The process between filing your claim and obtaining your settlement can be long and frustrating, so it is understandable to feel a wave of relief crash over you once you have finally made it there. Financial struggles and worries are no laughing matter. The stress and anxiety that comes with it can actually slow down your recovery.
Because of this, it is also extremely understandable when accident victims worry about whether or not their settlements will be subjected to taxing. After all, that money is desperately needed to cover medical expenses and aid you through your recovery. Fortunately for all the accident victims out there, in the vast majority of cases, settlements cannot be taxed. There are a scarce few exceptions out there, but they only affect a very specific sets of losses that are being compensated for. For more details, you can read on.
Can coverage for medical expenses be taxed?
Compensatory damages, which are often referred to as general damages, serve to compensate the victim for pain and suffering, medical expenses, consortium loss, emotional trauma, and other things of that nature. These sets of damages cannot be taxed under the current Canadian Tax Code, since their purpose is to compensate you for the out of pocket expenses that come with your recovery. In short: this money is awarded to cover expenses, not to simply fill your pockets.
Can compensation for future earnings and income loss be taxed?
If you are awarded damages for income loss or lost future earnings, then the CRA will treat these damages as income, which means this part of your settlement will also be treated as such. Your regular tax rate will be applied to this portion of your compensation, since its sole purpose is to replace your lost income. You might want to talk to your personal injury lawyer in Kitchener to get the finer details on the settlement.
Can awarded punitive damages be taxed?
When it comes to settlement awards, you will very rarely encounter punitive damages. This is because their sole purpose is to punish the party responsible for the victim’s losses, and to thus strongly discourage them from ever committing such a heinous act again. The behavior from the at fault party, and that led to the victim’s losses, must have been intentionally harmful. In short, this portion of your settlement is meant as punishment for the at fault party, and does not serve any purpose in regards to covering your accident related expenses. Hence, it is extra money and as such, it will be treated as income by the CRA. Getting some professional financial advice helps.