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. Is an award for loss of income due to a personal injury claim taxable in the hands of the recipient?
2. Is there a difference to the tax status of the award if the award is a result of either a Court judgement, or an out-of-court settlement?
Position: No. Whether the award is a result of a Court judgement or settlement is not relevant in determining its taxable status.
Reasons: IT-365R- damages received for personal injury are excluded from income.
XXXXXXXXXX
2010-038450
J. Nichols
December 2, 2010
Dear XXXXXXXXXX :
Re: Settlement - IT 365R2
I am writing in reply to your letter dated October 15, 2010, requesting our assistance in providing guidance on IT-365R2, Damages, Settlements and Similar Receipts, based on the following:
1. Is an award for loss of income arising out of a personal injury claim taxable?
2. Does it make any difference whether the plaintiff settles the claim out of court?
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed, and are the subject matter of an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. We are, however, prepared to provide the following general comments.
The Canada Revenue Agency's long standing position, based on decisions of the Courts, is that an award of damages for personal injury is generally not included in income, even when loss of income is used as a basis to calculate the amount. Interpretation Bulletin IT-365R2, Damages, Settlements and Similar Receipts, provides guidance on the taxation of damages and settlements. Specifically, in paragraph 2, it states that damages received in respect of personal injury or death, are not taxable.
In terms of whether there is differing treatment of damages awarded by an out-of-court settlement, paragraph 4 of IT-365R states that "where an amount in respect of damages for personal injury or death has been awarded by a Court or resolved in an out-of-court settlement, no part of such amount will be income to the recipient". Thus, how the settlement is arrived at should have no bearing on the tax status of the award.
We trust that these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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