Subdivision G of Canada’s Income Tax Act includes income from personal injury awards as property that is a non-taxable form of income. Section (g.1) of the Act states, “the income for the year from any property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person,” are not included in computing a taxpayer’s income. In plain language, this part of the Income Tax Act exempts personal injury settlements from taxation with your regular income.
Meanwhile, the Canada Revenue Agency clearly states, “compensation received from a province or territory if you were a victim of a criminal act or a motor vehicle accident” is not taxable. This means that even compensation from a province or territory that you recover in a personal injury settlement is not taxable with your income.
Compensation and Income Tax
Even though an individual would normally pay income taxes on the income for which their personal injury settlement is compensating them, they do not have to pay income tax on their recovery for lost wages. That leaves an individual with more of their income than they would otherwise retain.
For example, if an individual earns $80,000 per year and, for the sake of simplicity, pay 30 percent in income taxes, their take-home pay would be $56,000 per year. If an individual seeks compensation for their $80,000 income in a personal injury claim, they would not pay income tax on that $80,000 recovery.
Reporting a Settlement
Because everyone’s tax and income situations are different, an individual should speak with a qualified tax professional when filing their taxes the year they receive a personal injury settlement. An individual should be upfront and honest about their income, gains, and losses so the tax preparer can help an individual pay the taxes they owe and avoid any negative consequences later.
Contact a Lawyer
Before you can worry about taxes, you need to make sure you are resolving your personal injury claim for a fair amount. An experienced lawyer will help injured people in Ontario understand and exercise their right to compensation if another party caused their injuries.
To discuss the details of your accident and options to recover compensation, contact a lawyer immediately®. A lawyer from the Preszler Law Firm will be happy to explain your options and guide you to a fair settlement for your injuries.