Personal Injury Settlement Investment Guide: Ontario 2026

Question: Are personal injury settlements taxable in Canada?

Answer: Generally, no. Personal injury settlements for pain and suffering, loss of enjoyment of life, and physical injury are tax-free in Canada. However, portions of your settlement may be taxable: income replacement/lost wages components are taxable, interest earned on the settlement once invested is taxable, and punitive damages may have tax implications. Get your settlement breakdown from your lawyer to understand which portions are tax-free vs taxable. A CFP can help structure investments to minimize taxes on the taxable portions.

Question: Should I take a structured settlement or lump sum?

Answer: For most Ontario injury victims, lump sum is typically better IF you have the discipline to invest wisely. Structured settlements provide guaranteed income but offer lower total returns (often 2-3% annually) and no flexibility. Lump sums allow you to invest for 6-8% returns, access funds for emergencies, and leave wealth to heirs. However, if you have concerns about managing large sums, addiction history, or pressure from family, structured settlements provide protection. For settlements over $500K, consider a hybrid: partial lump sum for immediate needs plus structured payments for ongoing income.

Question: How much of my settlement should I invest vs keep liquid?

Answer: Follow the injury settlement framework: 1) Set aside 2 years of living expenses in a high-interest savings account (more than typical emergency fund because your earning capacity may be reduced), 2) Pay off all high-interest debt (credit cards, consumer loans), 3) If you have ongoing medical needs not covered by the settlement, reserve funds for future care, 4) Invest the remainder according to your time horizon. For a $500K settlement, this might mean $80K liquid, $30K debt payoff, $50K medical reserve, and $340K invested.

Question: What investments are best for injury settlement money?

Answer: Injury settlements require extra-conservative investing because: 1) This may be your only significant asset if injury affected earning capacity, 2) You can't 'earn it back' through work like other investors, 3) You may have ongoing medical expenses. Recommended allocation: heavy TFSA use (tax-free growth protects limited capital), balanced portfolio (60% stocks/40% bonds rather than aggressive growth), dividend-focused investments for income if you can't work, and avoid speculative investments entirely. Capital preservation is more important than growth for injury survivors.

Question: Should I pay off my mortgage with my injury settlement?

Answer: For injury survivors, paying off the mortgage is often the RIGHT choice, even if the math slightly favors investing. Reasons: 1) Eliminates monthly obligation if earning capacity is reduced, 2) Provides housing security regardless of health changes, 3) Reduces stress during recovery, 4) Guaranteed 'return' equal to mortgage interest rate. However, don't deplete all liquid assets - maintain emergency reserves. If your settlement is large enough, consider accelerated mortgage payments rather than full payoff, keeping investment capital working.

Question: How do I protect my settlement from creditors?

Answer: In Ontario, certain assets have creditor protection: RRSPs are protected from creditors in bankruptcy (with some exceptions), TFSAs are NOT automatically protected, life insurance with named beneficiaries has protection, and trusts can provide protection if properly structured. If you have significant debt or legal risks, consult a lawyer about trust structures BEFORE depositing settlement funds. Once commingled with other assets, protection becomes complicated.