Do I Have to Pay Taxes on My Calgary Personal Injury Settlement?
You can rest easy if you’re worried about whether the Canadian Revenue Agency (CRA) wants a bite out of your Alberta personal injury settlement.
The CRA does not consider most portions of personal injury settlements to be taxable income.
Yet you have to be careful.
Direct Compensation for Injuries
While you may consider your injury settlement one payment, Canadian law distinguishes between different portions of your settlement. For example, if you receive punitive damages, that portion of your settlement is taxable.
The tax-exempt part of your settlement would be any part directly compensating you for your injuries, including monies to cover your medical and dental bills, lost wages, and pain and suffering compensation.
Punitive damages, by contrast, are meant to punish a person or organization for a “wanton or intentional act.” Punitive damages are meant as a deterrent and to uphold the public good, even though a private individual (you) ultimately will receive the money. Therefore they do not count as “direct” compensation for injuries.
While they don’t come up as often in personal injury cases, breach of contract damages is the same. They’re meant to punish one party for defaulting on the contract or to compensate a financial loss arising from the breach, which is not the same as a personal injury. Therefore breach of contract damages are also taxable.
Investing Your Injury Settlement
What you do with the settlement may also make a difference. For example, if you put that money into an interest-bearing account, the interest you earn is taxable. It’s a good idea to meet with a financial planner before taking any significant steps with your money to discuss the tax implications and the implications for your ability to access and use the funds when needed.
This is not to say you should never invest personal injury funds. There are times when you may have to. For example, you may be forced to invest funds if you live off AISH, PDD, or other public support programs.
You can take steps with the money to keep it without losing access to those programs, but they’re limited. You’ll have 365 days to invest up to $100,000 into an exempt account. If you have over $100,000, you may have to take additional steps to protect your AISH money.
Loss of Earning Capacity Claims
In addition, you should keep in mind that taxes have an indirect impact on lost wages and loss of earning capacity claims.
If you can no longer work due to your injury—or you can work but now make far less money because you can no longer perform as you once did—you would be eligible for loss of earning capacity compensation.
The CRA will not tax this money directly.
However, Alberta’s Insurance Act reduces the amount of a loss of income award to the amount you would have been paid after taxes. Thus, if you made $65,000 a year and can no longer work, your award would be capped at $51,530 if your tax bracket is 20.5%. (Tax brackets range between 15% to 30% based on your income and are subject to change).
The tax rate reduction doesn’t take deductions or credits into account, so you may not be able to put the exact amount into your bank account every year that you used to live on. The amount will be close, but it won’t be identical. You can’t use personal injury suits to receive a “windfall.” For better or worse, Alberta thinks getting some untaxed and untaxable income would count for better or worse.
Get Help Today
Before worrying about paying taxes on your personal injury settlement, you have to win your case.
The team at Merchant Law is full of passionate injury attorneys with decades of experience.
Contact us to schedule a free case review. We’re ready to help you negotiate a fair settlement for your injuries!