Cost of Future Care Awards and Tax Gross Ups: Can Tax Planning Strategies Be Considered?

When Personal Injury Plaintiffs are awarded damages for costs associated with future medical care they are expected to invest the money and draw from this fund to pay for their future care needs over their lifetime.  The difficulty is that while personal injury damage awards are not taxable, investment income is.  To account for this Trial Judges have the ability to award further damages to set off these tax consequences.  This is called a “tax gross up” award.  Reasons for judgement were released this week by the BC Supreme Court, Victoria Registry, addressing this area of law.
In today’s case (Sartori v. Gates) the Plaintiff was awarded damages by a Jury which included $41,000 for cost of future care.  The Plaintiff applied for a tax gross up and presented an actuarial report which concluded that approximately $10,000 would be necessary to offset the investment tax consequences from the cost of care award.  ICBC presented contrary evidence arguing that an award of $3,000 would be appropriate.
The main reason for the difference in the economists opinions was whether the Court could consider tax minimizing strategies in quantifying a tax gross up award.  Ultimately the Court held that these can be considered, however, the whole of these strategies are not to be applied solely to the damage award for cost of future care.   Mr. Justice Wilson provided the following practical reasons:

[20]         In result, I find the tax free savings account benefits to be a lawful consideration in defining the tax gross up amount.  That said, however, Townsend is also authority (among many, many others) for the principle that, “compensation aims at restoring the victim to the position that person would have been in had no loss been incurred”.

[21]         A cost of future care award is founded on the theory that the tortfeasor must provide a fund from which the victim may draw to meet future expenses as they occur.  It is a presumption of law that the fund will be invested and will earn income.  According to the theory, as I understand it, the fund and its income, is a separate stand-alone phenomenon.  It appears to me that Mr. Szekely has treated it as such in his analysis.  Therefore, the tax benefits available to the plaintiff, by virtue of a tax free savings account, are exhausted in this separate stand-alone account.

[22]         Commencing 1 January 2009, the plaintiff has been entitled to the tax benefits of a tax free savings account.  It seems to me that if I assign all of the tax benefits, from a tax free savings account, to this stand-alone account, then I will not be restoring the plaintiff to the position he would have been in had no loss been incurred.  To put it in Mr. Wickson’s terms, adopting Mr. Szekely’s approach, fails to recognize the plaintiff’s right to use the tax free savings account for his “first slice” income.

[23]         I have considered the tax benefits of a tax free savings account as a legitimate factor in determining the tax gross up and having done so, I conclude that in this particular case, Mr. Szekely’s calculations are not applicable in the determination of the tax gross up amount…

[31]         Finally, the fund available to meet the plaintiff’s costs of future care is $41,333.33.  I find it is more probable than not that the income to be earned from the investment of this fund will be interest income.  Therefore, I make no allocation for capital gain or dividend income and assess the tax gross up at $10,025.