In personal injury cases when a final settlement is reached, generally speaking the case is settled by a lump-sum one-time payment. In certain circumstances, it may be possible to arrange to receive all, or part of the settlement proceeds through a Structured Settlement.
Where a lump sum payment is made, you would receive a cash payout on a one-time basis which would be tax-free, which is consistent with Canadian income tax laws at the present time. A Structured Settlement provides for the settlement funds to be paid into an annuity contract with a large life insurance company that qualifies as a structured settlement under Canadian law. For a qualified Structured Settlement, the settlement is then paid out on a periodic basis, often monthly, and the payments that are made are also made on a tax-free basis.
If either the lump sum settlement or monthly structured payments are re-invested and earn income or interest, the investment portion would be taxable.
Structured Settlements have to be agreed to by the insurance company as they fund the settlement, and so their consent is required, so it may not be available in every case. In some cases, the court may insist upon settlement funds being placed in a structured settlement to protect a party that may have difficulty managing a large sum of money, such as a minor or person with a disability that affects their ability to make financial decisions.
Whether to take a settlement in a lump-sum or in a structured settlement depends on the particular facts and circumstances of each case, but it is a good idea to discuss this option with your lawyer or financial advisor(s) to determine what is best for you.
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