1 ' ' J C,, ~ERSONALINJURY AWARDS, STRUCTURED SETTLEMENTS, AND DEDUCTIBILITY OF LITIGATION EXPENSES ~ J J These materials were prepared by Greg Swanson of Pedersen Norman McLeod & Todd of Regina, Saskatchewan for the Saskatchewan Legal.Education Society Inc. seminar, Tax Issues for Litigators;, March, 1999.
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3 I. PERSONAL INJURY AWARDS, STRUCTURED SETTLEMENTS, AND DEDUCTIBILITY OF LITIGATION EXPENSES DAMAGES FOR PERSONAL INJURY 2 A. SOURCES OF INCOME 2 B. TAXABILITY OF DAMAGES 3 C. REVENUE CANADA'S POSITION 5 D. DAMAGE AWARDS HELD FOR PERSONS UNDER 21 YEARS OF AGE.. 6 E. DEDUCTIBILITY OF PAYMENT BY WRONGDOER 7 F. LEGAL FEES 7 G. EXAMPLES OF PERSONAL INJURY 8 II STRUCTURED SETTLEMENTS 8 A. WHAT IS A STRUCTURED SETTLEMENT 8 B. TYPES OF STRUCTURED SETTLEMENTS 9 C. TAXATION OF STRUCTURED SETTLEMENTS 9 D. USE OF ANNUITIES IN STRUCTURED SETTLEMENTS 10 E. OPTIONS REGARDING STRUCTURED SETTLEMENTS 11 E. ADVANCED RULING 13 III. LITIGATION EXPENSES 14 A. SPECIFIC PROVISIONS IN THE ACT 14 B. INGENERAL 15 C. TAX PLANNING 16 APPENDIX A 17. I INTERPRETATION BULLETIN IT 365R2-Damages, Settlements and Similar Receipts APPENDIX B 22 ATR-40 - Taxability ofreceipts Under a Structured Settlement 22 APPENDIX C 24 INTERPRETATION BULLETIN IT-99R4-Legal and Accounting Fees 24,
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5 . I. DAMAGES FOR PERSONAL INJURY A. SOURCES OF INCOME The Canadian income tax system does not assess income tax against all money or property which a person receives. Only certain types ofmoney or property are "taxable". '" " l To determine whether a receipt ofmoney or property is taxable, one must determine the character ofthe receipt. Is it: 1. Ordinary income - which is taxable, or 2. A capital receipt. Capital receipts can be further characterized as: 1. An eligible capital amount - which is taxable (e.g. Goodwill; 2. A capital gain - which is taxable; or 3. A windfall- which is not taxable (e.g. a gift, an inheritance and a gambling win. Section 3 ofthe Income Tax Act (the Act provides the blueprint for determining the taxable income of a taxpayer for a taxation year. It outlines what receipts are taxable and what amounts are deductible in arriving at "taxable income'. --J ;. Subsection 3(a defines ordinary income to be the aggregate of amounts each of which is the taxpayer's income for the year.,. from a source inside or outside Canada, including, without restricting the generality of the foregoing, his income for the year from each office, employment, business and property;,
6 2 The three main "sources" ofordinary income" are: 1. Office and employment; 2. Business; and 3. Property. However the subsection does not give an exhaustive list ofthese sources. As such there can be other "unlisted" sources ofordinary income. ' The case ofcranswick v R. 82 DTC 6073 (FCA sets out some guidelines for determining what is or is not a "source ofincome". 1. Did the taxpayer have an enforceable claim to the payment; 2. Was there an organized effort on the part ofthe taxpayer to receive the payment; 3. Was the payment sought after or solicited by the taxpayer in any manner; 4. Was the payment expected by the taxpayer, either specifically or customarily; 5. Did the payment have a foreseeable element ofrecurrence; 6. Was the payor a customary source ofincome to the taxpayer; and 7. Was the payment in consideration for or in recognition ofproperty, services or anything else provided or to be provided by the taxpayer; was it earned by the taxpayer, either as a result ofany activity or pursuit ofgain carried on by the taxpayer or otherwise. In addition to setting out these criteria, the Federal Court ofappeal pointed out that no one item is -1.-.J,;j --J.
7 3 by itselfconclusive ofthe issue. The case ofbellingham v R. 96 DTC 6075 (FCA added to the list: Was money paid in exchange for the discharge ofeven a questionable legal right. B. TAXABILITY OF DAMAGES A damage award (whether it be from an out ofcourt settlement or as a result ofthe judgment ofa court ofcompetentjurisdiction in a personal injury action usually compensates the injured party for: 1. The physical injury suffered; 2. Out ofpocket expenses incurred as a result ofthe physical injury; 3. Loss ofincome, resulting from the physicalinjury, from the date thephysical injury occurred until the date ofjudgment or settlement; and 4. Future loss ofincome as a result ofthe physical injury. Clearly the portions ofthe damage award applicable to the physical injury suffered and the out of pocket expenses are not ordinaryincome. These have nothing to do with the earningofincome. The compensation for the out ofpocket expenses is nothing more than a reimbursement. Though the compensation for the physical injury suffered could be characterized as a capital receipt it would be considered a tax free windfall and not as an eligible capital amount or a capital gain. t- c What about the portion ofthe damage award applicable to past and future loss ofincome? Clearly these have the "appearance" ofbeing income from the way in which the loss is calculated. However to be taxable as income there must be a "source ofincome".
8 4 Looking at the criteria set down in the Cranswick and Bellingham cases (supra, regarding the damage award for loss ofincome, each point can be answered in the negative. What is the "source" ofthe damage award for loss ofincome? It is not the wrongdoer. Nor is it the insurance company. The source is the physical injury suffered by the injured party and this is not recognized by the courts as a "source ofincome". In Cirella v. The Queen 77 DTC 5442 (FCTD, the plaintiff, an employee, was injured in an automobile accident in After recovering, he attempted to return to his employment but was unable to perform his usual duties. He left that employment and established his own business. In 1972, a judgment awarded to the plaintiff, among other things, special damages for loss of employment income, past and future. Revenue Canada assessed the damages for loss ofincome as being taxable. In Cirella, The Federal Court, Trial Division found that damages for loss of income were not taxable. The damages were not income fi:om employment as they were not salary, wages, gratuities or other remuneration ofemployment and it was not paid as such. Nor were they business income because the business did not exist at the time the injury occurred. In looking at whether the damages could be some other unlisted source ofincome the court said: What a court awards in personal injury cases is damages to compensate the injured person for the wrong done him. One of the elements frequently involved in such awards is the impairment ofthe earning capacity ofthe injured person resulting from his injuries and, in such cases, it is usual to assess the damages in respect thereofin two parts: one consisting of the loss up to the time of the judgment, which can generally be calculated with some approach to accuracy because the relevant events have already occurred; and the other, the loss for the future which canneverbebetter than an informed and reasonable estimate. In both instances, however, they are for the same injury, the same impairment ofearning power. There is but one tort and one impairment and, in my opinion, the damages therefor are all ofthe same nature. -J U -
9 5 It has been suggested that, ifmr. Cirella had been self-employed and had received damages for loss ofbusiness income, those damages would have been taxable. On this point, in obiter, the Federal Court Trial Division stated: I should add that I also doubt that the plaintiffcould properly be regarded as an asset ofhis ownbusiness so as to treat damages recovered for personal injuries occasioned to him as filling a hole or shortfall ofthe revenue ofthe business resulting from his InJury. Obviously, the key factors in personal injury cases are: 1. It is the person who is injured and not the employment or the business, and 2. The damages are for compensation for a wrong committed against the plaintiff, not for actual loss ofincome. C. REVENUE CANADA'S POSITION Revenue Canada's position on the taxation of damages for personal injury are set out In Interpretation Bulletin IT-365R2. Paragraph 2 thereofstates: Amounts in respect ofdamages for personal injury or death may be received by an injured taxpayer or by a dependant ofa deceased taxpayer on account of: --l 'c J (a (b Special damages - examples are compensation for (i out-of-pocket expenses such as medical and hospital expenses, and (ii accrued or future loss ofearnings and General damages - examples are compensation for
10 6 (i pain and suffering, (ii the loss ofamenities oflife, (iii the loss ofearning capacity, (iv the shortened expectation oflife and (v the loss offinancial support causedbythe death ofthe 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 ofthe fact that the amount ofsuch damages may have been determinedwithreference to the loss ofearnings ofthe taxpayer inrespect ofwhom the damages were awarded. However, an amount which can reasonably be considered to be income from employment rather than an award ofdamages will not be excluded from income. For the most part this coincides with the Cirella case. However, it is difficult to conceive of a personal injury case where an award is considered to be income from employment and not damages. D. DAMAGE AWARDS HELD FORPERSONS UNDER 21 YEARS OF AGE. Section 81 (1 (g.l and (g.2 ofthe Act provide that income and capital gains earned on a damage award or settlement for a person is exempt from taxation up to and including the year that the person becomes 21 years ofage. This includes income accrued butnot paidondecember31 in the yearthat person becomes 21. To be eligible for this exemption: - ~ U
11 7 1. The property that earned the income must have arisen out ofan action for damages in respect ofphysical or mental injury to that person; 2. The property was paid either through settlement ofthe action or a judgment thereon; 3. The property and the income earned thereon was received either by the injured person or someone on their behalf. In light ofthese requirements, income earned on a damage award received by parents on behalfof their infant child for injuries suffered by that child would be eligible for this tax free treatment up to and including the year the child became 21 years ofage. However, income earned on a damage award received by those same parents for their own mental distress which they suffered as a result oftheir infant child's injuries would not be eligible for this tax free treatment. E. DEDUCTIBILITY OF PAYMENT BY WRONGDOER Usually the damage award is paid to the injured party by an insurance company and, therefore, the "wrongdoer" does not get a deduction therefor. If the damages are paid by the wrongdoer, their deductibility will depend upon whether or not the payment was incidental to the business operations of the wrongdoer. The same would be the case regarding any insurance deductible paid by the wrongdoer. F. LEGAL FEES ---1 U ~::7 J, Becausethe damage award for personal injury is not taxable in the hands ofthe recipient, the legal fees associated therewith are not deductible. If the payment of the insurance deductible or the entire damage award is deductible by the wrongdoer, the legal fees associated withthe action will be deductible as well. Otherwise, the legal fees will not be deductible.
12 8 The reimbursement or awards oflegal fees paid in respect ofdamages received for personal injury or death, like the damage award itselfare not taxable in the hands ofthe recipient. G. EXAMPLES OF PERSONAL INJURY Obviously, victims of automobile accidents, slip and fall accidents, etc. have suffered personal injuries, the damage award for which will be non-taxable. Revenue Canada, in private interpretations, has ruled that a person who suffers from Hepatitis C has " suffered a personal injury. No doubt the same logic could be applied to persons who contract HIV and women who received silicon breast implants and victims ofsexual abuse. Regarding sexual harassment cases, Revenue Canada has issued several rulings which state that damages for sexual harassment are not taxable (unless the damages can be characterized as being for loss ofemployment. However, in making these rulings, Revenue Canada has not indicated that they consider that a victim ofsexual harassment has suffered a personal injury. II STRUCTURED SETTLEMENTS A. WHAT IS A STRUCTURED SETTLEMENT A structured settlement is a method ofsatisfying a judgement or out ofcourt settlement ofa cause ofaction through periodic payments to the injured person. Structured settlements are most common in: 1. Personal injury cases where the life expectancy of the injured person may be uncertain. Payments usually stop upon the death of the injured person. The total payments may be substantially less than the estimated total using normal life expectancy tables J (J - j
13 9 2. Wrongful dismissal cases where the length of time the dismissed employee will be unemployed is uncertain. PaYments usually stop upon the employee finding new employment. Again the total payments may be substantially less than the "required notice period". ~ 3. B. Cases where a substantial payment must be made to the successful party. In this situation, the structured settlement simply is used as a financing tool. TYPES OF STRUCTURED SETTLEMENTS Structured settlements can take many forms. Some simple examples are: 1. a fixed amount paid to the injured person annually, without interest; 2. a fixed amount paid to the injured person annually, with interest; 3. an annuity purchased by or for the wrongdoer which provides for periodic payments to the injured person. C. TAXATION OF STRUCTURED SETTLEMENTS In personal injury cases: ----J. U e-j Structured settlements that call for a fixed amount to be paid each year regarding the injured person, without interest, are not taxable in the hands ofthe recipient. (This is consistent with the Cirella case (supra. See also Interpretation Bulletin IT-365R2 - paragraph 3 When the settlement calls for a fixed amount plus interest to be paid regarding the injured person, only the interestportionofthepayment will be subject to taxation in the hands ofthe recipient. (This is consistent with the Cirella case (supra.
14 10 3. When an annuity is used as the vehicle to provide payments for the structured settlement regarding the injured person, provided that the settlement and annuity are structured properly, the full amount ofthe annuity payments is not taxable in the hands ofthe recipient. D. USE OF ANNUITIES IN STRUCTURED SETTLEMENTS When an annuity is used as the source offunds for a structured settlement, either the wrongdoer or her insurerwouldpurchase an annuity from a company licensed to sell annuities. As aforementioned, ifthe settlement and the annuity are structured properly, the full amount ofthe annuity payments is not taxable in the hands ofthe recipient. Paragraph 5 of Interpretation Bulletin IT-365R2 sets out the criteria which must be followed to obtain the favourable tax treatment for the recipient: (a A claim for damages must have been made in respect ofpersonal injury or death, (b The claimant and the wrongdoer or his 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 ofthe claimant. (c The wrongdoer or her 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 inthe agreementreferred to in (b; (Under the terms ofthe annuity, these payments are payable to the person who acquired the annuity (the annuitant. (ii make an irrevocable direction to the issuer ofthe annuity contract to make all payments thereunder directly to the claimant; and
15 . (iii 11 remain liable to make the payments as required by the settlement agreement (ie, the annuity contract payout. Where these requirements are met, the recipient ofthe annuity payments is not taxable thereon. ~ lithe wrongdoer (who is not covered by insurance purchases the annuity, he is the owner and the annuitant of the annuity. The purchase of this annuity is not a tax deductible expense for the wrongdoer as the annuity is viewed as an investment for income tax purposes. But for the irrevocable direction, the annuitant would receive the annuity payments. As such, it is the annuitant who is taxable on the interest portion ofthe annuity payments. Ifpayment by the wrongdoer ofthe entire damage award would have been tax deductible by the wrongdoer, she may deduct the full amount ofthe annuity payments received each year by the injured party. When the annuity is purchased by the insurer: 1. In computing its taxable income for the year ofpurchase, the insurer may claim a reserve regarding its future liabilities regarding the structured settlement; 2. The insurer is taxable on the interest portion ofthe annuity payments; and 3. The insurerwill deduct the full annuity payments made each yearto the injured person with offsetting adjustments to the reserve aforementioned. Where the wrongdoer was uninsured and the injured person had insurance to cover that situation, the injured person's insurer will be the person who acquires the annuity etc. E. OPTIONS REGARDING STRUCTURED SETTLEMENTS U Ie ~ In private interpretations, Revenue Canada has ruled that the following are options which can be included in a damage award or settlement that is to be the subject ofa structured settlement:
16 12 1. The annuity can include a guarantee period, guaranteeing that payments will be made for a certain minimum amount oftime, regardless ofhow long the injured person lives; 2. The annuity can provide that ifthe injured person dies before the end ofthe guarantee period, the remaining payments can be paid to her surviving spouse, parent(s or to her estate in accordance with the award or settlement; 3. The annuity can be indexing based upon some fixed percentage or the Consumer Price Index for Canada as published by Statistics Canada for the 12 month period ending on the day of, ofthe preceding year;. ' 4. The annuity can provide that in circumstances where the injured person does not survive the guarantee period, and, under the terms ofthe settlement, a portion ofeach ofthe remaining periodic amounts can be paid to the injured person's estate and the remainder ofthe periodic amounts can be paid to the insurer; 5. The settlement or award can include lump sum payments (e.g. for special damages and legal fees as well as periodic payments pursuant to the annuity; 6. The annuity can provide for changing monthly payments with, for example, increases in the amount paid as the injured person get older. This can be in one annuity or several annuity contracts; 7. The annuity contract which funds periodic payments to produce an income stream which is intended to compensate the injured person for loss ofability to earn income as a result ofthe injuries suffered must be non-commutable. However, with respect to the annuity contract to fund the future care element (both medical and personal under the award or settlement arrangement, such contract must be non-commutable during the life ofthe injured person, but may be commutable after the death ofthe injured person provided that the beneficiary under the contract is the casualty insurer funding its obligations under the settlement ---J LJ J
17 13 arrangement. Revenue Canada has ruled that annuities in structured settlements can not contain clauses which: 1. Commute the annuity and pay the commuted value to the estate of the deceased injured person; E. ADVANCED RULING When contemplating the use of an annuity, it is often wise to obtain an advanced ruling from Revenue Canada to ensure that the payments received by the recipient are not taxable. Some ofthe information which Revenue Canada requires to consider a request for an advance ruling include: 1. The date ofbirth and an authorization in respect of each taxpayer for whom the advance income tax ruling is being requested (in the case ofa minor child, the authorization should be signed by his or her representative; ifthe estate ofa deceased individual is involved, an authorization from the legal representative also needs to be obtained; 2. Other than a minor child who does not have a social insurance number, the social insurance number of each taxpayer in respect of whom the advance income tax ruling is being requested; ~,j ~ ~ A copy ofthe statement ofclaim; A briefdescription ofthe incident which gave rise to the claim; A briefdescription ofthe role ofthe insurer in respect ofthe claim;
18 14 6. A copy ofthedocumentationrelating to the proposed settlement ofthe claim (normally, such documentation would involve a proposed settlement agreement. The other required material is listed in Revenue Canad publication Information Circular 70-6R2. III. LITIGATION EXPENSES A. SPECIFIC PROVISIONS IN THE ACT The Act contains some specific provisions dealing with litigation expenses. Section 8(1(b allows an employee to deduct amounts paid in the year for legal expenses incurred to collect or establish a right to salary or wages owed to the employee by his employer or former employer. Section 18(1(P(iv allows personal service corporations to deduct legal expenses incurred to collect amounts owing to it on account ofservices rendered. Section 56(1 (1 and section 60(0 work together regarding legal expenses incurred and costs awarded in appeals: 1. Under the Act; 2. To the Canada Employment and Immigration Commission, the Canada Employment and Insurance Commission, a board ofreferees or an umpire under the Unemployment Insurance Act or the Employment Insurance Act; or 3. Under the Canada Pension Plan or a provincial pension plan. Section 60(0 allows the litigant to deduct legal fees incurred in any of the aforementioned appeals.
19 15 Section 56(1 (1 includes in the litigants income the costs that they receive as a result ofany ofthe aformentioned appeal, ifand only ifthe litigant deducted legal fees under section 60(0. Section 56(1(1.1 and section 60(0.1 work together regarding legal expenses incurred and costs awarded in actions (other than those relating to a division or settlement ofproperty arising out of, or on a breakdown of, a marriage to collect or establish a right to a retiring allowance or a benefit under a pension fund or plan (other than a benefit under the Canada Pension Plan or a provincial pension plan. Section 60(0.1 allows the litigant to deduct legal expenses incurred in any ofthe aforrnentioned actions. The amount that can be deducted is limited to the lesser of: 1. The amount oflegal expenses incurred; 2. The amount ofcosts received and included in income pursuant to Section 56(1 (1.1; and 3. The amount ofthe award. B. IN GENERAL As aforrnentioned, for income tax purposes, damage awards or settlements can be categorized as eitherordinary income or a capital receipt. The characterizationofthe damage award or settlement, for tax purposes, determines the income tax treatment applicable to the associated legal expenses. When the payment ofa damage award or settlement is deductible by the payor (e.g. a payment for wrongful dismissal by an employer, the legal expenses associated therewith are also deductible. If U t;,l j any portion ofthe damage award or settlement is not deductible by the payor, an equivalent portion ofthe legal expenses associated therewith are also not deductible. When the payment is considered to be a payment on account ofcapital (e.g. a payment in a trade mark infringement case, the legal expenses will be treated as part ofthat capital payment. This may result in either a capital loss or a "nothing".
20 16 Similarrules apply regarding the recipient. Where the receipt ofthe damage award or settlementis taxable in the hands of the recipient (the wrongful dismissal award, the legal expenses are deductible. Ifthe receipt is a capital receipt, the legal expenses will either reduce any capital gain or be a "nothing". Where the damage award or settlement provides compensation in different categories e.g. income, capital gains and a windfall, the legal fees must be apportioned accordingly. The method ofapportionment may be based upon: 1. The amount paid or received in each category; 2. The time spent in prosecuting or defending the claim in each area; 3. Any other reasonable method. As a general rule, legal expenses regarding an action which enforces an existing right to receive income are an expense on account ofincome and are deductible. Legal expenses incurred to bring into existence a new right are on account ofcapital and are not deductible. Those expenses will be added to the cost ofthe right or the asset acquired as a result ofthe litigation. c. TAX PLANNING Depending upon the type ofdamages pursued in the action, there is an opportunity for tax planning. If, for example, the plaintiffs claim is for loss ofincome and damages to a capital asset, the claim may be settled by dropping the loss ofincome claim and receiving a payment applicable solely to the damages regarding the capital asset. In this case, a portion ofthe payment would be non-taxable. ---J J
21 ' ' Carswell TaxPartner Basic+ APPENDIX"A" 1998-Release 3 Interpretation Bulletin IT-365R2 - Receipts Damages, Settlements and Similar Date: Reference: 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 andcancels IT-365R datedmarch 9, 1981 andthe Special Release to IT-365R which was issued on May 25, This bulletin deals with the treatment for tax purposes ofamounts received (a out ofclaims for damages for personal injury or death, (b as compensation for the loss ofproperty or income, (c as crime compensation awards, and (d on termination ofemployment..~ j Amounts Received as Damages in Respect of Personal Injury or Death 2. Amounts in respect ofdamages for personal injury or death may be received by an injured taxpayer or by a dependant ofa 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 ofearnings and (b General damages - examples are compensation for (i pain and suffering, (ii the loss ofamenities oflife, (iii the loss ofearning capacity, (iv the shortened expectation oflife and (v the loss offinancial support caused by the death ofthe 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 ofthe fact that the amount ofsuch damages may have been determined with reference to the loss ofearnings ofthe taxpayer in respect ofwhom 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 ofan award ofcompensation, as adjudicated by a compensation board or commission in Canada, which is received as a result ofa worker having suffered injury, disability or death while performing the duties ofemployment, is 1998 Thomson Canada Limited 1
22 Carswell TaxPartner Basic Release 3 explained in IT-202R2. Awards Not Considered to be Annuities 3. An award ofdamages 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 ofsubsections 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 taxpayer's representative with proceeds ofa lump sum award received for damages for personal injury or death will be an annuity contract for all purposes ofthe 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 ofdamages for personal injury or death has been awarded by a Court or resolved in an out-of-court settlement, no part ofsuch amount will be income to the recipient even though the amount includes or is augmented by an amount which, pursuant to the terms ofthe 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 ofinterest earned will be included in the income ofthe injured taxpayer unless paragraph 81(1(g.l 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 ofthe trust or ofthe beneficiary, depending on the circumstances. Structured Settlement 5. A "structured settlement" is a means ofpaying or settling a claim for damages, usually against a casualty insurer, in such a way that amounts paid to the claimant as a result ofthe 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 ofpersonal 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 ofthe 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 ofthe 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 (ie, the annuity contract payout. As a consequence ofcompliance with the foregoing conditions, the casualty insurer is the owner - -l 1998 Thomson Canada Limited 2