Is a Personal Injury Settlement Taxable?

If you’ve been injured in an accident that was caused by someone else’s negligence, you can seek compensatory damages for your physical, financial, and emotional losses through a personal injury claim. A skilled personal injury lawyer will carefully guide you through the legal process toward a settlement or court award that fairly addresses the damages you’ve suffered. Generally, personal injury settlements and awards – including the portion that represents pain and suffering damages – are not taxable in Canada, but there are exceptions to this rule. If someone else’s negligence leaves you injured in an accident of any kind, the experienced legal team at Preszler Injury Lawyers in Nova Scotia can help.

Types of Compensation Available in a Personal Injury Claim

The funds you receive in your personal injury settlement will be categorized as either pecuniary, which refers to the direct financial losses you experience, or non-pecuniary, which refers to the impact your injuries have on your life and which are more difficult to quantify.

Pecuniary Damages

Pecuniary losses – or compensatory losses – are those that you can assign an exact value to, which include damages such as the following:

• Your related healthcare costs, including both current and ongoing medical bills
• Your lost wages, including diminished earning capacity
• Other out of pocket expenses relating to the injury

Proving the extent of your pecuniary damages generally comes down to proving their overall cost, which can be accomplished through a careful accounting of your current and projected expenses.

Non-Pecuniary Damages

Non-pecuniary damages address those losses that don’t have a price tag attached but that, nonetheless, negatively affect your life. Prime examples include the following:

• Diminished overall quality of life
• Diminished mental capacity or physical functioning
• Emotional distress
• Physical and emotional pain and suffering

When determining your non-pecuniary damages, Nova Scotia courts carefully consider factors such as the severity of your injuries, the amount of time associated with your recovery, and the degree to which your life has been affected by your injuries.

Are Personal Injury Settlements Taxable?

In Canada, the Income Tax Act outlines what’s taxable and what’s not. The section entitled Income from personal injury award property reports that, for taxation purposes, personal injury awards aren’t classified as income. Instead, the settlement or court award you receive from a personal injury claim is considered a financial remedy for the losses you’ve suffered as a result of another person or entity’s negligence.

Tax Exemptions for Personal Injury Settlements

The settlement amount you receive in a personal injury case is very likely to be tax exempt because the settlement funds are intended to cover the losses you’ve experienced due to someone else’s carelessness.

Special Damages

Special damages refer to losses that come with a specific value attached, such as the cost of your medical expenses, therapeutic care, and rehabilitation needs. Determining the overall cost of these out-of-pocket expenses is generally a straightforward process that involves compiling the associated bills and invoices. Special damages are not subject to taxation in Canada.

General Damages

General damages refer to your intangible losses, which are more subjective in nature. This category of loss refers to both physical and emotional pain and suffering as well as lost income. General damages are also exempt from income taxes.

Limiting the tax implications of your personal injury settlement is key, and a trusted Nova Scotia personal injury lawyer can help make that happen.

Exceptions to Tax Exemptions

While personal injury settlements are generally tax exempt, there are exceptions to the rule. For example, if you’re injured to the degree that you’re no longer able to work, any severance payment that you receive in your settlement can be treated as employment income, which means it may be taxed. This, however, may only apply to the percentage of your settlement that relates to employment income.

Further, if you choose to invest all or part of your settlement, any investment income you receive will be considered taxable income.

Structured Settlements and Tax Implications

The bulk of personal injury settlements are paid upfront in a lump sum award, but there is another option, which is the structured settlement. With a structured settlement, you’ll receive part or all of your compensation over time – in accordance with a predetermined schedule of periodic payments.

Structured settlements represent a source of income that can offer enhanced financial stability in the face of ongoing medical needs and lost earnings – in addition to providing a layer of protection from creditors.

The Canada Revenue Agency (CRA) determines the requirements for qualifying as a structured annuity – or structured settlement. Those that meet the requirements are exempt from taxation.

Unique Circumstances and Tax Considerations

Your personal injury claim will be unique to the specific circumstances involved, and limiting your exposure to taxation in relation to your settlement is essential. Working closely with a seasoned personal injury lawyer from the outset is always to your advantage.

Why Turn to a Nova Scotia Personal Injury Lawyer

The practiced Nova Scotia personal injury lawyers at Preszler Injury Lawyers are committed to building your strongest claim, to fiercely advocating for your rights and rightful compensation, and to limiting all related tax implications. We’re on your side and ready to help. Contact or call us at 833-586-8282 to learn more about how we can assist you.