When tax season rolls around, income or payments you received due to an accident claim can make it seem complicated to prepare your taxes properly. This guide can help you determine what may or may not be taxable (but it’s always advisable to consult a certified tax preparer).
Payments for Part 7 disability benefits
On any amount of income you receive to recover lost wages, the taxes have already been factored into that portion of the settlement. This is because lost income claims are based upon net income (the amount after taxes) rather than gross income.
Keep in mind that lost income claims for anyone who’s self-employed or works a day-labor or construction job for cash may encounter difficulties with their ICBC claims, and proving income for the claim may impact your regular tax liability. The only potential scenario where you might owe taxes on ICBC settlement income would be if you turned around and invested that money into an interest-bearing or stock account — in that case, the interest or profit would become taxable.
The other Part 7 benefit payments for things like medical or wellness expenses are identified by the revenue agency as also exempt. Again, as long as these funds are used for their intended purposes, there is no tax liability, but if the money is invested into any kind of profit-bearing account, the interest would still be taxed in the same way as any other kind of investment profit.
Payments for vehicle damage
Subdivision G of the Income Tax Act deals with “Amounts Not Included in Computing Income”, and subsection (g1) indicates that “Income from Personal Award Injury” is exempt. Even if your insurance plan included Emergency Roadside Assistance and you made a claim for reimbursement of funds paid out of pocket for this type of expense, the money received would also not be considered taxable income. A certified tax preparer can advise you on the possibility of tax deductions for automotive repairs if the vehicle was being used in an approved corporate capacity at the time of the accident.
In the event that someone other than the vehicle owner was behind the wheel at the time of the accident, the responsibility and potential payments would belong to the owner of the vehicle. It’s important for the vehicle owner to make sure his or her insurance policy will cover activities of additional drivers and that the driver borrowing the car is properly licensed.
Payments for tort claims
In most cases, the deadline for filing a claim involving negligence is two years, but should your tort claim be approved, this income would also be exempt from taxes per the above statutes. If you want to look at past judgments to investigate whether or not similar cases have been favorably adjudicated, you can search the BC Courts website, though a personal injury lawyer can easily discuss options with you for moving forward with a tort claim.
In all, the Revenue Agency makes it clear that the payments for expenses incurred due to an accident should not incur income tax, as long as these payments are used for their intended purpose of reimbursement. If the payment is turned into a profit-bearing investment, then the profit would be taxed per regular procedures depending on the investment vehicle. Using a tax-free savings account might be an exception to this rule, but it’s always best to consult with a certified tax preparer or financial advisor to determine the best options to reduce your tax liability.