Rules About Taxing Money From Car Insurance Settlement

Residents of Ontario appreciate their responsibility, with respect to paying a tax, one that reflects the size of their income. Does the government view settlement money as income? Is that taxed?

Basic rule

If you get settlement money, and if you did not take itemized deductions for medical expenses in a previous year, then there is no tax on the full amount of the settlement.

Exceptions to the basic rule:

The exceptions reflect the various answers to this question: What was the reason for the payment of compensation?

Was that payment made in response to a loss of wages, as suffered by the victim of an accident? If that is the case, then the money awarded as reimbursement for the lost wages can be taxed.

What was done with the award money. Was it placed in a savings account or other interest-bearing account? If that is the case, then the money received in the form of interest can be taxed. The award itself does not get considered, in determining the size of that tax.

Was the harm done to the victim the result of behavior that the court deemed as highly unacceptable? If that fact explains the nature of the victim’s injuries, then the court may have chosen to award the plaintiff with money for punitive damages. A plaintiff should prepare to pay a tax on any money awarded for punitive damages.

Did the personal injury lawyer in North Bay and Sarnia argue that the client/plaintiff had suffered a large amount of emotional stress? Did the court award damages for emotional stress? Unlike damages that arose from medical expenses, the money sought as compensation for emotional stress can be considered by the government agency that taxes the residents of Ontario.

Can the tax load associated with awarded damages be altered in any way?

A lawyer can alter the extent of that tax load by choosing to emphasize those damages that do not become the target of the government’s taxing body. For instance, an attorney could make a stronger argument for coverage of medical expenses, and a weaker one for the awarding of punitive damages. In other words, changes can be made in the amount of money requested by a given victim.

Understand though, that the size of the victim’s wages cannot be changed, in order to reduce the monetary value for a loss of wages. Yet, a lawyer could stress the physical disabilities suffered by a client, as opposed to focusing on the same client’s need to deal with emotional stress. The latter approach could avoid lowering the size of the client’s award, but it might succeed in limiting the amount of tax money that the same client would owe to the government.