Are Personal Injury Settlements Taxable in Canada?

28 Nov 2019 Legal Services

Knowing the answer to the common question “Are personal injury settlements taxable in Canada?” will provide you with a clearer picture of how much compensation you may be entitled to. At Linley Welwood, they understand how complex and confusing personal injury settlements can be. That is why their team of personal injury lawyers are always ready to answer any questions you might have.

Do You Have to Pay Taxes on Personal Injury Settlements?

In short, the answer is no. Since the Canadian Revenue Agency (CRA) does not consider compensation for pain and suffering taxable income, you will not have to pay taxes on either out-of-court settlements or settlements awarded by a judge or jury. This is because plaintiffs do not have to pay taxes on non-pecuniary damages, as well as on compensation received for hospital expenses, medications, and interest generated by the award by the end of the court decision.

Why are Settlements Not Taxed?

While it may feel strange to not have to pay taxes after receiving a large settlement, this is perfectly normal for settlements being received from ICBC. Since the exact value of lawsuit settlements are determined on a case-by-case basis, the ICBC insurance claims adjuster will take into consideration lost wages, the duration and severity of your injury, property damage, and the damages for pain and suffering caused by the accident before the settlement is paid out.

The final amount of your lawsuit settlement will not be taxed because ICBC will adjust the amount of your settlement based on the wages that you lost due to pain and suffering. By determining the amount of lost wages that can be attributed to the car accident and by deducting the amount of taxes you would have paid if you had received your proper income (based on your appropriate tax bracket), the ICBC adjuster will determine the proper overall sum of the settlement before you receive it.

It is also important to note that pain and suffering damages are not taxable under the Income Tax Act of 1985 and all ICBC Part 7 disability benefits are exempt from taxes.

If you would like to learn more about whether or not personal injury settlements are taxable in Canada, or if you are interested in one of their legal services for personal injury claims, please contact Linley Welwood at 604-850-6640 or by filling out a contact form on their website.