The income tax status of damage awards in personal injury actions assumes greater importance as litigation in this area increases and the monetary value of judgments and settlements escalates. If the United States experience has any predictive value for Canadian trends, the statistics are ominous indeed. During the last decade alone, medical malpractice cases, which represent but one segment of personal injury actions, have witnessed an increase in the average quantum of damages from $62,151 to $350,000, while the total payout in New York State went from $1.4 million to $17 million.1 If, as Street had commented, ". . . the importance of a topic is to be judged by the number of writs issued, then actions for personal injuries are as important as any legal topic today..."2 - perhaps more so in 1976 than in 1962 when the observation was made. At the same time, the doctrinal treatment of tax considerations differs markedly between Canadian, English and American jurisdictions. In Canada, since the Supreme Court's decision in R. v. Jennings, a judicial tribunal is not required to account for income tax factors in the determination of the quantum of damages in such actions. The Court reasoned that compensation in personal injury actions replaced impaired capacity rather than earnings, and was perturbed by the pragmatic hurdles to a deliberative consideration of tax factors. Further, whether or not the right to sue for damages for personal injury constitutes a "chose in action" and therefore "property" under the capital gains provisions has not been settled.
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Vern Krishna, “Taxation of Personal Injury Awards: A Wiry Methuselah” (1976-1977) 3:2 DLJ 385.