Are Personal Injury Lawsuit Settlements Taxable?
Most personal injury law cases result in either a settlement or an award at a trial/hearing. When this occurs, the amount you received is meant to compensate you for your losses that you’ve sustained following an injury, and, often, additional damages for pain and suffering. Clients are often concerned that a significant amount may be lost to the government in taxes. Thankfully, this is usually not the case. Here is what you need to know about tax on personal injury settlements.
Most Settlements Are Not Taxable
The good news is that most personal injury settlements and awards are entirely non-taxable. If you’ve been injured, and the purpose of the payment is to help you pay for your medical expenses, compensate you for pain and suffering and compensate you for past or future lost income, the amount of your settlement or award is non-taxable.
Settlements or awards that represent compensation for the death of a loved one are also not taxable to the person who receives the payment.
In most personal injury cases you’ll pay legal fees subject to a contingency fee agreement at the conclusion of your case. Law firms do have to charge HST on legal fees, and so this is usually the only tax you’ll pay as part of your case.
Are There Any Exceptions?
The tax system in Canada is complicated, so there are some exceptions to the rule that your settlement money is not taxable:
- If your case was for wrongful dismissal (i.e. employment law) and represented a negotiated severance or termination payment, it is likely taxable;
- If your settlement was for a taxable long-term disability benefit, the amount of the settlement represent LTD benefits owed to the date of the settlement (i.e. the outstanding past benefits) is taxable;
- If you invest your settlement amount and it earns interest, those earnings will usually be taxable income.
How Do I Make Sure My Settlement Is Not Taxable?
In many cases you won’t need to do anything, and the entire settlement will be non-taxable automatically.
However, in cases involving the exceptions outlined above, there are sometimes steps that a lawyer can take to minimize the tax implications at the time a settlement is negotiated. These can include:
- having more damages claimed as general damages (amounts for pain and suffering/loss of dignity) as opposed to lost wages for employment cases;
- for long-term disability cases involving taxable benefits, ensuring proper documentation of the settlement outlining what part represents future LTD benefits (which are non-taxable), legal fee contributions, etc. and thus lowering the amount that represents the taxable past LTD benefit;
- working closely with an accountant and/or financial advisor to minimize the tax impact of sound investments following the resolution of your case.
Receiving sound advice from both a knowledgeable personal injury lawyer and financial professionals familiar with large insurance settlements is an important part of the resolution of your case, and in ensuring that the amount you receive meets your future financial and care needs.
