20 September 2000 External T.I. 2000-0025895 - STRUCTURED SETTLEMENT-ASSIGN.

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

1. Would it be acceptable to provide for an assignment of an annuity contract under a structured settlement where the owner (general insurance corporation) suffers insolvency.

2. Would the new casualty insurer be entitled to a policy reserve under paragraph 20(7)(c) of the Act and subsection 1400(e) of the Regulations ?

POSITION TAKEN
1. It is generally acceptable where the claimant's rights have not been altered
2. It is possible and we will consider this issue on an advance ruling basis

Reasons FOR POSITION TAKEN

1. Specific fact situation involving a change in general insurance carrier due to insolvency with no alteration in the contract in regards to the claimant.

2. Question of fact whether the assignment agreement constitutes an insurance policy.

XXXXXXXXXX 2000-002589
C. Tremblay
Attention: XXXXXXXXXX

September 20, 2000

Dear XXXXXXXXXX:

This is in reply to your letter of May 12, 2000, wherein you ask us for our opinion on assignment issues dealing with structured settlements. You state that a casualty insurance company that has become insolvent and is presently in liquidation proposes to assign and transfer all of its rights under an annuity contract and all of its obligations under a settlement agreement to another casualty insurer ("Assignee") pursuant to an Assignment and Assumption Agreement. You would like us to confirm that (i) the payments received by the Claimant or her estate under the structured settlement will continue not to be subject to taxation under any provision of the Income Tax Act (the "Act"), (ii) the assignment and assumption agreement of an annuity contract in these circumstances will not contravene the restriction contained in paragraph 5 of IT-365R2 that an annuity be non-assignable and non-transferable, and (iii) that the Assignee be allowed in computing its income from its insurance business carried on in Canada a policy reserve for the year in respect of its obligations under the Assignment and Assumption Agreement equal to such amount as determined under paragraph 20(7)(c) of the Act and subsection 1400(3) of the Income Tax Regulations (the "Regulations").

Our Comments

The Canada Customs and Revenue Agency's (the "CCRA") position regarding structured settlements is described in paragraph 5 of Interpretation Bulletin IT-365R2. As you are aware, our Directorate has issued advance income tax rulings on certain variations to those requirements described in the Bulletin. For example, our Directorate accepted the concept of absolute assignment as well as the potential for commutation of a portion of the annuity under those circumstances described in Advance Income Tax Ruling ATR-68, Structured Settlements.

With respect to the situation you have described above, the CCRA would generally continue to regard the payments received by the claimant from the Assignee as non-taxable where all relevant parties have consented to the arrangement. Where the claimant's rights under the original settlement agreement (i.e. an award of damages for personal injury that decrees that it be paid in periodic payments) have not been altered in any way, other than a change in the payer (i.e. the casualty insurer), the CCRA would generally rule favourably to the non-taxability of the remainder of the periodic payments to be paid to the claimant.

With respect to your 3rd enquiry, it would be a question of fact whether or not an assignee insurance corporation which does not carry on a life insurance business would be entitled to claim a reserve under paragraph 20(7)(c) of the Act and subsection 1400(3) of the Regulations in respect of the assignment. In our view, the assignee insurance corporation could be entitled to claim such a reserve provided:

• the assignment agreement constitutes an insurance policy;
• there is a claim under that insurance policy in respect of the structured settlement;
• a reserve in respect of that claim is reported by the assignee insurance corporation in its annual report for the year to the "relevant authority", as that term is defined in subsection 1408(1) of the Regulations, (or reported in its financial statements for the year where the corporation was subject to the supervision of the relevant authority but was not required to file an annual report with the relevant authority for the year); and
• the assignee insurance corporation is permitted by the relevant authority to enter into such assignment agreements.

The above comments are not an advance income tax ruling and are not binding on the CCRA and may or may not apply to the circumstances of a particular case. We will be pleased to consider this issue by way of an advance income tax ruling where there is an actual proposed transaction.

We trust our comments are of assistance.

Your truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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