Tax Gross-up and Investment Management Fees on ICBC Claims

Because a tort award is a once and forever award, if the plaintiff will have significant needs in the future, the award itself must be managed to cover future expenses. There are two specific expenses that are considered for larger claims: tax gross-up and investment management fees.

Tax Gross-Up

Damages for personal injuries are not taxable income. However, where there is a lump sum award for cost of future care, that sum is reduced on the assumption that the currently unused portion of the fund will be invested and earn income. However, investment income is taxable. If no allowance is made for this tax, the judgment will prove insufficient to provide the care required for the predicted lifespan of the plaintiff. The theory of “grossing-up” is that there should be an additional sum awarded to compensate for the tax that will accrue on the interest portion of the award.

A tax gross-up is not applied to an award of damages for loss of future income-earning capacity, in spite of the fact that it is earning capacity which is being compensated for (not lost earnings). The policy behind this position is that the tax liability incurred on the award is expected to offset the tax that would have been payable on the earnings, had the plaintiff earned the income in circumstances where the accident did not occur.

Management Fee

A management fee should be awarded if the plaintiff lacks the acumen to invest funds awarded for future care so as to produce the requisite rate of return. It is not necessary for the plaintiff to establish mental impairment due to the negligence of the defendant.

A plaintiff seeking to recover either a management fee or an investment counselling fee must establish that management assistance, investment advice, or both, are necessary. This can be done on the plaintiff’s own evidence, or on the evidence of relatives and friends, as to the plaintiff’s intelligence, schooling, and level of sophistication. In cases in which the plaintiff’s natural intelligence and judgment have been diminished by brain injury, the medical evidence should draw attention to the plaintiff’s need.

The plaintiff must also adduce evidence as to the cost of such services. Evidence as to the amount of the fee can be obtained from an actuary, from a financial or investment counsellor, or from a trust company officer who is skilled in managing portfolios for individual investors.

Structured Settlement

The court may order a structured settlement, in which case there would be no management fee. For pecuniary awards exceeding $100,000, a structured settlement is mandatory.

Consult with Simpson Thomas

Book A Consultation
Your browser is out-of-date!

Update your browser to view this website correctly.Update my browser now

×