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Taxation and Personal Injury Settlements: What Do I Need to Know?

If you or someone you love have recently been injured in an accident, or collision as a result of someone’s negligence or ill intent, you may be wondering how you can receive fair compensation for your pain and suffering. At James H. Brown and Associates, we know that moving forward after a serious incident can feel overwhelming, and the prospect of facing a legal claim can be daunting without the right help on your side. Since 1993, we’ve proudly partnered with Albertans to fight for your right to fair compensation.

Below, we’ll cover some of the ins and outs of one of the most commonly asked questions with regard to personal injury compensation: will you be taxed on your settlement? Read on to learn more!

Are Injury Settlements Taxed in Alberta?

There is no income tax applicable to personal injury compensation within Alberta. Under CRA guidelines, such funds are not considered taxable income, and any amount paid to an individual as the direct result of their pain and suffering resulting from a slip or fall, car accident, or other serious incident is exempt from taxation under the Income Tax Act.

With that being said, it is crucial to be aware that there are specific exemptions that you may have to account for when filing your taxes, and failure to do so could result in an audit or subsequent repercussions from the CRA (more on that in a moment).

A Closer Look at Exemptions

When receiving compensation for a personal injury claim, the plaintiff’s settlement will encompass two main categories of consideration: general and special damages.

General damages are associated with any physical, psychological, or emotional injuries that hinder your quality of life. Special damages refer to the more specialized inconveniences and difficulties faced as a result of/in addition to your existing injuries including medical care costs, the cost of buying proper equipment to treat/manage your pain, lost wages, living expenses, and more.

Special damages are compensation to cover the financial losses and expenses a victim incurred as a result of an accident or negligent medical treatment. These are the tangible costs associated with an injury claim. Special damages are exempt from Canadian taxes.

Core examples from both categories include:

  • Reimbursement of out-of-pocket medical or hospital expenses
  • Loss of current and future earnings
  • Pain and suffering compensation
  • Loss of amenities of life
  • Shortened life expectancy, and more


In the simplest of terms, the government recognizes that the funds received and intended for use as the direct result of a personal injury are different from a standard form of income, and thus they are not taxed the same as other forms of financial gain.

What is Taxable?

As mentioned above, while much of your settlement is not considered taxable, there are certain exceptions to be aware of. Such exceptions include:

Severance Packages

Should your injury render you unable to continue in your current profession, you may be awarded a severance payment. Unlike other forms of compensation that are tied to out-of-pocket expenses and anticipated medical costs, severance is tied to professional background, and as such is considered a form of employment income, making it taxable in most instances.

The Surrogatum Principle

While personal injury settlements are typically intended to compensate individual victims following an accident, there are certain incidences where the intent of the settlement is to reconcile other kinds of losses outside of a specific medical injury. In a business context, for example, if a sole proprietor or key actor is injured and unable to perform their duties to such an extent that they lose clientele or existing projects, they may be eligible for compensation under the “surrogatum principle.” The surrogatum principle assesses the characteristics and attributes of a loss and can be used to cover more abstract cases like lost revenue. It’s worth noting that since the lost business income would have been taxable, your settlement may be considered taxable due to the nature of what it is intended to replace (in this case, lost revenue).

What About Investing?

As most settlements are exempt from taxation, many accident victims find the prospect of investing some of their compensation attractive. While this certainly can pay off in the long run, you should be aware that the gains made from investments are taxable and will need to be reported to the CRA annually.

Don’t Face Medical Fees and Pursuing Compensation Alone

At James H. Brown and Associates, we know firsthand just how crucial it is to have the right team on your side as you fight for your rights following a personal injury. With over 250 years of combined experience behind our team members, you can trust us to put your best interests first and to keep you protected when and where it matters most while you focus on your long-term recovery.

Learn more about beginning your journey for just compensation by contacting our team today!

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