The Canadian Revenue Agency makes it clear that there is no income tax on pain and suffering awards. Awards can be granted by a judge, jury or they can be settled out-of-court without paying taxes.
Settlements are not taxed if they’re non-pecuniary damages.
Non-pecuniary damages are those damages that are difficult to measure. For example, it’s difficult to put an exact value on an impairment of life, emotional distress or impairment of physical or mental abilities.
“Trying to figure out the right medical treatments, whether surgery is necessary and you’re going to be able to pay these bills can be overwhelming for any victim,” states Reyna Injury Lawyers.
Awards are seen as compensation not income. They money awarded in a settlement is a reimbursement.
Personal injury awards are tax-free. Litigation damages, however, are not tax-free. Damages are taxed in the same manner as income, and in some areas, such as Alberta, the taxation rate may be as high as 39%.
Litigation damages are different than pain and suffering.
Business contracts or the destruction of property are within the scope of litigation damages. In these circumstances, it’s often plausible to put a monetary value on the damages. A contract, for example, may have resulted in a loss of $1 million in business.
This figure can be determined by how much money was lost as a result of the contract obligations not being fulfilled.
Personal injury claims cannot have an exact amount given with 100% certainty. A person may have been awarded lost wages in a settlement, but this figure will also not be taxed. The main difference is pecuniary versus non-pecuniary damages.
Profits from Awards
Settlement money is yours to do as you wish, but if you choose to invest this money, the income earned will be taxable. That is, if you were to invest your money at a 5% rate per year and earned $1,000 in income, this would be taxable income.
Settlements are only tax-free initially.
You can also opt to receive a structured settlement. These settlements are interest- and tax-free, and they’re periodic payments.
Annuity payments must meet the following criteria:
- Awarded only in death or personal injury cases
- Agreement on payment terms
- An annuity contract must be purchased
- Insurers must remain in accordance to the settlement
Canada’s non-pecuniary damages had a maximum compensation value of $100,000 following a 1978 Supreme Court decision. The value is adjusted for inflation and remains around $350,000 at the time of writing this article.
Employment damages are tricky because the characterization may result in the defendant needing to meet withholding requirements or not. Exceptions must be clear if the income is not to be taxed. Otherwise, the income from employment damages would be subject to the Income Tax Act.
Employers that are paying a settlement to an employee are almost always going to result in the settlement being seen as employment income. Necessary withholdings will be required. If the employment income is related to another matter, it may fall within an exception.