The Impact of Tax on Your Settlement

When settling a claim, the main focus is usually the payment amount. However, an important question arises: will the client be liable for taxes on the settlement award? This consideration is crucial for structuring the settlement to benefit the client the most.

Let's start with short-term disability payments. Most of these are taxable, especially if paid by the employer. For long-term disability benefits, which often make up most of a settlement, the key factor is who paid the premiums. If the employer paid any part of the premium, the benefit is taxable.

If the benefit isn't taxable, the settlement funds awarded to the client are also not taxable. If the benefit is taxable, we need to consider the tax liability. This involves distinguishing between past due benefits and future payments.

Here’s the breakdown: the amount payable for arrears (past due benefits) is taxable. However, the amount designated for future lump sum payments is not taxable. This distinction is based on Canada Revenue Agency rules.

It's important to ensure that the attribution between arrears and future amounts is reasonable given the case’s specifics, especially the timeframes involved. This can be tricky but is essential for determining the correct tax liability.

By understanding these nuances, we can structure settlements to minimize tax burdens for our clients, ensuring they get the most out of their benefits.

If you have any questions, contact your Client Services Team at Share Lawyers. We’re here to help!