Is My Personal Injury Settlement Taxable in Canada?
Jul 24, 2026
5 min read
Settlement
Canada
Our Practice Areas
Key Takeaways
- Pain and suffering (general damages) from a personal injury settlement are not taxable in Canada.
- The portion of your settlement that replaces lost wages is also generally tax-free, as it is viewed as compensation for the loss of your earning capacity rather than standard income.
- Investment income earned on your settlement money is taxable, even if the settlement itself was tax-free.
- LTD settlement tax treatment depends on who paid the policy premiums: employer-paid means taxable, self-paid means usually not.
- Structured settlements can shelter investment growth from tax when set up correctly.
- Always consult an accountant experienced with injury settlements before finalizing your case.
If you have received or are expecting a personal injury settlement in New Brunswick, Nova Scotia, or Prince Edward Island, one of the first questions on your mind is likely about taxes. Will the Canada Revenue Agency take a share of your compensation? The answer depends on the type of damages included in your settlement. Some portions are tax-free. Others are not.
Here is a plain-language breakdown of how the CRA treats injury settlements so you can plan ahead.
General Damages: Not Taxable
The largest part of many personal injury settlements is general damages, which is the compensation you receive for pain and suffering, loss of enjoyment of life, and the overall impact of the injury on your day-to-day existence.
General damages are not taxable. The CRA's position is set out in Interpretation Bulletin IT-365R2, which confirms that amounts received as damages for personal injury or death are excluded from income. Personal injury settlements simply do not fall within the Income Tax Act's definition of income, so the CRA does not treat them as taxable.
So if your settlement is $150,000 and $100,000 of it is for pain and suffering, that $100,000 is yours, free and clear. The CRA does not touch it.
This is one reason why understanding personal injury case value matters. The breakdown of your settlement into different categories affects not just the total, but how much of it you actually keep.
Lost Wages: Also Not Taxable
A common misconception is that the portion of a settlement covering lost wages should be taxed because your regular paycheque would have been taxed. That is not how the CRA treats personal injury settlements.
Interpretation Bulletin IT-365R2 states that all amounts received as special or general damages for personal injury or death are excluded from income, even where those damages are calculated with reference to lost earnings. In plain terms, the lost wages portion of your personal injury settlement is not taxable, even though the paycheques it replaces would have been.
So if your settlement from a motor vehicle accident includes an amount for the income you lost during your recovery, that amount is not subject to income tax.
There are narrow exceptions. If part of a settlement is actually a severance payment from your employer, or compensation to a business owner for lost business revenue, those portions can be taxable because they are really employment or business income in the shape of a settlement. This is different from the lost wages portion of a genuine personal injury claim.
The way your settlement is structured and documented still matters, and understanding what a personal injury case is worth helps you make sense of how the total number is built.
Investment Income on Your Settlement: Taxable
Once you receive your settlement money and deposit it in a bank account or invest it, any interest, dividends, or capital gains earned on that money are taxable. This is true even though the original settlement itself may have been tax-free.
For example, if you receive $200,000 in general damages and invest it, earning $8,000 in interest in the first year, the $200,000 is not taxable but the $8,000 is. This is standard investment income, and the CRA treats it the same as any other investment return.
Planning for this is important, especially if your settlement is large. Speak with a financial advisor or accountant about how to invest your settlement in a tax-efficient way.
Long-Term Disability Settlements
The tax treatment of long-term disability settlements follows the same replacement rule. LTD benefits replace income you would have earned, which means they are generally taxable.
However, the tax treatment depends partly on who paid the premiums for your LTD policy. If your employer paid the premiums and the cost was not included in your taxable income, then the benefits, and any lump-sum settlement, are taxable. If you paid the premiums with after-tax dollars, the benefits are typically not taxable.
If your LTD claim was denied or cut off and you received a lump-sum settlement through litigation, the same principles apply. The settlement replaces benefits that would have been paid over time, so the tax treatment follows what the original benefits would have been.
Structured Settlements: A Tax Planning Tool
A structured settlement is an arrangement where your compensation is paid out over time, often through an annuity, rather than in one lump sum. One of the advantages of structured settlements is that the periodic payments, including the growth on the invested funds, can be tax-free if the structure is set up correctly.
This is different from receiving a lump sum and investing it yourself, where the investment income would be taxable. Structured settlements are particularly useful for serious injury cases involving large amounts of money and long-term care needs.
Not every case is suited for a structured settlement, but it is worth discussing with your lawyer and accountant as part of your overall plan.
CRA Interpretation Bulletin IT-365R2
If you want to read the CRA's own guidance on this topic, the relevant document is interpretation bulletin IT-365R2, titled "Damages, Settlements and Similar Receipts." It outlines the CRA's position on when settlement amounts are taxable and when they are not. While it is written in tax language rather than plain English, it is the definitive source.
Your accountant or tax professional should be familiar with this bulletin. If they are not, it may be worth finding someone who has experience with personal injury settlements specifically.
Always Consult an Accountant
Tax law and personal injury law overlap in ways that can be complicated. Every settlement is different, and the tax implications depend on the specific facts of your case, how the settlement is structured, and your overall financial situation.
A personal injury lawyer can help you negotiate the best possible settlement. But for the tax side, you should also work with an accountant or tax professional who understands how injury settlements are treated by the CRA. Getting this advice before you finalize your settlement can save you money.
Getting Help With Your Claim
If you are dealing with a personal injury or disability claim in Atlantic Canada and you are unsure about the tax implications, the first step is to understand your full legal picture. CLG Injury Law offers free case reviews across New Brunswick, Nova Scotia, and Prince Edward Island. We can help you understand what your claim is worth and connect you with the right professionals for the tax side. You do not have to navigate this alone.
If you have received or are expecting a personal injury settlement in New Brunswick, Nova Scotia, or Prince Edward Island, one of the first questions on your mind is likely about taxes. Will the Canada Revenue Agency take a share of your compensation? The answer depends on the type of damages included in your settlement. Some portions are tax-free. Others are not.
Here is a plain-language breakdown of how the CRA treats injury settlements so you can plan ahead.
General Damages: Not Taxable
The largest part of many personal injury settlements is general damages, which is the compensation you receive for pain and suffering, loss of enjoyment of life, and the overall impact of the injury on your day-to-day existence.
General damages are not taxable. The CRA's position is set out in Interpretation Bulletin IT-365R2, which confirms that amounts received as damages for personal injury or death are excluded from income. Personal injury settlements simply do not fall within the Income Tax Act's definition of income, so the CRA does not treat them as taxable.
So if your settlement is $150,000 and $100,000 of it is for pain and suffering, that $100,000 is yours, free and clear. The CRA does not touch it.
This is one reason why understanding personal injury case value matters. The breakdown of your settlement into different categories affects not just the total, but how much of it you actually keep.
Lost Wages: Also Not Taxable
A common misconception is that the portion of a settlement covering lost wages should be taxed because your regular paycheque would have been taxed. That is not how the CRA treats personal injury settlements.
Interpretation Bulletin IT-365R2 states that all amounts received as special or general damages for personal injury or death are excluded from income, even where those damages are calculated with reference to lost earnings. In plain terms, the lost wages portion of your personal injury settlement is not taxable, even though the paycheques it replaces would have been.
So if your settlement from a motor vehicle accident includes an amount for the income you lost during your recovery, that amount is not subject to income tax.
There are narrow exceptions. If part of a settlement is actually a severance payment from your employer, or compensation to a business owner for lost business revenue, those portions can be taxable because they are really employment or business income in the shape of a settlement. This is different from the lost wages portion of a genuine personal injury claim.
The way your settlement is structured and documented still matters, and understanding what a personal injury case is worth helps you make sense of how the total number is built.
Investment Income on Your Settlement: Taxable
Once you receive your settlement money and deposit it in a bank account or invest it, any interest, dividends, or capital gains earned on that money are taxable. This is true even though the original settlement itself may have been tax-free.
For example, if you receive $200,000 in general damages and invest it, earning $8,000 in interest in the first year, the $200,000 is not taxable but the $8,000 is. This is standard investment income, and the CRA treats it the same as any other investment return.
Planning for this is important, especially if your settlement is large. Speak with a financial advisor or accountant about how to invest your settlement in a tax-efficient way.
Long-Term Disability Settlements
The tax treatment of long-term disability settlements follows the same replacement rule. LTD benefits replace income you would have earned, which means they are generally taxable.
However, the tax treatment depends partly on who paid the premiums for your LTD policy. If your employer paid the premiums and the cost was not included in your taxable income, then the benefits, and any lump-sum settlement, are taxable. If you paid the premiums with after-tax dollars, the benefits are typically not taxable.
If your LTD claim was denied or cut off and you received a lump-sum settlement through litigation, the same principles apply. The settlement replaces benefits that would have been paid over time, so the tax treatment follows what the original benefits would have been.
Structured Settlements: A Tax Planning Tool
A structured settlement is an arrangement where your compensation is paid out over time, often through an annuity, rather than in one lump sum. One of the advantages of structured settlements is that the periodic payments, including the growth on the invested funds, can be tax-free if the structure is set up correctly.
This is different from receiving a lump sum and investing it yourself, where the investment income would be taxable. Structured settlements are particularly useful for serious injury cases involving large amounts of money and long-term care needs.
Not every case is suited for a structured settlement, but it is worth discussing with your lawyer and accountant as part of your overall plan.
CRA Interpretation Bulletin IT-365R2
If you want to read the CRA's own guidance on this topic, the relevant document is interpretation bulletin IT-365R2, titled "Damages, Settlements and Similar Receipts." It outlines the CRA's position on when settlement amounts are taxable and when they are not. While it is written in tax language rather than plain English, it is the definitive source.
Your accountant or tax professional should be familiar with this bulletin. If they are not, it may be worth finding someone who has experience with personal injury settlements specifically.
Always Consult an Accountant
Tax law and personal injury law overlap in ways that can be complicated. Every settlement is different, and the tax implications depend on the specific facts of your case, how the settlement is structured, and your overall financial situation.
A personal injury lawyer can help you negotiate the best possible settlement. But for the tax side, you should also work with an accountant or tax professional who understands how injury settlements are treated by the CRA. Getting this advice before you finalize your settlement can save you money.
Getting Help With Your Claim
If you are dealing with a personal injury or disability claim in Atlantic Canada and you are unsure about the tax implications, the first step is to understand your full legal picture. CLG Injury Law offers free case reviews across New Brunswick, Nova Scotia, and Prince Edward Island. We can help you understand what your claim is worth and connect you with the right professionals for the tax side. You do not have to navigate this alone.
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People Also Ask
Is my pain and suffering settlement taxable in Canada?
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