The article “Is A Personal Injury Settlement Taxable, And Can It Impact OAS or GIS Benefits?” was originally published on MoneySense on August 17, 2020.
After receiving a personal injury settlement, J is looking for advice on how it might be taxed, and whether it will affect eligibility for government benefits.
Q. I received a small settlement for an Ontario car accident, which my lawyer says is non-taxable, and so no T4A will be issued. If I deposit the funds into a bank account, will this one-time settlement clawback my OAS and GIS benefits?
A. I’m sorry to hear about your accident, J. Hopefully the settlement is reasonable.
You mention that your lawyer said a T4A slip will not be issued for the settlement. A T4A tax slip is used to report pension, retirement, annuity and other income. As a rule, I would suggest caution about relying on the lack of a T4A slip as being evidence that an amount is not taxable. For example, self-employed commissions paid to an independent agent should be reported on a T4A slip, but are often not reported—although self-employment income is, of course, taxable. Whether an amount is deposited to a bank account does not impact its taxation, either (for example, cash paid for taxable employment or self-employment).
I am currently dealing with a major Canadian insurance company that incorrectly issued a T4A slip for a client and they have to date refused to change it. So, even insurance companies make mistakes.
That said, in this instance, your lawyer is right. Paragraph 81(1) (g.1) of the Income Tax Act states: “There shall not be included in computing the income of a taxpayer for a taxation year…the income for the year from any property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person.”
This tax exemption would apply to a payment received as either a lump-sum or as a structured settlement paid over time with periodic payments (like an annuity).
If you invest the proceeds of your settlement, J, to the extent the funds then generate taxable income like interest, dividends, capital gains or rental income, that income is taxable. But the actual receipt of the settlement should be tax-free.
The Canada Pension Plan (CPP) is not tied to your income. A CPP retirement pension is determined based on previous contributions to the plan during your working years.
Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) are means-tested government benefits, meaning your income does impact these payments. OAS is subject to a recovery tax if your net income on line 23600 of your tax return exceeds $79,054 for the 2020 tax year, causing an incremental 15% tax on top of your regular marginal tax rate.
GIS is reduced at much lower levels of income, and payable to single, widowed, or divorced OAS recipients with incomes below $18,600. For recipients with a spouse or common-law partner, the threshold is $24,576 if your spouse or common-law partner receives the full OAS pension, or $44,592 if they do not receive an OAS pension.
Because a car accident settlement is not reported on your tax return, it will not impact your OAS or GIS benefits, J. There may be other federal or provincial benefits that are impacted by non-taxable income, or bank account balances, or other factors, but not in this case.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.