Personal injury settlements commonly arise from motor vehicle accidents, slip and fall incidents,
medical malpractice, and other negligence-based claims. In Canada, personal injury
settlement money is generally not taxable.
A personal injury lawyer can help you understand both the legal process and what happens to
your settlement money once your case resolves.
How CRA Determines Whether Settlement Money is Taxable
The Canada Revenue Agency (“CRA”) focuses on one key question: What is the settlement
meant to replace? Personal injury compensation, whether through a lawsuit or through your accident benefits provider (if you’ve been involved in a motor vehicle accident), is meant to compensate you for
the long-term impact an injury can have on a person’s independence, earning potential and care
needs. Because the CRA treats this compensation as personal rather than economic, this
compensation is non-taxable.
Why Personal Injury Settlements are Usually not Taxed
In the CRA’s IT365R2 Bulletin, the CRA confirmed that amounts received as general or special
damages (i.e., compensation) for personal injury or death are excluded from income, even
where the amount is determined with reference to lost earnings.
General and special damages include but are not limited to:
- Pain and suffering
- Future care costs
- Out-of-pocket expenses
- Past and future income loss
- Loss of earning capacity
None of this compensation will be treated as taxable by the CRA. Not even lost income.
Courts may consider past and future income loss, and loss of earning capacity as loss of
income, but the CRA doesn’t. The CRA treats monies awarded for employment income as a
personal loss. The CRA recognizes that settlement money is intended to acknowledge harm
suffered, not to provide income or financial gain. As it is not treated as real income, it’s not
taxable.
Are Accident Benefits Settlements Taxable?
If you suffer a personal injury after being involved in a motor vehicle accident, you may receive
accident benefits from your insurer. In Ontario, if you settle your accident benefits claim, that
settlement is generally not taxable. Your settlement may include cash lump-sums for:
- Income replacement benefits or non-earner benefits
- Caregiver benefits
- Medical benefits
- Rehabilitation benefits
- Attendant care benefits
- Death and funeral benefits
- Other expenses
Regardless of how the cash lump-sums are allocated across the specific benefits, these
amounts are not treated as taxable by the CRA.
When Settlement Money may become taxable
The general rule is that settlement funds are not taxed when you receive it. However, if you
choose to invest those funds after receiving it, any income earned from that investment is
taxable.
How CRA Treats Structured Settlements
Most personal injury settlements are paid as a lump sum. Some, however, are paid as
structured settlements.
Structured settlements are often used in catastrophic injury cases, or where the injured person
is a minor or lives with a disability. In some cases, the claimant chooses this arrangement. In
others, it is required as part of the settlement.
Instead of receiving a lump sum payment, a structured settlement pays the claimant a pre-
determined amount over a pre-designated time frame. For example, instead of receiving
$360,000 as a lump sum, the claimant receives $3000 on the 1 st of every month for the next 10
years. This type of settlement lowers the claimant’s risk of exhausting their funds too quickly or
being reckless with their monies.
For tax purposes, the income earned on the investment of the principal within a properly
arranged structured settlement is generally received tax-free in the claimant’s hands.
Because structured settlements involve complex planning, they are often heavily negotiated
beforehand and typically arranged with legal and financial professionals.
Practical Tips for Understanding Your Settlement Tax Obligations
Settlement often turns on small details, which means taking a careful, informed approach can make a meaningful difference.
- Review your settlement agreement carefully and ensure each category of compensation is clearly described.
- Do not assume all settlement money is tax-free, even if the claim involves a personal injury. If you personally invest your settlement money, the income earned from the investment is taxable.
- Keep clear records, including settlement agreements, correspondence, and payment breakdowns explaining the purpose of each amount.
Final Thoughts
So, is settlement money taxable in Canada? The short answer: not usually. If you are uncertain, seeking advice from a personal injury lawyer early in the process can help prevent complications later.
If you would like our help or want to understand your rights under the law, we are here for you.
As a Reminder: This is just a general guide and is not tax advice. For more information and to understand how this may apply to your own financial circumstances, please contact an Ontario tax professional.
