If you’ve been injured in a car accident in Halifax you might ask yourself if you have to pay tax on any financial compensation you receive, This compensation can be obtained in a settlement or after a successful trial. This question is a common one. Needing to declare personal injury settlements on your income tax return can make a big difference in terms of how much compensation you actually receive.
The Straight-Forward Answer:
Well, good news! The answer to this common question is a very straight-forward “no”. CRA does not treat compensation received for car accident injuries, or any other injury settlements, as taxable income. It is treated similar to things like life insurance payouts, lottery winnings and most gifts/inheritances. Personal injury compensation is non-taxable in Canada.
You can have a look at CRA’s policy by clicking here.
The technical explanation for not paying taxes on injury settlements in Halifax:
Canada’s tax rules come from a piece of legislation called the Income Tax Act. This defines what is taxable and what isn’t. Subsection G of the Act contains the sections that excludes personal injury compensation from tax.
The legislation 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.
This part of the Income Tax Act exempts personal injury settlements from taxation with regular income.
The Policy Explanation for not paying tax on injury settlements in Halifax:
As Halifax injury lawyers, we get asked all the time why personal injury compensation isn’t taxable. People in Nova Scotia are conditioned to paying taxes. They often don’t believe when we tell them that financial settlement we’ve helped achieve for them is tax-free.
To understand why the Income Tax Act excludes personal injury compensation from tax requirements, consider the following:
i. Pain and Suffering Compensation: An award of compensation for pain and suffering is intended to symbolically compensation you for the loss of your quality of life. While pain and suffering compensation is financial, it is only financial in the symbolic sense. In theory pain and suffering compensation isn’t “income”. You aren’t entitled to “income”because your injuries have reduced your enjoyment of life. You are entitled to “pain and suffering” compensation. It’s this same theory that excludes “pain and suffering” compensation from bankruptcy proceedings.
ii.. Income Loss Compensation: If your injury results in income loss, the insurance companies and courts calculate the income loss compensation on a “net” basis. This means that they will determine the amount of lost wages that are caused by a car accident (for example) and then deduct the amount of taxes you would have paid if you had received income from working (had you not been injured). They determine this by using your appropriate tax bracket. Any compensation you receive for income loss has, in theory, already been taxed. It would therefore not be appropriate for CRA to tax any net income loss compensation received in a personal injury settlement.
Get Advice from a Professional:
While the above advice can serve as a general guide, every injury claim is slightly different and everyone’s tax and income situations are different. Because of this you should speak with a qualified tax professional when filing their taxes the year they receive a personal injury settlement.
You can also have a free consult with an experienced personal injury lawyer. They will help answer any questions about the impact of a personal injury settlement on your taxes.