In this appeal from the Ontario Superior Court of Justice, the Ontario Court of Appeal held that structured settlement annuity payments are to be treated as income rather than property.
By way of background, the Ontario Court of Appeal explained that a structured settlement is created when some or all of a personal injury settlement is deposited with a life insurance company in exchange for guaranteed tax-free payments for a specific number of years or for the recipient’s lifetime. While it is usual to structure the payments so that the recipient receives them monthly, the structure can also include periodic lump sums. If so, the lump sum payments are also received tax-free. The Canada Revenue Agency (“CRA”) does not view the payments from a structured settlement as income.
During the parties’ marriage, the wife was injured in an accident and reached a settlement in her claim. Some of the proceeds of the personal injury settlement were used to create a structured settlement (the “SS Annuity”) for her. The marriage had since ended but the wife continued to receive payments from the SS Annuity.
The issue on appeal was whether the SS Annuity payments are to be treated as property or income under the Family Law Act. The Ontario Court of Appeal unanimously found that the SS Annuity payments are to be treated as income.
The issues on appeal were whether the trial judge erred in deciding that the SS Annuity payments are property as opposed to income under the Act in the absence of an agreed statement of facts and without adequate evidentiary record and whether the trial judge erred in finding that those payments are property that must be included in her NFP statement.
Justice Gillese found that the SS Annuity payments should be considered as income for the purposes of spousal support and not property under Part 1 of the Act for two (2) reasons: (1) the SS Annuity arose from a structured settlement; and (2) the SS Annuity is analogous to disability benefits and not to a pension.
1. The SS Annuity arises from a Structured Settlement
The Respondent husband contended that the Appellant wife received all of the settlement monies during the marriage and purchased the SS Annuity with a portion of those monies. However, Justice Gillese held that the fact that the SS Annuity arose from a structured settlement provided a full answer to the husband’s contention.
Further, Justice Gillese referred to the structured settlement as an annuity but acknowledged that structured settlements are a very specialized type of annuity. For instance, unlike other annuities, an individual cannot purchase a structured settlement.
There was no dispute between the parties that the SS Annuity was the result of a structured settlement that complied with the conditions of the CRA. As the SS Annuity arose from a structured settlement, the wife never received the part of the settlement monies that were used to buy the SS Annuity. In this case, the casualty insurer purchased the SS Annuity and made an irrevocable direction to the issuer of the annuity contract to make all payments directly to the wife. Yet, the husband contends that the wife received the settlement monies and then bought the SS Annuity. However, if the husband is correct, then it could not be a structured settlement because an individual cannot purchase a structured settlement. Although the wife was receiving tax-free payments from the SS Annuity, she did not own it nor did she have constructive receipt of the settlement monies used to create it.
Therefore, Justice Gillese held that once we understand the process by which a structured settlement is created, it becomes clear that the wife did not receive the whole of the settlement monies during the marriage. Although the wife received approximately $200,000 during the marriage, by way of a lump sum payment from the settlement, this lump sum was used for the benefit of the family. Despite this, the wife did not receive the balance of the settlement monies because those funds were used to create a structured settlement that entitled her to receive the SS Annuity payments.
2. The SS Annuity is more analogous to Disability Benefits than to a Pension
In Justice Gillese’s view, the payments received from a structured annuity are more analogous to disability benefits, and should therefore be treated as income. In Lowe v Lowe, Justice Sharpe stated the following about disability benefits:
…”the purpose of the disability payments is to replace in whole or in part the income that the person would have earned had he or she been able to work in the normal course.” This makes disability benefits “more comparable to a future income stream based on personal service” than to either a retirement pension plan (explicitly included in family property by s. 4(1)), or to a future stream of payments from a trust (held to constitute property in Brinkos). . . . disability benefits replace income during the working life of the employee and therefore are appropriately treated as income for purposes of equalization and spousal support. As Aitken J. put it at para. 115, “a disability pension is simply the flip side of employment or self-employment income.”
Justice Gillese held that akin to the disability benefits in Lowe, the SS Annuity payments replace, in whole or in part, the employment income of the wife that she would have earned had she been able to work. The SS Annuity payments gave her financial support because she cannot work. They are, therefore, of the same nature as the income that she would have earned had she not been injured. Furthermore, the SS Annuity is not like an employment pension plan in which entitlement accrues with service.
Ultimately, Justice Gillese made an Order declaring that for the purposes of the Family Law Act, the SS Annuity payments post-separation are to be treated as income to the wife and not as property.