Are Personal Injury Settlements Taxable?
- Yellow Pages Admin
- Apr 30
- 4 min read
Injuries caused by a motor vehicle accident can leave you reeling. You’re struggling to cope with pain, restrictions, and limitations. You’re facing financial stress if unemployed or working reduced hours because of the accident. On top of all of that, now you’re starting to worry whether you’ll have to pay tax on your personal injury settlement.
Settlements can be substantial, especially if you suffered severe or life-threatening injuries. The thought of losing a portion of your personal injury compensation to taxation is upsetting. The good news is that generally speaking, personal injury settlements in Canada are not taxable.
Before we get into a discussion of personal injury damages and why they aren’t usually taxable, it’s important to note that every case is unique. There are some exceptions to the tax-free status of personal injury damages, and there can also be tax implications that arise from how your settlement is structured. The best course of action is to get advice on potential tax implications. We welcome you to reach out to our Sault Ste. Marie lawyers to discuss your case.
Understanding Damages in Personal Injury Cases
When you’ve been hurt in an accident caused by someone else’s fault or negligence, you’re entitled to bring a personal injury lawsuit seeking compensation. The purpose of damages in a personal injury case is to compensate you for:
· financial losses and expenses you incurred as a result of the accident (special damages); and
· pain, suffering, and loss of enjoyment of life occasioned by the physical, psychological, and emotional injuries you suffered (general damages).
Depending on the nature and severity of your injuries, compensation in your motor vehicle accident claim may include special damages such as lost wages, loss of future earnings, reimbursement for out-of-pocket expenses (medical treatments, medications, etc.), future care costs (ongoing medical treatments, attendant care, equipment to manage pain or adapt to injuries, etc.), as well as damages for pain and suffering (general damages or “non-pecuniary” damages).
You also have the right to bring an accident benefits claim (also known as a “no-fault” benefits claim), which is separate from your personal injury lawsuit. We welcome you to reach out to our Elliot Lake law firm. We can explain the differences between these types of claim and guide you through both processes.
Are Damages in a Personal Injury Case Taxable?
In Canada, the general rule is that damages in personal injury cases are not taxable. It doesn’t matter if compensation is paid to you pursuant to an out-of-court settlement agreement with an insurance company, or pursuant to an award made following a trial before a judge and jury.
Why is Personal Injury Compensation Tax-Free?
The Canada Revenue Agency (“CRA”) does not consider compensation received by motor vehicle accident victims to be personal income. Canada’s Income Tax Act contains the general rule that personal injury awards are not “income” for taxation purposes and do not need to be reported or taxed (see section 81(1)(g.1)).
The CRA has issued detailed guidelines for the tax treatment of damages and settlements received out of claims for damages for personal injury or death (Bulletin IT-365R2). The gist is that amounts received as general or special damages in a personal injury claim are typically excluded from income, regardless of the fact that some of the damages may be based on loss of earnings.
What Are Some of Exceptions to be Aware of?
One exception is damages that are more reasonably considered to be income, such as a severance payment or payment from your employer, or the portion of a settlement to compensate a sole proprietor or business owner for revenue or clients lost due to the accident. Such payments are taxable.
Another major exception is that any income you earn on personal injury compensation is taxable. For example, if you receive a large award and invest some or all of it, you must report the income you earn each year going forward on your tax return. That can result in a hefty tax bill.
To avoid that outcome, consult with one of our Sault Ste. Marie lawyers to determine whether a structured settlement is recommended in your situation. Personal injury compensation is normally paid out in a single, lump sum payment. Conversely, a structured settlement is an agreement for periodic payments for a fixed term (or the duration of your life, depending on the terms of the structured settlement). Under a structured settlement agreement, you receive settlement payments on a set schedule (e.g., weekly, monthly). If the structured settlement meets the CRA’s specific criteria, the periodic payments are tax-free in your hands.
Get Advice From Our Law Firm
Elliot Lake, Wawa, Blind River, Sault Ste. Marie and the surrounding Algoma District are served by the experienced personal injury lawyers at Feifel Gualazzi. We specialize in motor vehicle accident claims, and we’ll help you determine how much you are entitled to claim as compensation for your injuries and losses.
Details matter. You should have professional advice before accepting an offer from the insurance company or receiving any form of settlement payment. If you or a loved one has been injured in a car, ATV, motorcycle, bicycle, or snowmobile accident, contact the personal injury lawyers at Feifel Gualazzi. Our personal injury lawyers will help you navigate the insurance process, advise you on important issues, and get you the compensation you deserve.
