29 October 1997 External T.I. 9725885 - STRUCTURED SETTLEMENTS

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.

		972588
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

October 29, 1997

Dear XXXXXXXXXX:

Re: Income from Personal Damages Awards - Structured Settlements

We are replying to your letter of June 9, 1997 concerning the above-noted subject. We apologize for the delay in replying.

In your letter, you have referred to paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act (the Act), which concern awards for personal injury damages. A discussion of these provisions which, in general terms, exempt certain income and capital gains of a taxpayer until the end of the year in which the taxpayer becomes 21 years of age, is set out in paragraphs 6 and 7 of Interpretation Bulletin IT-365R2, "Damages, Settlement and Similar Receipts."

A structured settlement, as described in paragraph 5 of IT-365R2, is the result of an agreement between a claimant and a casualty insurer that, among other things, requires the insurer to purchase a single premium annuity contract designed to produce periodic payments as agreed by the parties. As the beneficiary of the annuity contract is the insurer, the insurer is required to give an irrevocable direction to the issuer of the annuity contract to make all of the periodic payments to the claimant. The insurer remains liable to make the payments as required by the agreement and the payments are made to the claimant who sustained personal injury.

With respect to paragraphs 81(1)(g.1) and (g.2) of the Act, it is your view that non-taxable payments made under a structured settlement arrangement to a claimant (i.e., the person who sustained personal injury) would constitute "property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages." Therefore, if a claimant could not make full use of a structured settlement payment and chose to invest, and thereby earn income on any unused portion, paragraph 81(1)(g.1) of the Act would apply to exempt from tax, any income earned in respect of a period before the end of the year in which the claimant reached the age of 21. Similarly, it is your view that paragraph 81(1)(g.2) of the Act will be applicable to exempt from tax any income on the investment income of structured settlement payments.

We generally agree with your views. If you have a more specific concern in relation to a particular transaction, we would be pleased to consider it.

We trust that our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch