ARTICLE · 10 JULY 2013

Taxation Of Litigation Damages

McLennan Ross LLP

Whatever the circumstances and whatever the party's status, as either plaintiff or defendant, it is important to ensure that the tax consequences of potential damages are taken into account, either as part of trial strategy or in settlement discussions.

CanadaTax

MaryAnne Loney

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Litigation often comes down to numbers: how much is the defendant going (or willing, in the case of a settlement) to pay and how much is the plaintiff going to receive? In many circumstances, those amounts are not the same, because damages received arising from litigation are often subject to tax.

Depending on the circumstances, litigation damages may be taxed at a rate as high as 39% in Alberta. There may also be an obligation on the payor to withhold and remit income tax. It is therefore important to determine the tax consequences to both parties.

The general rule

The general rule for the taxation of litigation damages is that damages are taxed in the same manner as any income earned in the same context would be. This means damages from an employment claim are generally treated as employment income, damages in respect of the non-performance of a business contract are treated as business income, and damages for the destruction of property are treated

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Taxation Of Litigation Damages

The general rule

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