C.C.R.A. Interpretation Bulletin IT– 365r2

The Canadian Customs and Revenue Agency (CCRA) published the following May 8, 1987 Interpretation Bulletin regarding structured settlements.

(link http://www.ccra-adrc.gc.ca/E/pub/tp/it365r2/it365r2-e.html):



May 8, 1987 Section 3 (also section 6, subsections 5(1), 12.2(1) and (3), 14(1), 16(1), 56(1), and 248(1), paragraphs 81(1)(g.1) and (g.2) and subparagraphs 14(5)(a)(iv) and 56(1)(a)(ii)).

This bulletin replaces and cancels IT-365R dated March 9, 1981 and the Special Release to IT-365R which was issued on May 25, 1984. Current revisions are designated by vertical lines.

1. This bulletin deals with the treatment for tax purposes of amounts received (a) out of claims for damages for personal injury or death, (b) as compensation for the loss of property or income, (c) as crime compensation awards, and (d) on termination of employment.

Amounts received as Damages in Respect of Personal Injury or Death

2. Amounts in respect of damages for personal injury or death may be received by an injured taxpayer or by a dependant of a deceased taxpayer on account of: (a) Special damages – examples are compensation for (i) out-of-pocket expenses such as medical and hospital expenses, and (ii) accrued or future loss of earnings and (b) General damages – examples are compensation for (i) pain and suffering, (ii) the loss of amenities of life, (iii) the loss of earning capacity, (iv) the shortened expectation of life and (v) the loss of financial support caused by the death of the supporting individual. All amounts received by a taxpayer or the taxpayer’s dependant, as the case may be, that qualify as special or general damages for personal injury or death will be excluded from income regardless of the fact that the amount of such damages may have been determined with reference to the loss of earnings of the taxpayer in respect of whom the damages were awarded. However, an amount which can reasonably be considered to be income from employment rather than an award of damages will not be excluded from income. The tax treatment of an award of compensation, as adjudicated by a compensation board or commission in Canada, which is received as a result of a worker having suffered injury, disability or death while performing the duties of employment, is explained in IT-202R2.

Awards Not Considered to be Annuities

3. An award of damages for personal injury or death that decrees that it be paid in periodic payments is not, despite such periodic payments, considered to be an annuity contract for the purposes of subsections 12.2(3) and 56(1) and the periodic payments themselves are not considered to be annuity payments. However, an annuity contract purchased by a taxpayer or a taxpayer’s representative with proceeds of a lump sum award received for damages for personal injury or death will be an annuity contract for all purposes of the Act and will, except in the circumstances described in 6 below, give rise to income in the taxpayer’s hands.

Interest Element of Awards for Personal Injury or Death

4. Where an amount in respect of damages for personal injury or death has been awarded by a Court or resolved in an out-of-court settlement, no part of such amount will be income to the recipient even though the amount includes or is augmented by an amount which, pursuant to the terms of the Court order or the settlement agreement, is referred to as interest. However, where an amount that has been awarded for damages is held on deposit, the amount of interest earned will be included in the income of the injured taxpayer unless paragraph 81(1)(g.1) or (g.2) has application (see 6 below). Where an amount that has been awarded for damages is held in trust, any interest earned on the amount is income of the trust or of the beneficiary, depending on the circumstances.

Structured SettlemenT

5. A “structured settlement” is a means of paying or settling a claim for damages, usually against a casualty insurer, in such a way that amounts paid to the claimant as a result of the settlement are free from tax in the claimant’s hands. To create such a structured settlement the following conditions must be complied with: (a) a claim for damages must have been made in respect of personal injury or death, (b) the claimant and the casualty insurer must have reached an agreement under which the latter is committed to make at least periodic payments to the claimant for either a fixed term or the life of the claimant, (c) the casualty insurer must (i) purchase a single premium annuity contract which must be non-assignable, non-commutable, non-transferable and designed to produce payments equal to the amounts, and at the times, specified in the agreement referred to in (b), (ii) make an irrevocable direction to the issuer of the annuity contract to make all payments thereunder directly to the claimant, and (iii) remain liable to make the payments as required by the settlement agreement (i.e., the annuity contract payout). As a consequence of compliance with the foregoing conditions, the casualty insurer is the owner of, and annuitant (beneficiary) under, the annuity contract and must report as income the interest element inherent in the annuity contract while the payments received by the claimant represent, in the Department’s view, non-taxable payments for damages.

Income from Property that was Received by a Taxpayer Under 21 Years of Age as an Award of Damages for Personal Injury

6. For the 1984 and subsequent taxation years, paragraphs 81(1)(g.1) and (g.2) 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), 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) 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.

7. For taxation years ending after 1971 and before 1984, former paragraph 81(1)(g.1) (a) caused the exempt period to end on the day immediately preceding the day on which the injured taxpayer attained the age of 21 years, and (b) restricted exempt income to income that was actually received while the injured taxpayer was under 21 years of age.