Findlay Personal Injury Lawyers | October 26, 2026 | Blog \ Personal Injury Cases
Are personal injury settlements taxable in Canada? In most cases, no. The Canada Revenue Agency (CRA) does not treat damages for a personal injury as income, whether you receive them through a settlement or a court judgment. There are exceptions, though, and money you earn after the settlement is paid can be taxed, so it helps to know where the lines fall before you sign.
Key Takeaways
- Damages for personal injury, including amounts for pain and suffering and lost earnings, are generally not taxable in Canada.
- Interest that is part of a personal injury award or settlement is generally not taxable either.
- Investment income you earn on a settlement after you receive it is usually taxable, with an exception for injured people under 21.
- Structured settlement payments are generally received tax-free when the arrangement is set up properly.
- Some related payments follow different rules, such as long-term disability benefits from an employer-paid plan and wrongful dismissal settlements.
- How a settlement is worded can affect the taxability of personal injury settlements, so get legal and tax advice before you sign.
Is a Personal Injury Settlement Taxable in Canada?
The CRA’s long-standing position is set out in its interpretation bulletin IT-365R2, Damages, Settlements and Similar Receipts. The bulletin itself has been archived, but the CRA continued to rely on it when it answered a question about personal injury damages at a 2023 tax conference.
According to the bulletin, amounts that qualify as special or general damages for personal injury or death are excluded from income. That holds even when part of the award is calculated with reference to the income you lost because of the injury.
The bulletin adds one caution: an amount that can reasonably be considered income from employment, rather than damages, is not excluded. A payment from your employer that simply continues your wages is treated differently from a damages award paid by the at-fault party’s insurer.
What Parts of a Settlement Are Tax-Free?
A typical personal injury settlement is made up of several categories of damages. Under the CRA’s approach, these are generally received tax-free:
- Pain and suffering: Compensation for physical pain, emotional distress, and loss of enjoyment of life. Our guide to pain and suffering compensation in Ontario explains how it is valued.
- Past and future income loss: When paid as damages for the injury, not as wages.
- Future care costs: Therapy, attendant care, home changes, and equipment, as described in our guide to how future care costs are calculated.
- Out-of-pocket expenses: Reimbursement for treatment, medication, and travel.
- Interest included in the award: The bulletin says no part of a personal injury award is income even if it includes an amount described as interest.
When Settlement Money Can Become Taxable
Investment Income After You Receive the Money
Once a settlement is paid to you, the money is yours to invest, and the income it earns is generally taxable like any other investment income. If the award is held on deposit, the interest earned is included in the injured person’s income. If it is held in a trust, the interest is taxed to the trust or the beneficiary, depending on the circumstances.
The Under-21 Exception
Under paragraphs 81(1)(g.1) and (g.2) of the Income Tax Act, qualifying investment income earned from personal injury compensation received by or for an individual may be exempt from tax until the end of the taxation year in which that individual turns 21. The exemption is subject to statutory conditions, so the treatment of a particular settlement or investment arrangement should be confirmed with a tax professional. This matters for injured children whose awards are held until they reach adulthood.
Structured Settlements
A structured settlement pays the award over time through an annuity. When it is set up properly, the casualty insurer owns the annuity and the injured person receives the payments tax-free. If you instead take a lump sum and buy your own annuity, the interest portion of each payment is generally taxable.
How Related Benefits Are Taxed
Not every payment connected to an injury is a damages award. The table below sets out the general treatment of common payments.
| Type of payment | Generally taxable? | Notes |
|---|---|---|
| Personal injury damages (settlement or judgment) | No | Includes pain and suffering, income loss, and future care |
| Interest included in a personal injury award | No | Part of the damages under the CRA bulletin |
| Investment income earned after payment | Yes | Exempt until the end of the year the injured person turns 21 |
| Structured settlement payments | No | When the insurer owns the annuity |
| Long-term disability benefits from an employer-paid plan | Yes | Reduced by premiums the employee paid |
| Workers’ compensation benefits | No | Reported on the return, then deducted |
| Wrongful dismissal or severance settlement | Yes | Amounts tied to employment are income |
If you receive long-term disability benefits, whether they are taxed depends on who paid the premiums. Benefits from a plan your employer funded are generally taxable, while benefits from a plan you paid for entirely yourself generally are not.
Does It Matter How the Settlement Is Worded?
Yes. When a claim combines different types of compensation, such as injury damages and amounts owed by an employer, the way the settlement documents describe each amount can affect how the CRA treats it. Ask your lawyer to make sure the release and settlement documents accurately describe what each payment is for. For a large award, speak with an accountant or financial planner about investing the money and the tax on future income.
Taxes are only one part of a settlement’s true value. The Ontario statutory deductible on pain and suffering awards can have a much larger effect, as our guide to the pain and suffering deductible explains.
How Findlay Personal Injury Lawyers Can Help
Findlay Personal Injury Lawyers help injured people across Hamilton and Ontario recover full compensation and understand what that compensation means for them over the long term. We structure settlement documents carefully, consider whether a structured settlement makes sense, and work with your financial advisors when needed. We work on a contingency fee basis, so there is no upfront cost. If you are weighing a settlement offer, contact Findlay Personal Injury Lawyers for a free consultation.
FAQ
Are Personal Injury Settlements Taxable in Canada?
Generally, no. The CRA treats damages for personal injury or death as non-taxable, whether they come from a settlement or a court judgment, and that includes amounts calculated by reference to lost income. Interest included in the award is also generally not taxable. Income you earn by investing the settlement afterward is usually taxable, unless the injured person is under 21.
Do I Have to Report a Personal Injury Settlement on My Tax Return?
A personal injury damages award is not income, so it is generally not reported as income on your return. Any interest or investment income the money earns after you receive it must be reported in the year it is earned, unless the under-21 exemption applies. Keep your settlement documents in case the CRA asks how the payment was made up.
Is Interest on a Personal Injury Settlement Taxable?
Interest that forms part of the award or settlement is generally not taxable, according to the CRA’s bulletin on damages and settlements. Interest earned after the money is paid to you, such as interest from a savings account or investments, is generally taxable. For injured people under 21, that investment income is exempt until the end of the year they turn 21.
Is a Structured Settlement Taxable in Canada?
Payments from a properly arranged structured settlement are generally received tax-free. In that arrangement, the casualty insurer owns the annuity and reports the interest element, while the injured person receives the scheduled payments. If you take a lump sum and buy your own annuity, the interest portion of each payment is generally taxable.
