Does Receipt of Settlement Money Mean You Will Owe Part of Sum To Canada Revenue Agency (CRA)?

Citizens and residents of Canada have become used to the government’s rules, regarding the taxing of income. Fortunately for the person that has won a settlement, those rules do not apply to a large portion of that settlement money. Still, there may be some funds that can be taxed.

Understand why a large portion of such funds is not taxable:

The person that is settling a personal injury case has suffered recognized losses. The awarded money is supposed to cover the costs that arose from such losses. For that reason, any money that covers compensatory or general damages does not get taxed.

Exceptions to the general rule that settlement money will not get taxed:

If no one had been injured at the time of the collision, all those involved could have returned to work. The government views the money paid as compensation for lost earnings in the same way that it views any person’s wage. The government has the right to tax the money that was received as compensation for lost wages.

The government has the same view of any money awarded in return for lost earning potential. That, too, can be taxed. The government uses the normal tax rate, when determining how much money the recipient of the awarded funds owes to the IRS.

Sometimes the court uses the money awarded to the claimant in a personal injury case as a form of punishment. The government feels obligated to punish a defendant that has committed an act of negligence that might be described as egregious. For instance, if a defendant’s carelessness rises to the level of violence, that negligent behavior could push a judge to call for the defendant’s payment of punitive damages.

The plaintiff would not need the funds associated with the punitive damages in order to regain a life of normalcy. Hence, the punitive damages received by the winner in a personal injury case could be taxed. After all, the awarded amount gets added to the plaintiff’s income; it does not replace any lost earnings.

The government’s actions give personal injury lawyers an additional role.

At times, those injury lawyers in Sherwood Park must help their clients to obtain a fair settlement, but also limit the extent to which each of the clients’ awards might be taxable. In striving for that end, a lawyer’s approach could call for an emphasis on those damage awards that would not be taxed.

If a client had been the victim of a violent attack, the lawyer might argue for more compensatory damages, in order to cover a client’s medical costs. Then the same lawyer might urge the judge to impose a limited number of punitive damages on the defendant in the client’s case.