Pain and Suffering Awards in Canada: Taxable or not?
"Do I have to pay income tax on my personal injury award?"
I get asked this question a lot. The short answer is, at least until the government changes the Income Tax Act, personal injury awards in Canada are not taxable.
In Canada, compensation for non-pecuniary damages (what is typically referred to as “pain and suffering”) is not considered taxable income. However, if you invest the money that you receive, any interest, profit or gain that you receive from those investments is taxable.
For example, say you receive $100,000.00 in compensation for your “pain and suffering” claim. The entire award is tax free.
However, if you take that $100,000.00 and buy an investment that earns 5% interest per year, the $5,000.00 you earn each year will be considered taxable income.
There are tools that your personal injury lawyer can use to ensure that investments from your injury settlement are tax free.
In certain circumstances your personal injury lawyer may recommend that you place your settlement funds into an investment known as a “structured settlement”.
A structured settlement is a type of investment, known as an annuity, where you purchase an insurance contract that entitles you to receive periodic payments (usually monthly) over a specific time frame (which may be a specific number of years or even your entire life).
All of the payments, including any increase in value of the payments over time, are tax free.
Structured settlements are not right for every personal injury claim. There are advantages and disadvantages that you will need to discuss with your personal injury lawyer.
Structured settlements can be complicated and your lawyer will probably retain the services of an expert to determine whether a structured settlement is right for you and what the appropriate terms of the structured settlement should be.
