Are Personal Injury Settlements Taxable in Ontario?

Quick Answer

Most personal injury settlements in Ontario are not taxable. Settlement money for pain and suffering, medical expenses, future care, lost income, loss of earning capacity, and wrongful death damages is generally not treated as taxable income when it is paid as compensation for personal injury or death.

The main exceptions involve income earned after settlement funds are invested, payments that are really employment income, business losses, property damage, or settlements that resolve more than a personal injury claim.

If you are resolving a serious injury claim, an Ontario personal injury lawyer can help you understand what the settlement is intended to compensate. For tax advice about your own return, investment income, trusts, or structured settlements, speak with an accountant or tax professional.

Why Personal Injury Settlements Are Usually Not Taxable

Personal injury settlements compensate an injured person for harm caused by an accident, unsafe property, collision, fatal incident, or other wrongful act. It is different from wages, business income, or investment income.

The Canada Revenue Agency’s archived bulletin on damages, settlements and similar receipts, which CRA still makes available for research and reference, explains that damages for personal injury or death can include both special damages and general damages.

Special damages include out-of-pocket expenses, medical and hospital expenses, and accrued or future loss of earnings. General damages can include pain and suffering, loss of amenities of life, loss of earning capacity, shortened life expectancy, and loss of financial support caused by death.

The CRA bulletin states that amounts qualifying as special or general damages for personal injury or death are excluded from income. That remains true even where part of the settlement was calculated by looking at lost earnings.

That point sometimes causes confusion in Ontario injury cases. A settlement often includes money for income the injured person already lost or income they are expected to lose in the future. That does not automatically make the settlement taxable. If the money is paid as damages for personal injury, it is generally treated differently than ordinary employment income.

Do You Pay Tax on Pain and Suffering Damages?

No. Pain and suffering damages in an Ontario personal injury settlement are generally not taxable.

Pain and suffering damages compensate for the human consequences of the injury. That can include physical pain, loss of enjoyment of life, reduced independence, emotional distress, permanent impairment, scarring, loss of mobility, sleep disruption, and the effect of the injury on daily living.

These damages are not paid because the injured person performed work or earned income. They are paid because the injured person suffered harm. For that reason, pain and suffering compensation is generally excluded from income.

In Ontario motor vehicle cases, pain and suffering damages also have to be considered alongside the statutory deductible and serious impairment threshold.

Is Lost Income in a Personal Injury Settlement Taxable?

Lost income is one of the most common sources of confusion. In many Ontario injury cases, the settlement includes compensation for income the injured person already lost, income they are expected to lose in the future, or reduced earning capacity. The CRA’s archived damages bulletin specifically recognizes accrued or future loss of earnings and loss of earning capacity as examples of damages that can arise from personal injury or death.

That means a settlement can include compensation measured by lost income without being taxed like a paycheque.

The answer changes where the payment is really employment income rather than personal injury damages. Salary continuation, severance, termination pay, wages in lieu of notice, or employment-related settlement money can have different tax treatment. CRA’s Income Tax Folio on retiring allowances explains the treatment of certain employment termination payments.

Are Medical Expenses and Future Care Damages Taxable?

Medical expense and future care damages in personal injury settlements are not taxable if they are paid as compensation for injury-related needs.

These damages can include past treatment expenses, rehabilitation, medication, assistive devices, attendant care, home modifications, therapy, case management, transportation to treatment, and future care needs. In serious cases, future care evidence can become a major part of the settlement because the injured person will need support long after the lawsuit is resolved.

For example, someone suffering with a traumatic brain injury could require cognitive rehabilitation, psychological treatment, supervision, case management, or help with daily organization. Someone with a spinal cord injury could require attendant care, mobility equipment, accessible housing, bowel and bladder supports, and long-term rehabilitation.

These are compensatory damages, not ordinary income. For more on how these claims are assessed, see our guide to cost of future care in Ontario personal injury claims.

Is Interest on a Personal Injury Settlement Taxable?

Interest has to be separated into two categories.

First, a personal injury settlement or court award sometimes includes an amount described as interest as part of the resolution of the claim. CRA’s archived damages bulletin states that where damages for personal injury or death are awarded by a court or resolved by settlement, no part of that amount will be income to the recipient even if the amount includes or is increased by an amount referred to as interest under the court order or settlement agreement.

Second, once the injured person receives the settlement money, income earned from investing that money is generally taxable. CRA’s current page on amounts that are not reported or taxed explains that income earned on non-taxable amounts is taxable. CRA also states that interest and other investment income must be reported on a tax return.

The simple distinction is that the personal injury settlement itself is usually not taxable, but income generated by the settlement money after it is received can be taxable.

Can Structured Settlements Be Tax-Free?

Structured settlements are often used in serious injury cases, especially where the injured person needs long-term financial security.

A structured settlement usually involves periodic payments funded through an annuity arrangement. CRA’s archived damages bulletin explains that a properly arranged structured settlement can result in payments to the claimant being treated as non-taxable damages, provided the required conditions are met.

Those conditions are technical and require a personal injury or death claim, an agreement with the casualty insurer, periodic payments, and an annuity structure where the insurer remains responsible for the payments. If the injured person simply takes a lump-sum settlement and later buys an annuity independently, the tax result can be different.

Structured settlements are not right for every case. They are most often considered where the settlement is significant, the injury is permanent, the injured person has future care needs, the injured person is a minor, or long-term income security is more important than receiving all funds at once.

They are especially relevant in serious claims involving catastrophic impairment, traumatic brain injury, spinal cord injury, or other permanent injuries that require long-term planning.

Are Wrongful Death Settlements Taxable?

Wrongful death and Family Law Act settlements are generally not taxable when they compensate family members for losses arising from a death caused by negligence.

In Ontario, eligible family members can claim compensation under section 61 of the Family Law Act. These claims can include loss of care, guidance and companionship, loss of financial support, funeral expenses, and other recognized losses.

The CRA damages bulletin specifically includes loss of financial support caused by death as an example of general damages arising from personal injury or death. As with other settlements, the tax answer depends on what the payment is compensating. A wrongful death settlement for loss of support is different from income earned after the funds are received and invested.

For more on these claims, see our pages on Ontario wrongful death claims and Family Law Act claims in Ontario.

Do You Have to Report a Personal Injury Settlement on Your Tax Return?

In most cases, a personal injury settlement for damages arising from personal injury or death does not have to be reported as taxable income.

The answer can change if part of the settlement is not really personal injury compensation. It can also change after the money is received. If the settlement funds are invested and produce interest, dividends, capital gains, or other income, that later income can be taxable and reportable.

Speak With an Ontario Personal Injury Lawyer

Foster Injury Law represents injured people across Ontario in serious personal injury claims, including car accidents, motorcycle accidents, pedestrian and bicycle injuries, brain injuries, spinal cord injuries, catastrophic injury claims, and wrongful death claims.

If you are dealing with a serious injury claim, contact Foster Injury Law for a free consultation.

Frequently Asked Questions

Are personal injury settlements taxable in Ontario?

Most personal injury settlements in Ontario are not taxable when the money compensates the injured person for damages arising from personal injury or death. This usually includes pain and suffering, medical expenses, lost income, loss of earning capacity, future care, and wrongful death damages.

Do you pay tax on a personal injury settlement in Ontario?

Usually, no. A personal injury settlement is generally not taxed when it compensates for injury-related damages. Income earned after the settlement money is received and invested can be taxable.

Is pain and suffering taxable in Canada?

Pain and suffering damages are generally not taxable in Canada when paid as compensation for personal injury. They are treated as damages for harm suffered, not employment income.

Is lost income from a personal injury settlement taxable?

Compensation for lost income in a personal injury settlement is generally not taxable when it is paid as damages for personal injury.

Can a structured settlement be tax-free?

A properly arranged structured settlement for personal injury or death can result in periodic payments being treated as non-taxable damages. The structure has to be arranged correctly. A person considering a structured settlement should get legal and tax advice before finalizing the settlement.

Are wrongful death settlements taxable in Ontario?

Wrongful death settlements are not taxable when they compensate family members for losses arising from the death, such as loss of care, guidance and companionship, loss of financial support, and funeral expenses.