Can an Alberta Personal Injury Settlement be Taxed?
Can an Alberta personal injury settlement be taxed? You need every cent of your personal injury settlement, so it’s natural to worry about who might come looking for a cut of your money. Fortunately for you, the Canadian Revenue Agency won’t be one of the parties who do.
Here’s what you need to know about how the CRA treats personal injury settlements.
The Law is Very Generous
Every part of your settlement is protected from taxation.
This includes your pain and suffering award, the damages to repair your motor vehicle, and your lost wages or loss of earning capacity monies. As long as this money comes from a personal injury settlement, you are in the clear.
This is distinct from a different kind of settlement that might compensate you for lost income from a business, job, or investment. For example, if you sued your company for wrongful dismissal and got a big settlement the CRA would tax that amount. It just will not tax any personal injury claim.
Interest Is Taxable
Many people wisely want to invest their settlements to make the money last longer. This impulse is especially prudent if the accident has robbed you of your ability to ever work again.
Unfortunately, if you earn interest income on your settlement the interest can be taxed. That’s why you have to be very careful with the way you accept or handle your personal injury funds.
Fortunately, there is a solution: structured settlements.
Structured Settlements Can Solve Interest Issues
If you’re trying to ensure the money will be with you for life then you may want to ask for a structured settlement instead of a lump sum.
In a structured settlement, your medical bills and legal fees get paid first. The rest goes into an annuity that provides periodic payments over time. For example, it might give you a certain sum every month which you can then live on as if you were receiving a regular paycheck.
If you take a structured settlement you will need to work closely with your lawyer to make sure it’s done right. For example, the insurer must purchase an annuity contract that can’t be transferred, assigned, or commuted. This means, basically, that you can never give the annuity to anyone else and that you can never covert it back to a lump sum payment.
Your interest rates must also be fixed at the time of purchase to protect you from fluctuations in the market.
If you want the money to go to an heir after your death you will have to have that written into the structured settlement, and you’ll usually have to pay the insurance company holding the annuity for that privilege. As you can imagine, structured settlements can get complex fast, which is why you’ll want the advice of a lawyer.
Who Else Might Be Able to Make Money?
There are two instances in which you might see other parties get some of your personal injury settlement.
The first is subrogation. This happens when one insurance company pays a debt that really belongs to a different insurance company.
Let’s say your own car insurance company steps up to replace your vehicle fast, even though they know the defendant’s car insurance company is supposed to pay for that loss. They do this because they want to retain you as a customer, and they know they may not be able to do that if you have to wait months and months to get back on the road just because your personal injury case is stalling out in court.
So they pay, knowing that when you get your settlement they will be reimbursed. You don’t get to double-dip…that is, you don’t get to say, take a $10,000 payment from Insurance Company A, only to get it again from Insurance Company B. That would give you $20,000 for a $10,000 loss. Instead, Insurance Company A pays your $10,000 loss and then Insurance Company B pays Insurance Company A for their $10,000 loss.
All of this would happen before you got your share of the structured settlement or lump sum payment. It’s part of the whole payout process. This means you’re unlikely to “feel the pain” of this loss as it’s not your money to lose and it doesn’t come out of the eventual check or checks you receive.
The second instance would be a situation in which a creditor sues you and obtains a judgment that allows them to garnish your bank account. This would let them take the entire amount you owe them out of your bank account regardless of where the money came from. The best way to prevent this is to address creditor lawsuits quickly, paying them off or settling the debt when your money comes in. Sometimes you may be able to negotiate that debt down to 60% or 70% of what you owe, rather than paying the full amount. Hopefully, this article helped you to understand Can an Alberta personal injury settlement be taxed or not.
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