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Are taxes payable on damages awarded during bankruptcy?

I declared bankruptcy in October 2007, with CRA as the only creditor.

I was working as an independent contractor and got fired in January 2008, which led to a wrongful dismissal settlement. I hadn’t been paid since September 2007, but we negotiated $45k (after fees) as ‘damages’ (justifiably) rather than lost income, and the trustee decided I could keep it.

A portion of the money was paid before my discharge was granted in June 2008. I received the rest on a monthly schedule for the rest of the year.

Do I declare the money I received before the discharge on my 2008 tax return? In fact, do I have to declare damages on my tax return at all? The trustee couldn’t tell me.

Thanks for any light you can shed on this!

Posted from: British Columbia

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One Response to “Are taxes payable on damages awarded during bankruptcy?”

Barton Goth – Goth & Company Inc. -Trustee in Bankruptcy said...

This is really a question you need to ask of a tax expert, so I would suggest you contact your accountant. As a trustee we have some exposure to taxes but this is beyond the scope of my (and most trustee’s) expertise.

However, if it is taxable, then you do have to include any monies received in 2008, irrespective of when the discharge occurred.