Payment of compensation is meant to bring an accident victim back to the point where he or she was before the accidental incident. Of course, at that earlier time, he or she was not free from all obligations.
Two forms of compensation
This includes money from a negotiated settlement, one that a claimant has made with an insurance company and money awarded to a plaintiff, following a judgment. Regardless of the type of compensation given to an accident victim, he or she might ask this question: Do I need to pay a tax on this money?
As a general rule, when damages related to personal injuries get compensated, those same funds cannot be taxed.
That rule applies regardless of the method used for delivery of the compensation package. It could get sent to the plaintiff has a lump sum, or it could arrive in the form of installments.
That rule applies to any damage award that serves as reimbursement for medical expenses, or for the price of relief from pain and suffering. Still, not all damage awards carry out one of those 2 functions.
One damage award hits the defendant with the need to pay what is known as punitive damages. Injury lawyers in Calgary do not ask a judge to burden a defendant with that financial punishment. Yet, some judges elect to make a defendant responsible for paying punitive damages.
A judge usually takes that action when the defendant has demonstrated especially egregious behavior. The court system seeks to prevent a repetition of such behavior. Judges have that goal in mine, when hitting a defendant with an added financial punishment.
Another time when funds in a compensation package can be taxed
Remember what was written at the start of this article. The legal system seeks to get an accident victim back to the point where he or she was before that unfortunate incident. At that time, the victim may well have had a job. If that was the case, then income was lost during the victim’s recovery.
Consider what would have happened to that income, if the injured employee had been able to earn it. Any wages would have been taxed. Any profits made by a business owner would have been taxed. The government expects payment of a tax on any wages or profits.
Obviously, the government does not seek all of the funds that have been used to compensate an accident victim. It seeks only the amount it is due. The rest gets delivered to the compensated victim, in the same way as wages or profits had always been made available to that same person.
The legal system is fair to victims. The government, too, wants to be treated fairly by all accident victims.