5 August 1994 Internal T.I. 9413286 - AMOUNTS REC'D AS DAMAGES RE. PERSONAL INJURY

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:

general comments only sought re. personal injury damages to be received by individual in Canada from non-resident payor

Position TAKEN:

comments given can be found in IT-365R2 and in 81(1)(g.1) and (g.2) of ITA

Reasons FOR POSITION TAKEN:

		August 5, 1994

	Provincial and International	Head Office
	 Relations Division	Rulings Directorate
		Sandra Short
(613) 957-8953
	Attention: Bruno Fioravanti

		941328

Amounts received as damages in respect of Personal Injury

This is in reply to your memorandum of May 19, 1994 wherein you have requested our comments to the following situation:

XXXXXXXXXX

The payor has asked whether compensation paid for pain and suffering, costs and inconvenience is subject to tax in Canada and also whether compensation for loss of income paid out from a life insurance company in one lump sum or in the form of a life annuity is taxable. In both instances, you have been asked to provide the rate of tax required to be paid if either compensatory amounts are found to be taxable.

In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").

We recommend that you forward a copy of Interpretation Bulletin IT-365R2 to XXXXXXXXXX Most of the information they are looking for can be found in the Bulletin (for example, paragraph 2 states that amounts received for pain and suffering, out-of-pocket expenses such as medical and hospital expenses, and the loss of earning capacity all qualify as special or general damages for personal injury and will be excluded from income). Given the comments in paragraphs 3 and 4 of the Interpretation Bulletin, XXXXXXXXXX or the claimant may wish to request an Advance Income Tax Ruling with respect to any periodic payments which may be paid by the insurance company. As you are aware, where an amount is subject to taxation, the recipient is required to pay the tax at his or her marginal rate of tax.

In general, amounts received as damages in respect of personal injury or death will be excluded from income under common law principles. An award of damages in respect of personal injury or death that is payable in periodic instalments is not considered by Revenue Canada to be an annuity contract and the periodic payments are not considered to be annuity payments for purposes of the Act. However, where an annuity contract is purchased by the claimant with the lump sum proceeds of such an award, the annuity contract will give rise to income in the claimant's hands. If the annuity contract is purchased within the context of a structured settlement, the annuity payments will not be taxable in the claimant's hands. Income earned on a damage award, such as interest, is included in the taxpayer's income. There are two exceptions to this. One is where the interest can be characterized as pre-judgement interest. The second exception is found in paragraphs 81(1)(g.1) and (g.2) of the Act. These two paragraphs exempt from tax the income of a taxpayer from particular sources for taxation years during any part of which the taxpayer was under 21 years of age. To qualify for this exemption, the income must, during the particular taxation 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) of the Act not required to be included in the taxpayer's income for a particular taxation year described above.

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 (i.e., earned but not received) up to, but not beyond, the end of the taxation year in which the taxpayer attains the age of 21 years.

R.S. Biscaro
Acting Director General
Rulings Directorate
Policy and Legislation Branch