Structured settlements are an important option for personal injury claimants in Ontario. Contrary to the more conventional lump sum payment that most personal injury claimants go for, a structure is a financial package, designed to meet a particular plaintiff’s needs through periodic payments, either for a fixed term or for the plaintiff’s life. In recent years, structures have grown increasingly popular among plaintiffs and insurers.
One of the most obvious benefits of a structured settlement is that payments made under the scheme are tax-free for the injured party. Under Subdivision G of the Canadian Income Tax Act, damages for personal injury or death are not deemed regular income, and therefore have not traditionally attracted income tax. This goes for both lump sums and structures, and yet there is one revenue-related roadblock that makes the use of a structure in Ontario less attractive.
According to Brittany Gillingham (pictured), principal at McKellar Structured Settlements Inc., Ontario’s social assistance regime discriminates against structures in favour of lump sums in that it diminishes claimants’ eligibility for the Ontario Disability Support Program (ODSP) – a program that lots of seriously injured individuals take advantage of because it provides a variety of different benefits like income supplement, extended health benefits, and sometimes a housing supplement.
“What the government says is that if I am to receive a structured settlement as part of my personal injury settlement, they’re going to allow me to receive payments from that structure up to the amount that funded the structure,” she explained. “If I have a $500,000 structure for my injury [and my recovery] needs require me to get $3,000 a month, then I can continue to get that $3,000 a month and not have it affect my ODSP until I’ve received the total of $500,000. Anything after that - any other future payments I receive - is going to be considered income for the purposes of determining whether I’m eligible for ODSP. Essentially, in that example, I lose my ODSP.”
Established by the Canada Revenue Agency (CRA), a structured settlement is an annuity that is paid out over a certain period of time (it must be longer than five years) which is negotiated by the claimant. It is tax-free money as long as the annuity contract is non-transferable, non-commutable, and non-assignable, meaning people cannot transfer or assign the payments to anyone else, and they cannot change the structure once the contract is written.
“There is a tax slip associated with a structured settlement but it is never given to the person who receives the payments; it’s provided to the casualty insurance company or their assignee [paying the claim],” Gillingham told Insurance Business. “The person who receives a structured payment does not accrue any interest, so the interpretation that somehow someone is receiving interest when they get a structure payment, and that interest should affect their eligibility for social assistance, is just a technical inaccuracy in the way that the social assistance regime in Ontario has chosen to look at structures. The problem with that is they’ve created an incentive for people who people who rely heavily on the ODSP to get a lump sum of cash as quickly as possible and spend it, or otherwise dissipate it, so they can return to full eligibility for the ODSP with no problem.”
People who take advantage of structures because they’re concerned about securing long-term access to funds, or people who are forced to take structures – perhaps because of a requirement of the Motor Vehicle Accident Claims Fund – are potentially discriminated against on the basis of having that structure because they could be deemed ineligible for ODSP, according to Gillingham.
“The government hasn’t totally considered the disincentive towards structures and the inventive towards getting lump sums and spending them as quickly as possible, or otherwise shedding them so they’re not visible to those who are evaluating eligibility for social assistance,” she said. “We think that’s really problematic, and I think the government understands that. Over time, and especially recently [with COVID-19], it’s become even more apparent how important it is to ensure that those on social assistance are given incentives and they’re not penalized for meeting their care needs through their own resources if they’re able to do that.”