Veterans ombudsman Guy Parent also concluded that those who are receiving the permanent impairment allowance, along with a recently introduced supplement, are only awarded the lowest grade of the benefit.
The criteria used by federal bureaucrats to evaluate disability do not match the intent of the allowance, and that the guidelines are too restrictive, the report said.
"The evidence presented in the report clearly demonstrates that many severely impaired veterans are either not receiving these benefits or may be receiving them at a grade level that is too low," Parent said in a statement.
"This is unfair and needs to be corrected."
Investigators could find no evidence that Veterans Affairs adjudicators consider the effect of an enduring injury on an individual's long-term employment and career prospects, he added.
In defending itself against criticism that veterans are being short-changed, the Harper government has been quick to point to the allowance and the supplement as a sign of its generosity.
Veterans Affairs Minister Julian Fantino told a House of Commons committee last spring that some permanently disabled soldiers receive more than $10,000 per month, but figures from his own department show that only four individuals in the entire country receive that much.
The report also noted that when a veteran dies, the spouse automatically loses the allowance, creating financial hardship for the family. Under the old Pension Act system, the widow or widower continued to receive support.
The permanent impairment allowance is a taxable benefit awarded to disabled soldiers in three grade levels as compensation for lost future earnings. The Harper government introduced a supplement to the allowance in 2011.
In some respects, that supplement contributed to a dramatic increase in the number of applications.
According to figures released by Veterans Affairs in June, there are 521 ex-soldiers who are deemed to be the most critically injured, but the vast majority of them — 92 per cent — receive the lowest grade of allowance support.
The ombudsman's report estimates Canada has a total of 1,911 severely wounded soldiers, 924 of whom receive no allowance at all.