Internal government estimates have suggested the settlement could run to $600 million, a figure that may turn out to be low.
Late last week, lawyers representing ex-soldiers revealed that federal negotiators were still crunching numbers for the total compensation package and it was being "complicated by the fact the proposed amounts may go back to the start of the offset in 1976," according to a letter obtained by The Canadian Press.
One of the veterans affected by the lawsuit said the federal government has only itself to blame.
"I can't see it going to $1 billion, but if it does, the government was really stupid to let this go as long as it did over 40 years," said Ron Cundell, a former sergeant and disabled veteran living near Barrie, Ont.
Until last spring, the Harper government fought a protracted legal battle against a class-action lawsuit by 4,500 disabled veterans whose long-term disability benefits were reduced by the amount of their monthly Veterans Affairs disability pension.
The Federal Court sided with the ex-soldiers last May and the judge "unreservedly" rejected the government’s arguments.
The government "had to have known that what it was doing was wrong," said Cundell, a veterans advocate.
The insurance company that administers the program on behalf of the Canadian Forces apparently urged the federal government almost a dozen years ago to change the system, said Cundell.
In abandoning the legal fight, the government appointed Stephen Toope, the president of the University of British Columbia, to negotiate with the Halifax legal team of Dennis Manuge, the former soldier who launched the court action.
The Federal Court will have to approve any agreement and lawyers for the veterans estimate there won't be a deal to put before a judge until January.
A spokesman for Defence Minister Peter MacKay wouldn't comment on costs, but said the government is trying "to reach a mutually acceptable settlement."
"The care of our ill and injured personnel is minister MacKay's No. 1 priority," Jay Paxton said Monday.
At the same time, Manuge's lawyers say the federal government has agreed to fast-track the claims of so-called zero-sum claimants.
They are among the most severely disabled veterans, but their disability benefits are reduced to nothing because other payments exceed the limit of 75 per cent of their military salaries.
Other veterans whose benefits don't exceeded the 75 per cent cap saw their payments reinstated in July.
But veterans' advocates argue those with most grievous injuries should see an immediate reinstatement of the benefits, particularly since many can't work and rely solely on pain and suffering awards.
The letter from Manuge's lawyers say they're looking at a way to provide interim payments, but nothing will be final for a couple of weeks.
There are 900 zero-sum clients.
Cundell says the focus right now is to get payments started for the most severely disabled and the question of their retroactive compensation will be lumped in with the other negotiations.
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