5 February 2007 External T.I. 2006-0187391E5 - Personal Injury Settlement - Taxable amounts

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Whether a personal injury settlement is taxable

2) Whether related legal fees are deductible 3) If repayment from settlement proceeds of expenses that were originally covered by OHIP qualifies as an eligible medical expense for purposes of the non-refundable medical expense tax credit 4) Whether a registered retirement savings plan that was purchased to offset potential tax liability arising from the settlement could be withdrawn if the settlement is not taxable.

Position: 1) The Canada Revenue Agency's general position on the taxable status of a personal injury settlement is discussed in Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts. As indicated in paragraph 2 of IT-365R2, amounts received by a taxpayer as special or general damages for personal injury are excluded from income and, as a result, are not subject to income tax. 2) Any legal fees incurred in respect of a non-taxable personal injury settlement would therefore not be deductible for income tax purposes. 3) The repayment of expenses that were originally covered by OHIP would not qualify for the medical expense tax credit by virtue of subparagraph 118.2(3), where the reimbursement of the medical expenses was not required to be included into income. 4) RRSP's can be withdrawn; however there will be tax implications of doing so.

Reasons: 1) IT-365R2 2) ITA 3) IT-519R2 4) Guide T4040

XXXXXXXXXX 							2006-018739
								Joy Bertram, CGA, CPA(vt)
February 5, 2007 

Dear XXXXXXXXXX:

Re: Personal Injury Settlement

We are writing in response to your letter of March 23, 2006, wherein you requested our opinion on whether a personal injury settlement is taxable, whether the related legal fees are deductible and if a repayment from settlement proceeds of expenses that were originally covered by OHIP qualifies as an eligible medical expense for purposes of the non-refundable medical expense tax credit. You also inquired whether a registered retirement savings plan that was purchased to offset potential tax liability arising from the settlement could be withdrawn if the settlement is not taxable. We apologize for the delay in our response.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by the Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out Information Circular 70- 6R5, Advance Income Tax Rulings, dated May 17, 2002.The determination of the income tax treatment of payments described is a question of fact. However, based on the limited information provided to us, we are prepared to offer the following general comments, which may be of assistance.

The Canada Revenue Agency's general position on the taxable status of a personal injury settlement is discussed in Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts. As indicated in paragraph 2 of IT-365R2, amounts received by a taxpayer as special or general damages for personal injury are excluded from income and, as a result, are not subject to income tax. Any legal fees incurred in respect of a non-taxable personal injury settlement would therefore not be deductible for income tax purposes. The repayment of expenses that were originally covered by OHIP would not qualify for the medical expense tax credit by virtue of subparagraph 118.2(3). This provision would disqualify any medical expense that is reimbursed unless the amount of the reimbursement is required to be included in computing income. For more information see Bulletin IT-519R2 Medical Expense and Disability Tax Credits.

In respect to reversing the RRSP contributions, amounts can be withdrawn; however there will be tax implications of doing so. For more information, see Guide T4040 - RRSP's. This publication and the bulletins referred to above are available on our website at www.cra-arc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett
Manager
Business and Personal Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch