Do You Have to Pay Tax on Your Personal Injury Compensation?

If you suffered injuries in an accident that was someone else’s fault, you may be able to pursue compensation. After filing a successful lawsuit, a court may award you money to compensate you for your injuries and losses. An experienced personal injury lawyer can help you seek money to pay for the harm you suffered in an accident.

If a judge or jury awards you compensation, you will want to know whether the cash proceeds from your personal injury case are taxable as income. Generally, the proceeds from a personal injury award or settlement are not taxable.

You shouldn’t have to take financial responsibility for your losses if you sustained injuries in an accident that was not your fault. You can seek compensation for your losses. Do you need assistance and want to learn more about filing a personal injury case? Contact an experienced Nova Scotia personal injury lawyer today for a free initial case evaluation.

What Is a Personal Injury Case?

A personal injury case is a legal action typically arising from the negligent conduct of one or more parties. Injured parties can seek compensation from the at-fault parties in a personal injury lawsuit.

If you have sustained an injury in an incident that was not your fault, you may have a right to pursue compensation for any physical injuries and other losses. Accidents that commonly give rise to injury cases include:

  • Motor vehicle accidents
  • Slip and fall accidents
  • Defective product incidents
  • Medical malpractice
  • Nursing home and foster care abuse
  • Pedestrian accidents
  • ATV and snowmobile accidents
  • Bike accidents
  • Boating accidents
  • Intentional torts (assault, sexual assault, false imprisonment)
  • Dog bites

If you sustained injuries because of the fault of another person, you should talk to an experienced personal injury lawyer. Wagners offers free consultations so you can get an evaluation of your case at no risk or cost. A personal injury lawyer can conduct a complete investigation of your accident that may reveal crucial facts about your case.

What Types of Compensation Are Available in A Personal Injury Claim?

In a personal injury lawsuit, you have the right to seek compensation for losses to your well-being and property caused by the fault of another person. The law of personal injury separates these losses into two categories, pecuniary and non-pecuniary damages.

An experienced personal injury lawyer can provide the representation necessary to ensure that you seek the full range of pecuniary and non-pecuniary losses recoverable in your personal injury matter.

Pecuniary damages are losses that are quantifiable by some factual record of their existence. Examples of these losses include:

  • Medical expenses for current treatment (doctors’ visits, hospitalization, and medication)
  • Medical expenses for long-term treatment (therapy, rehabilitation, and medication)
  • Lost wages, if you are unable to work due to your injuries
  • Property damage, such as damage to your vehicle if you were in a car accident

A receipt, invoice, paystub, or written estimate can directly prove loss in a personal injury case. While pecuniary damages have a bill or other record attached, non-pecuniary damages are more difficult to measure and, therefore, harder to verify.

When determining non-pecuniary damages, courts place considerable weight on the seriousness of your injuries. If their severity causes a long extensive recovery, it will also increase any effects your injuries have on your life. As a result, non-pecuniary damages generally correspond to the severity of your injuries.

Examples of non-pecuniary damages include:

  • Emotional distress
  • Pain and suffering
  • Impairment of your quality of life
  • Impairment of mental capacity
  • Impairment of the ability to physically function
  • Loss of guidance, care, and companionship

Federal law caps the amount of non-pecuniary damages you may recover in a personal injury case at just over $400,000. This cap has been adjusted over time for inflationary purposes from the original cap of $100,000, which was put in place in 1978.

If the acts of the at-fault party exhibit a malicious disregard for your safety or gross recklessness, the court may award you punitive damages. However, courts only award punitive damages in rare circumstances and only in an amount relative to the harm caused by the defendant or at-fault party.

Are Personal Injury Settlements Taxable in Canada

Generally, you do not have any tax liability if you receive personal injury compensation. Whether you receive money awarded by a judge or jury or from a settlement negotiated by your lawyer, the CRA does not classify it as taxable income. It also doesn’t matter whether your compensation is paid in a lump sum or by structured installment payments.

Federal law states that “the income for the year from any property acquired by . . . a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person . . .” shall not be included in taxable income.

Any property substituted for an award of monetary compensation and any taxable capital gain for the year you incur from selling or otherwise disposing of this property is also not included in your taxable income.

In determining whether an award or settlement is taxable, the CRA follows the “surrogatum” principle. The surrogatum (substitute) principle analyzes the item the settlement or award intends to replace to determine whether it is taxable income.

For example, if you successfully sue for breach of contract and recover lost business revenue, this income is taxable. Why? Because the CRA considers it a substitute for business revenue, which is income normally taxable under the Income Act.

Personal injury proceeds are exempt from taxation if they qualify as special or general damages for personal injury. These damages are not taxable even where the court considers them to represent lost earnings.

Special damages include out-of-pocket medical expenses and loss of present and future earnings. Of the many examples of general damages, one is pain and suffering. Another is lost future earning capacity.

Personal Injury Awards and Settlements Exempt From Taxation

Whether you receive personal injury compensation from a settlement or award, proceeds from your personal injury claim are not taxable. Specific types of settlements and awards exempt from taxation include:

  • Payments from a class-action settlement
  • Lump-sum judge and jury awards
  • Lump-sum settlements
  • Annuities from a structured settlement received over time from an insurance carrier
  • Short-term disability or long-term disability compensation
  • Punitive damages

While you can keep a capital gain in the first year on property received as an award, any other investments made with your personal injury proceeds could result in tax liability under the Income Act.

What Type of Settlement is Taxable?

In rare cases, you may have to include personal injury proceeds as taxable income. For example, if you receive cash from a compensation award or settlement held in a deposit account that accrues interest before payment, this interest is taxable. Awards for lost work income are typically taxable, as they replace your regular source of income. An experienced personal injury lawyer can help you avoid these mistakes and others. Awards for lost work income are typically taxable, as they replace your regular source of income.

Consult with an Experienced Nova Scotia Personal Injury Lawyer

The experienced personal injury lawyers at Wagners have more than four decades of experience helping our clients in Nova Scotia obtain compensation for their injuries in all types of personal injury matters.

Our office offers free initial consultations to help you learn more about your personal injury claim at no risk. Reduce stress and exchange uncertainty for clarity by talking to one of our experienced personal injury lawyers.

Consulting with a seasoned and skilled personal injury lawyer as soon as you realize that you may have to pursue legal action can improve your chances of success. We will assist you throughout the legal process and help you understand your options at each stage. Contact our office for a free case evaluation today.

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