Are Income Replacement Benefits Taxable?
Recently, we addressed the question whether long-term disability benefits are taxable in Canada. As we saw, the answer to that question is complicated — some types of benefits are always taxable, some are never taxable, and some are only sometimes taxed. Today, we want to consider a similar question that has a much simpler answer: Are income replacement benefits taxable?
As we’ll see, the answer is no. And that fits in with a broader pattern in how Canadian tax law treats personal injury recoveries: Normally, no income tax is due on an award of damages or settlement amounts in a personal injury case. In this regard, income replacement benefits are analogous to damages for lost wages in an Ontario personal injury lawsuit.
In this post, we’re going to take a closer look at income replacement benefits and how Canada’s tax law treats them. But first, a quick reminder: We’re not tax lawyers. If you have questions about your particular financial circumstances or about how the following tax discussion applies to you, you should contact a knowledgeable Ontario tax professional.
What are income replacement benefits?
Income replacement benefits are payments made to a person who, as the result of an automobile accident, becomes unable to work. The benefits are offered as part of Ontario’s Statutory Accident Benefits (SABs), which every auto insurance policy in Ontario must provide.
In general, income replacement benefits will be equal to 70% of your gross weekly income before the accident provided you were employed and not self employed. Gross weekly income is determined by dividing one of the following amounts by 52:
- Your gross income for the 52 weeks before the accident; or
- 13 multiplied by your gross income for the four weeks before the accident.
However, income replacement benefits are limited to $400 per week (or a higher amount if you purchased an optional add-on for your automobile insurance policy). In addition, your benefits will be reduced based on any collateral benefits you receive, such as disability benefits under the Canada Pension Plan or a private disability insurance policy.
The Canadian Income Tax Act excludes from taxable income “the income from any property acquired as an award of, or pursuant to an action for, damages in respect of physical or mental injury.”
In 1987, the Canada Revenue Agency (CRA) issued an interpretation bulletin in which it expanded on that exclusion. There, the CRA explained that the exclusion extends to both general and special damages, including the following:
- Out-of-pocket medical expenses
- Accrued and future lost earnings
- Pain and suffering
- Loss of amenities of life
- Lost earning capacity
- Shortened life expectation.
The CRA made clear that “[a]ll amounts . . . that qualify as special or general damages for personal injury or death will be excluded from income regardless of the fact that the amount of such damages may have been determined with reference to the loss of earnings” (emphasis added).
In short, a damage award or settlement amount in a personal injury lawsuit will normally not be taxed, even though part of it (lost wages) is effectively a replacement for what would have been taxable income.
Income Replacement Benefits and Taxes in Canada
Given how the Income Tax Act treats personal injury damages, it should come as no surprise that income replacement benefits are also not taxed. However, although this is a real advantage, remember that these benefits will always be 30% less than your pre-injury income, and may be reduced still further if you receive similar benefits from other sources.
CONTACT PRESZLER INJURY LAWYERS
Thankfully, the Income Tax Act’s treatment of income replacement benefits is not as convoluted as its treatment of long-term disability benefits. When you receive income replacement benefits, you do not pay tax on them, just like you don’t pay tax on a damage award resulting from personal injury.
But as easy as that principle is to understand, qualifying for income replacement benefits can be more complicated. In the first place, not everyone is eligible for income replacement benefits in Ontario. In addition, insurance companies are notorious for how much they resist any application for benefits, even when their liability is clear.
If you were recently injured in a motor vehicle collision and have questions about the accident benefits you should be entitled to, contact Preszler Injury Lawyers today and receive a free initial consultation. To speak with our Ontario accident benefits lawyers, call 1-800-JUSTICE.