage, encumber, or anticipate the Periodic Payments, or any part thereof, by assignment or otherwise, except as authorized in advance in a qualified order as defined in Section 5891(b)(2) of the Internal Revenue Code and otherwise complies with applicable state law, without limitation any applicable state structured settlement protection statute.

23.   The obligation of XXXXXXXXXX to make each Periodic Payment set forth above shall be discharged upon the mailing by XXXXXXXXXX of a valid check or electronic funds transfer in the amount of such payment to the last address on record for the Trust (while in existence, otherwise the Claimant), with XXXXXXXXXX.

24.   The Trust has not been settled. A separate Advance Income Tax Ruling request has been submitted in respect of the Trust. The Trust will be settled after the Ruling in respect of the Trust has been obtained.  XXXXXXXXXX will withhold payments until the Trust is settled.

25.   In the event that the Trust is terminated, the Trustee will provide proof of the Trust’s dissolution to XXXXXXXXXX and/or XXXXXXXXXX and instruct the remaining Periodic Payments to be payable to the Claimant.  The Court Order and the Structured Settlement provide further that:

Any Periodic Payments to be made after the death of the Claimant shall be made to the Parents equally or 100% to the survivor, provided that if both of the Parents have predeceased the Claimant the remaining Periodic Payments shall be payable to the estate of the last to die of the Parents. In the event both the Parents predecease the Claimant, the personal representative of the estate of the last to die of either of the Parents shall provide written notice of the death to Assignee, and shall further provide Assignee written notice of the jurisdiction and case number of the probate proceedings of the estate of last to die.  A request for change of beneficiary may be submitted in writing by the Claimant upon reaching age of majority.

Proposed Transaction

The Claimant proposes to enter into the Settlement Agreement and Release, the General Release and the Second General Release containing, among other matters, the provisions set forth in paragraphs 9 through 24 above.

Purpose of the Proposed Transaction

The purpose of the proposed transaction is to settle the claims for damages of the Claimant against the Defendants, and to provide for the payment of damages in respect of such claim.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, that the Settlement Agreement and Release, the General Release and the Second General Release is substantially the same as the documents provided to us, as reflected herein, and that the proposed transaction is carried out as described herein, we confirm that the Trust Settlement Proceeds, as set forth in paragraph 12 above, which will be received by the Trust, and the Periodic Payments, as set forth in paragraph 17 above, which will be received by the Trust, and then by the Claimant after the Division Date, 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 last of the secondary payees to die, 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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