If you’re involved in a collision and you’re injured, you may have to file a personal injury coverage claim through your car insurance policy. Once the claim is settled, you may be wondering if the money is taxable. We get to the bottom of this question below.
Car accident settlement following a personal injury claim
If you are involved in an accident that you are not at fault for, and you are injured or a loved one is killed, you might be able to file a claim to receive compensation for your losses. This is what’s known as a personal injury claim. By filing a personal injury claim with your insurance provider, you might be able to receive compensation to cover costs associated with your losses. These costs may include medical expenses, rehabilitative care, lost income due to the injury, pain and suffering, shortened life expectancy, or funeral fees.
Although you might think that the most important aspect of filing a personal injury claim is the amount of money you will receive from the insurance company, what is even more important is how the settlement is structured. The Canada Revenue Agency (CRA) is the government body that will determine if your car insurance settlement is taxable. The CRA’s tax laws are complex and can be somewhat confusing. For this reason, it is generally recommended that you
Please note that personal injury claims can affect your insurance, so it’s best only to file a claim if you are eligible to do so. If you decide to cancel your personal injury claim, you must contact your insurance company as soon as possible. Depending on whether the claim has already been processed and you have received the compensation, you may not be able to cancel the claim.
Finally, when filing a personal injury claim, make sure that the information you provide is true. Providing false or misleading information to your insurance company during the claims process can lead to your claim being denied.
Do you have to pay taxes on a personal injury settlement?
This is where things get complicated. Generally speaking, the CRA follows what is known as the surrogatum principle. This principle evaluates whether a settlement payment takes on the characteristics of what it was intended to replace. For example, if a business sues an ex-employee over revenue lost due to a contract breach, then the purpose of the settlement compensation would be to replace the lost business income. Thus, according to the CRA, the settlement amount would be taxable because the income it is replacing would have been taxable.
That said, the tax laws that apply to personal injury settlements work a little bit differently. The CRA typically makes an exception for these types of payments, so long as the compensation awarded is for special or general damages, such as lost wages. This means that personal injury settlements for car insurance are usually not subject to taxes. Please note that this is the case whether a settlement is reached out of court or a judge or jury determines the compensation.
The only situation in which you might have to pay tax on a portion of your personal injury settlement is if you are awarded something other than special or general damages, e.g. guaranteed severance payment or another type of compensation that could count as income and, therefore, might be taxable.
In addition, how you use the money awarded to you through your car insurance settlement also matters. For instance, if you use the settlement money to purchase an annuity or invest in other assets, then the interest earned on these assets could be taxable.
However, to put it plainly, most car insurance settlements are not taxable under the Canada Revenue Agency.
Do you have to pay taxes on a disability settlement after a car accident?
If you are injured in a car accident and are subsequently unable to work as a result, then the at-fault party’s car insurance company might issue a type of payout known as short-term disability or long-term disability compensation to replace the lost income. This income is usually not taxed in Canada.
Can I invest the money I received from a car accident settlement?
Yes, you are allowed to invest the money you receive from a car insurance settlement. That said, the investment you choose can have tax implications. So, if you do not want your car insurance settlement to be taxable, you need to be careful about what you decide to invest your money in.
Filing a personal injury claim after a car accident
If you get into a common car accident and are injured, you will need to call both the police and your insurance company. Not only is it a legal requirement that you notify the police about a collision where one or multiple parties are injured, but you will need a police report for the insurance claim. Once the accident is over and you are safe and sound, contact your insurance company right away. If you were not at fault for the accident, they would help you file a personal injury claim so that you can receive compensation for your losses. The process of filing a personal injury claim typically looks like this:
1. Contact your car insurance company
Your car insurance company can give you clear instructions on how to file a personal injury claim and what type of claim to file. They can also provide you with a list of forms that must be filled out.
2. Seek treatment from a medical professional
If you suspect that you were injured in the accident, visit your doctor or a nearby hospital as soon as possible. If you were taken to the emergency room in an ambulance immediately following the accident, make sure that you request that all test results and doctor’s notes be sent to your family doctor. You will want a paper trail of the various tests conducted and all treatments received.
After being assessed by a medical professional, they will determine what category your injuries fall into. The category they assign your injuries will be considered when your insurance company defines a settlement.
3. Keep a record of all medical bills and expenses
Anytime you visit the doctor and receive medical treatment, make sure to keep a record of all bills, expenses, and documents. This can all be used as evidence when you fill out the necessary forms and file your personal injury claim. Examples of the forms that you may need to fill out if you are submitting an accident benefits claim (in Ontario) include:
- Application for Accident Benefits (OCF-1)
- Employer’s Confirmation of Income (OCF-2)
- Disability Certificate (OCF-3)
- Permission to Disclose Health Information (OCF-5)
- Treatment Confirmation Form (OCF-23)
Note that you likely won’t need to submit all of these forms, only some of them. A BrokerLink insurance broker can help you determine which forms are needed for your claim.
4. An insurance adjuster will be assigned to your case
Your car insurance company will assign an insurance adjuster to your case who will review your claim and ultimately recommend a settlement. If they have questions or require additional information, they will contact you.
5. Receive your personal injury settlement
The next step in the personal injury claims process is receiving your settlement. This settlement will be based on the evidence you provided when you submitted your claim and the findings of the insurance adjuster’s recommendations. When you hear from your insurance company, they will provide more detailed instructions on the exact benefits that you will receive. You can contact your insurance company if you need clarification or wish to dispute your settlement.
6. Close your personal injury claim
The final step in the claims process is to close your claim. If you are satisfied with the insurance adjuster’s decision, you can accept the settlement they offer you, receive the benefits that you qualify for, and have your medical expenses and any other applicable expenses paid out. Once you have received the agreed-upon compensation, your insurance company will close your claim.
Get in touch with BrokerLink to learn more
If you still have questions about how car insurance settlements work, how to file a personal injury claim, and whether the payouts you receive from these settlements are taxable, reach out to BrokerLink today.
In addition, as auto insurance experts, we can offer greater insight into the claims process more generally. For example, we can explain how insurance companies determine fault during the claims process or what kind of claim to file if you get hit as a pedestrian.
As insurance brokers, we can also help you find the best possible policy for your needs. We offer an objective, expert opinion on the best coverage for your car, driving habits, and budget. All of our recommendations are tailored to you, and we always do what we can to make your policy as affordable as possible. This all starts by shopping around on your behalf, obtaining quotes from multiple insurance companies, and comparing those quotes to get you the best possible rate. Beyond that, we unlock discounts you didn’t know you were eligible for and help you keep your rates low, year after year.
A few of the types of auto insurance we can help you find include the following:
As you can see, our licensed experts can help you find both mandatory and optional coverage in your province. We can also explain how much your policy will cost, provide insight into the factors that insurance companies consider when they calculate premiums, and provide you with a complimentary auto insurance quote. Get in touch today to request your free quote online, over the phone, or in person at one of our locations.
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