If you have been in a motor vehicle accident, you might wonder if you will have to pay taxes on the settlement that is ultimately reached (or the damages award if it goes to trial). After all, a motor vehicle accident settlement can be in the range of tens of thousands or even hundreds of thousands of dollars.
Fortunately, at least in Canada, there is a straightforward answer to this commonly asked question. The answer is no. The Canada Revenue Agency does not treat compensation for motor vehicle accidents as taxable income. As is the case with lottery winnings, most life insurance payouts, and most gifts and inheritances, this type of compensation is nontaxable.
Note, however, that income earned from a settlement or other non-taxable amount might be taxable. An example would be interest earned from a settlement amount that you have invested. You should consult a tax professional to review how the tax laws apply to your particular situation.
You can read more about the Canada Revenue Agency’s guidelines regarding nontaxable amounts here.