PERSONAL TAX GUIDELINES

WORKERS' COMPENSATION PAYMENTS

1. Overview

Workers' compensation payments are designed to provide income support to individuals who are unable to work due to workplace injuries or illnesses. Under the Income Tax Act, these payments are excluded from taxable income. However, they may impact net income and eligibility for certain credits or benefits.

2. Non-Taxable Nature of Payments

Workers' compensation benefits are generally not subject to taxation in Canada. The CRA does not require a T5007 slip to report lump-sum payments unless they are part of a structured settlement. Recipients are advised to retain documentation for their records but are not required to include these payments in taxable income.

3. Net Income Impact

While workers' compensation benefits are excluded from taxable income, they still form part of net income calculations. This can affect:

• Eligibility for Benefits: Programs like the Canada Child Benefit (CCB), GST/HST credits, and medical expense credits may use net income to determine eligibility.
• Spousal Claims: The ability of another person to claim the taxpayer as a dependent may also be impacted.

4. Common Issues

• OAS Benefits Impact: In some cases, workers' compensation benefits may reduce Old Age Security (OAS) entitlements, especially for lump-sum settlements covering multiple years.
• Adverse Tax Consequences: Lump-sum payments received in a single year can result in unexpected impacts on benefits and credits.

5. Reporting Requirements

Although not taxable, workers' compensation payments must be accurately documented. If part of the payment includes other taxable amounts, such as back wages or vacation pay, these should be reported appropriately on a T4 slip.

6. Examples

• Example 1: An employee receives a lump-sum workers' compensation settlement for a workplace injury. The amount is non-taxable and does not need to be reported as income.
• Example 2: A recipient uses workers' compensation income to qualify for GST/HST credits but finds their OAS benefits are reduced due to the impact on net income calculations.

7. Additional CRA Resources

For more information on workers' compensation payments, refer to the following CRA resources:

• CRA - Workers' Compensation Payments
• Guide T4001: Employers' Guide to Payroll Deductions and Remittances

8. Conclusion

Understanding the tax treatment and reporting requirements for workers' compensation payments is crucial for recipients and employers alike. While these payments are non-taxable, their impact on net income and eligibility for benefits makes accurate documentation essential.