Damages

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 327-341

327

CH AP TER 11

DA M AGES

A. GENER AL COM MENT

Civil litigation — generally a f‌ight over money damages — is a long jour-

ney. At the end of the journey — which can last ten to f‌ifteen ye ars — the

only real concern that the ex hausted plaintiff and defendant have in

common is the amount that they take out of, or put into, their pockets

net of costs, legal fees and taxes. The tax treatment of damage awards

has a signif‌icant effect on the ultimate cost of f‌inancial recovery or

in demnit y.

The only thing that one can say w ith any certainty about dam age

awards is that some are t axable and others are not. Taxation depends

upon how we characterize the award, which in turn depends upon the

underlying cause of action. If dam ages are income, the next step is to

determine the source and ty pe of income and the applicable tax rate.

To determine the nature of damages we star t by looking at the pur-

pose of the award. Broadly spea king, damages in lieu of income that

would otherwise have been t axable retain their cha racter as such and

are taxable. Damages on account of capital a re not taxable. However, as

we shall see, damages on account of income can sometimes be crystal-

lized into capital receipts.