Personal injury settlements are designed to compensate accident victims for the losses they suffered in a car accident, slip and fall, dog bite, or any other type of accident that left them with bodily harm. Our lawyers help Nova Scotia residents file personal injury claims for accidents they’ve suffered, with the hopes of awarding them compensation to cover the cost of their damages. But many accident victims are left confused when they realize they have to pay income tax on their personal injury settlement. Read on to learn what practices to avoid in order to mitigate the risk of paying taxes on your settlement.
As you already know, the Canada Revenue Agency (CRA) administers tax laws for the Government of Canada and for most provinces and territories, and sets the standard for what types or income are subject to annual taxes and which aren’t. It’s a little known fact, but the CRA may actually require that you pay taxes on your personal injury settlement if it is used in certain ways.
Under the CRA, there is a “surrogatum principle,” which determines whether or not a personal injury settlement genuinely fulfills the losses a victim experienced as a result of the accident. As an example, if a carpenter got into an accident that someone else caused, lost their arm, and no longer is able to perform their job, their personal injury settlement should pay them a sum of money that account for their loss of future earnings, lost wages while they heal and the cost of any medical expenses they’ve accrued. Generally speaking, as long as they used the compensation from the personal injury claim to fulfill lost wages, pay medical expenses or satisfy any other accident-related damages, the settlement money will not be taxed as income.
Additionally, if a government entity (such as a territory or province) is the party responsible for paying for your injuries, the payments are still not taxable by the CRA. Taxes can become complicated quickly, especially with personal injury settlement earnings on top of your standard annual income. If you have concerns about tax implications of your settlement, or have more questions about the amount of money in your settlement and how it should be used to minimize tax penalties, talk to your lawyer.
When Is A Personal Injury Settlement Taxed?
If the conditions of your settlement include compensation other than actual damages, you could be taxed on this income. Some personal injury lawsuits will include compensation for employment purposes, such as severance pay. Since this money does not explicitly cover damages from the accident, it can be taxed.
Additionally, if you used the money from your personal injury settlement to purchase an asset such as an annuity, you can be taxed on this money or any interest that these assets accrue over time.
Since there is always a possibility of having to pay taxes on your personal injury claim settlement, it’s important to choose the right lawyer up front. At McKiggan Hebert, we inform our clients about the potential of tax implications up front, and help them structure their settlement in a way that maximizes tax benefits for them. Not all lawyers go the extra mile to make sure their clients not only win their cases, but that they maximize their financial outcomes as well. At our law firm, this is a top priority.
Can I Invest Settlement Money?
Once you receive money from a personal injury claim, you can do with that money essentially whatever you please- but beware that you may be on the hook for paying taxes on it.
Victims who are above the age of twenty one will typically be required to pay income taxes on investment income that they got by spending their personal injury compensation. For example, if this person invests some of the money from the settlement into stocks, and then earns money from those stocks, they will be legally obligated to pay taxes on the money earned from their settlement.
For this reason, some people choose to structure their settlement in an annuity. If you choose to do this, you would not be legally required to pay any federal income taxes on your settlement, even the interest that this money gains over time.
Call Today To Schedule A Free, No Obligation Consultation With Our Personal Injury Attorney Regarding Your Accident Settlement
If you have received a personal injury settlement for any kind of accident, whether it’s a car accident, dog bite, pedestrian accident, slip and fall or something else, our team of attorneys can help answer your pressing questions about what your tax liabilities may be.
Additionally, if you have gotten into an accident and have not yet filed for a personal injury claim, but would like to do so to recoup your losses after the accident, talk to one of one and we will fight for your right to the money you deserve. Schedule a free, no-obligation consultation with McKiggan Hebert lawyers today.