Month: December 1996

Winter 1996 issue of the Expert Witness newsletter (volume 1, issue 4)

Posted on By economica

Contents:

  • Calculation of the Dependency Rate in Fatal Accident Actions
    • by Christopher Bruce
    • In this article Christopher Bruce deals with the topical issue of alternative approaches to the calculation of the dependency rate. He argues here that determination of whether a sole dependency method, a revised dependency method, or a revised cross dependency method is appropriate will depend upon the nature of the marriage of the couple in question.
  • The Income Tax Gross-Up on a Cost of Care Award
    • by Derek Aldridge and John Tobin, C.A.
    • In this article Derek Aldridge and John Tobin discuss the various factors that affect the size of the tax gross-up on a cost of care award. Factors range from the plaintiff’s taxable income (including investment income from the award), to the proportion of the tax-creditable expenses, to the time path of the consumption of his/her cost of care award. Depending on these various factors, it is clear that the gross-up may be significant, thus making this calculation very worthwhile.
  • Application of Contingencies in the Pre-trial Period
    • by Scott Beesley
    • In this article Scott Beesly offers some brief comments concerning whether or not survival probabilities and employment contingencies should be applied to pre-accident income in the pre-trial period.
  • The Valuation of Household Services – Conceptual Issues
    • by Therese Brown
    • In this article Therese Brown explores various complexities arising from the determination of the loss of household services in personal injury or fatal accident actions. While it is pointed out that information specific to the individual is preferable, average statistics are frequently relied on as well.

The Valuation of Household Services – Conceptual Issues

Posted on By economica

by Therese Brown

This article first appeared in the winter 1996 issue of the Expert Witness.

Since individuals make valid contributions through their efforts at both paid and unpaid work, the courts have concluded that they should be compensated when they are unable to pursue either type of employment. In the field of personal injury litigation this has implied that calculation of a plaintiff’s damages should include the loss (or impairment) of the individual’s ability to perform household services. Controversy remains, however, concerning the method which should be used to establish the economic value of that loss.

Three frequently discussed household services valuation methods will be explored here: the opportunity cost method, and both the generalist and specialist variants of the market replacement method. Each of these wage-based methods will be defined and the advantages and disadvantages associated with each of them will be outlined. It will be argued that there are sound reasons for the courts to have frequently adopted the generalist variant of the market replacement approach in personal injury cases.

The Opportunity Cost Method

Valuation of household services utilizing the opportunity cost method is based on the assumption that when an individual chooses to undertake unpaid work, such as household activities, the possibility of spending that time at paid work is precluded. Thus, the salary associated with that employment is foregone. Wages sacrificed to allow the individual to spend time at unpaid work are thus said to be representative of the economic value that the individual places on the unpaid activity. For example, if the individual has chosen to give up 20 hours a week of employment paying $10 per hour, in order to engage in 20 hours of housework, the opportunity cost approach concludes that the value of that housework must have been at least $10 per hour. Ten dollars becomes the valuation of an hour of housework.

There are various problems associated with adopting the opportunity cost method to valuate household services, not the least of which is the determination of the wage that has been sacrificed to allow the individual to participate in unpaid work. Janet Yale has delineated some of these concerns in her article, “The Valuation of Household Services in Wrongful Death Actions” (University of Toronto Law Journal, 1984, 303). She notes that it is reasonably simple to estimate the foregone market wage in the case of an individual who has had recent labour market experience, who has clearly defined skills, or who belongs to a particular profession. Outside of this framework, the estimation of an appropriate market wage may become extremely difficult.

More problematic is the assumption, underlying the opportunity cost method, that the amount which must be spent to restore the plaintiff to his/her pre-accident position is the value which the plaintiff had placed on the household services which have been lost. Although the individual may have given up $20 per hour to engage in housework, that individual can, in principle, be compensated for his/her loss by employing a third person to perform the forgone tasks. If a maid service can be hired to wash the kitchen floor for $15, it does not matter whether the plaintiff had previously foregone $6 or $60 to wash that floor – it will be equally clean in either case. (The exception to this argument occurs when the plaintiff had formerly obtained pleasure from household chores – but the compensation of this loss is properly that of non-pecuniary damages.)

The Replacement Cost Methods

The approach taken in both replacement cost methods is to value household services according to what it would cost to hire an individual who offers those services on the market. The difference between the two market substitute methods is that the generalist method assumes that these services could be replicated by an individual who does general domestic work. The specialist method, on the other hand, assumes that to replace household services it would be necessary to hire individuals with expertise in specific areas that comprise the various components of household duties.

Jamie Cassels expresses two concerns about the use of the replacement cost method in an article entitled “Damages for Lost Earning Capacity: Women and Children Last!” (The Canadian Bar Review, 1992, 488). First, he notes that homemaking is more all-encompassing than is implied when described simply as housekeeping, and as such the services of a housekeeper cannot adequately replace the contributions made by someone who is running a household. He also argues that domestic wages are depressed due to the large volume of “volunteer and vulnerable” labour provided by women in this sector. This would imply that these services have a higher value than the relevant market wages would indicate.

Selection Among Methods

The concerns identified above are representative of the various criticisms leveled at wage-based methods. For the most part these concerns are valid and in principle imply that these methods are inferior to the ultimate tool in the assessment of household services which has been identified as one that valuates the outputs of unpaid work (Households’ Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No. 3, 28). Elimination of this method, on the basis of its impracticality, leaves the choice between wage-based methods and more subjective methods of valuation. Since the latter would unquestionably lead to inconsistent results, we come back to wage-based methods. Although not flawless, these prevail as the best techniques available, in any practical sense, to facilitate the calculation of loss of household services.

Once the field is narrowed to these methods, it is necessary to identify the criteria that the method of choice must satisfy. Janet Fast and Brenda Munro have outlined several criteria which serve this purpose in their article “Toward Eliminating Gender Bias” (Alberta Law Review, 1994, 12-13). In particular they note three issues which warrant consideration when choosing an appropriate method: first, its computational complexity; second, the extent to which it achieves distributional equity; and third, how well it satisfies the objective of restoring the plaintiff (as much as is possible) to his/her pre-accident position. On this basis, Fast and Munro recommend the use of replacement cost methods in the valuation of household services in personal injury claims, as they best meet these criteria.

Of the two replacement cost methods, it may well be that the specialist variant is unmanageable in a practical sense, in addition to being less than objective. This approach necessitates a lapse into subjectivity when a particular specialist in one of various occupational fields has to be matched to certain household tasks (Households’ Unpaid Work: Measurement and Valuation, Statistics Canada Publication 13-603E, No.3, 25). Another hurdle remains after the occupational field is identified, as various factors affect the wage payable to specialists, depending on whether they are self-employed or employees, full or part-time employees, supervisors or labourers in entry-level positions, etc. Prior to calculation of the average wage an assumption must be made as to the “type” of employee under consideration. It is apparent that the determination of the wage for a specialist is not a clearcut matter.

If the specialist variant is ruled out, for practical reasons, this leaves the generalist variant of the market replacement method as the technique of choice in the valuation of the loss of household services. One concern that remains in reference to this method is that individuals who work in the domestic sector may perform household tasks more efficiently than would individuals in their own homes. Allowance is made for this increased efficiency in Economica’s calculation of the loss of household services. To reflect this efficiency differential, the estimation of hours of household services which have been lost is reduced by 25 percent, giving an approximation of the number of replacement hours required (see “Adjusting Claims for Hours Devoted to Household Chores”, in the Summer 1996 Expert Witness).

In our view, the generalist variant of the replacement method, once adjusted in this way, is the tool which lends itself best to the calculation of the loss of household services in personal injury cases. It is only when the generalist approach is clearly inappropriate, such as when the plaintiff provided services to the household which could only be replaced by a skilled tradesperson, that we would recommend use of the specialist method.

The caveat still holds, however, that an estimate derived using the replacement cost method is only as reliable as the factors used in its calculation, specifically the determination of the number of hours requiring replacement and the hourly cost of the replacement services. Both of these topics will be discussed in future issues of The Expert Witness, as will a review of court judgments dealing with the loss of household services.

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From 1996 through February 1998, Therese Brown was a consultant at Economica.

Application of Contingencies in the Pre-trial Period

Posted on By economica

by Scott Beesley

This article first appeared in the winter 1996 issue of the Expert Witness.

There is an interesting discussion regarding pre-trial “work life expectancy” continuing among members of the National Association of Forensic Economics (NAFE). We mention here two issues: survival probabilities (i.e. life expectancy) and employment contingencies.

First, there is debate over whether or not survival probabilities should be applied to pre-accident income in the pre-trial period, when the plaintiff has in fact lived to the date of trial. It can be argued that the accident “changed the world” completely, and that the post-accident fact of survival does not guarantee the plaintiff would have lived, had the accident not occurred. While I believe this argument is correct, some writers have gleefully pointed out that the application of survival probability to reduce expected pre-accident income invites plaintiff’s counsel to say to a defense economist “So, you are suggesting that the injury to my client has helped to keep him alive, are you?” In fact, this debate is virtually meaningless in almost all cases, because survival probabilities are so close to one, even near retirement age, that approximating them as equal to one in the pre-trial period is accurate. This is Economica’s conventional approach.

The contingencies applied to reflect the pre-accident risk of unemployment and disability are much more significant in the calculation of pre-trial loss. Again, we usually view those “from the date of the accident” in the sense that, if the plaintiff has worked steadily since the accident, we still assume they might have become disabled or unemployed, had the accident not occurred. This is clearly correct when the plaintiff no longer works in the same field, or does not work at all. The only awkward circumstance is when the plaintiff works in the same job or field (presumably with lower hours and earnings). The argument then is that the fact of no (further) disability or unemployment between the date of the accident and the date of trial provides additional information which implies that those contingencies should not be applied to pre-accident income. I disagree with this argument as it applies to disability, believing that any injury significant enough to reduce a plaintiff’s income also changes their lifestyle, and in particular would tend to make them more risk-averse at home and at work. The argument has merit as it applies to unemployment, however, since the time path of unemployment for a given company or industry is known better 3 or 6 years later, and market-wide risk of unemployment is the same pre-or post-accident. If an industry had grown rapidly between the date of accident and date of trial, and unemployment in the plaintiff’s area had fallen from 12 to 6 percent, the use of a 12 percent contingency would seem incorrect.

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Scott Beesley is a consultant with Economica and has a Master of Arts degree (in economics) from the University of British Columbia.

The Income Tax Gross-Up on a Cost of Care Award

Posted on By economica

by Derek Aldridge and John Tobin, C.A.

This article first appeared in the winter 1996 issue of the Expert Witness.

Consider a simple example where a plaintiff requires an award to pay for $11,000 in cost of care expenses one year from today. Assuming an annual (nominal, or observed) interest rate of 10 percent, this suggests that an award of $10,000 will be sufficient to cover the future cost of care expenses ($10,000 + 10% x $10,000 = $11,000). But suppose that the plaintiff’s interest income is taxed at a rate of 25 percent. Now $250 of the $1,000 in interest income is lost to tax, effectively reducing the interest rate from 10 percent to an after-tax rate of 7.5 percent (i.e., the plaintiff receives $750 after-tax interest on an investment of $10,000). One year from now the plaintiff will have only $10,750 to cover the $11,000 in expenses, a shortfall of $250.

To compensate for the tax impact, the plaintiff will require an additional award of $232.56 for a total of $10,232.56. Now the plaintiff will earn $1,023.26 in interest income (= $10,232.56 x 10%), of which 25 percent, or $255.82, will be lost to tax, for net after-tax interest income of $767.44. When the net interest income is added to the award, or capital, of $10,232.56, the plaintiff will have the required $11,000 to meet cost of care expenses one year in the future. The additional award of $232.56 is known as the cost of care tax gross-up.

Usually, the gross-up is reported as a percentage of the non-grossed-up award. In the example discussed above the tax gross-up would normally have been reported as 2.3256 percent of the “non-grossed-up” amount $10,000. Readers of The Expert Witness will know from experience that this percentage gross-up varies widely from case to case. The purpose of this article is to identify some of the factors which may affect the percentage gross-up.

Factors affecting the income tax rate (and the tax gross-up)

The gross-up is determined by calculating the plaintiff’s tax liability prior to considering the award for cost of care. This is compared to the liability including income generated from the award for cost of care. The gross-up is the additional capital required to fund the resulting tax liability.

The percentage gross-up is dependent on the plaintiff’s marginal tax rate and the plaintiff’s eligibility for various income tax credits. In the example above, if the individual’s investment income had been taxed at a marginal rate of 50 percent, instead of 25 percent, the effective after-tax interest rate would have fallen from 7.5 to 5 percent. A consequence of the increased marginal tax rate is that now the individual would have to invest $10,476.19 to provide $11,000 one year from today. That is, the percentage gross-up increased from 2.3256 to 4.7619.

A number of factors combine to affect the overall tax rate and the amount of tax paid on income invested to compensate for future costs of care. First, some of the future costs of care may be eligible for a medical tax credit (e.g., the cost of a wheelchair would typically be eligible for a tax credit). A tax credit reduces the plaintiff’s tax liability, at a certain percentage. The more expenses that the plaintiff has which are eligible for a medical tax credit, the lower his tax liability and the tax gross-up. To further complicate the tax calculation, it could be the case that once every five years the plaintiff will incur $50,000 in expenses, of which $40,000 are tax- creditable, while in the other years he faces costs of $20,000, of which only $5,000 are tax-creditable. Also, in certain circumstances the plaintiff’s injury may result in his qualifying for the disability tax credit. This will further reduce his tax burden (and the associated gross-up). In some cases, a severely disabled plaintiff may be entitled to a smaller gross-up, in percentage terms, than a moderately disabled person, as a result of his higher medical expenses and his eligibility for the disability tax credit (though the former’s total cost of care and gross-up will almost certainly be higher).

The plaintiff will usually have other sources of income which will affect the gross-up. Interest income on a loss of income award or a non-pecuniary award, as well as post-accident employment earnings or pension income will all attract tax, and will affect the marginal tax rate on the interest income earned from the cost of care award. (The percentage of tax applied to each dollar of additional income is the marginal tax rate.) The courts have ruled that the investment income from the cost of care award is to be added to all other sources of income and taxed at the rate associated with the highest tax bracket in which the individual’s income places him. To estimate the gross-up, details about the future cost of care requirements (and the associated tax credits) are required as well as information about all of the plaintiff’s expected income, including future employment income and any additional interest income that he will earn (especially from loss of income awards). The higher the plaintiff’s expected income, the greater the percentage gross-up resulting from income being taxed at a higher marginal tax rate.

A third issue to consider is the time path of award consumption. Just as the amount of any non-pecuniary and loss of income award will affect the tax gross-up, the time path of the consumption of these awards will affect the calculation. If the plaintiff spends his entire loss of income and non-pecuniary award immediately upon receipt, then the award will not generate any interest and will not attract any tax. Therefore, the plaintiff will be in a lower marginal tax bracket and he will pay a lower average tax rate over his lifetime on the award for cost of care. This would result in a lower tax gross-up. For the loss of income award, it may be argued that the plaintiff will consume enough of this award each year to compensate him for the income which he has lost due to his injury. For the non-pecuniary award, it may be assumed that the plaintiff will consume the award gradually over his lifetime, or alternatively that he consumes it quite quickly. Except for very large non-pecuniary awards, where the plaintiff does not have any other significant income, the variation of the consumption assumption on the award does not have a significant effect on the gross-up calculation.

We occasionally encounter cases where a plaintiff with a shortened life expectancy is expected to receive a “lost years” award (see “Shortened Life Expectancy: The ‘Lost Years’ Calculation” in the Spring 1996 Expert Witness) – this adds a further complication to the gross-up calculation. In such a “lost years” case, a plaintiff will receive a portion of the money that he would have earned in years in which he is now not expected to be alive. In these circumstances, if we assume that the plaintiff will consume enough of this award each year to compensate him for that year’s loss of income due to his injury, then he will not consume all of the loss of income award before his death. As an alternative in these situations, for the purposes of making the gross-up calculations, we assume that the plaintiff will consume the loss of income award at such a rate that by his expected death he will have consumed the entire award.

Given equal total awards, older plaintiffs will typically require lower gross-ups than their younger counterparts. This is because older plaintiffs will begin to draw on the capital amount earlier, so the interest income will decline more rapidly. A young plaintiff will usually consume only a portion of the interest income (which can be substantial) for several years before he begins to draw on the capital. Thus, we would expect that for several years a younger plaintiff will earn large amounts of (taxable) interest income, in excess of medical expenses which may be eligible for a tax credit. It should be noted, however, that if the plaintiff is a child then he may not be required to pay tax on any of the interest income earned on the cost of care award until the tax year of his 21st birthday. This would substantially reduce the tax gross-up. If a minor has a shortened life expectancy then it is conceivable that the gross-up would be nominal.

In the example described at the beginning of this article, it was assumed that the cost of care would be incurred one year hence. It can easily be shown that the tax gross-up will be larger, the further into the future is the cost of care to be incurred. For example, assume that $16,105.10 is to be replaced 5 years from now and that, again, the interest rate is 10 percent. In the absence of taxes on the investment income, this amount can be replaced with an investment today of $10,000. If the interest income is taxed at a marginal rate of 25 percent (resulting in an effective after-tax interest rate of 7.5 percent), the required award will increase to $11,218.15 – for a tax gross-up of 12.1815 percent (compared to 2.3256 percent in the earlier example). As the number of years over which the award is to be invested increases, the interest which will be earned on the award also increases. Hence, while the non-grossed-up award (here, $10,000) remains the same, the impact of income taxes increases, as does the percentage gross-up. In short, the longer is the period over which the costs of care are to be awarded, the higher is the percentage gross-up (everything else being equal).

Summary

To summarize, we have listed some of the factors which influence the value of the gross-up. Other things being equal, we can normally assume the following:

  • Cost of care award. A larger cost of care award will generate more interest and more tax. Thus it will lead to a higher gross-up.
  • Loss of income award. A larger loss of income award will translate to a larger cost of care tax gross-up.
  • Post accident employment income. Greater post accident employment earnings will lead to a larger gross-up.
  • Tax-creditable expenses. The greater the portion of tax-creditable expenses, the less tax will be paid. Thus the tax gross-up will be lower.
  • Time path of consumption. If a large portion of the cost of care award will be consumed early in the plaintiff’s life, then this will lead to a lower gross-up.
  • Age. Young plaintiffs will generally require larger gross-ups than will old plaintiffs, both because they will have more interest income and, therefore, be in higher tax brackets, and because their awards will continue much further into the future.

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Derek Aldridge is a consultant with Economica and has a Master of Arts degree (in economics) from the University of Victoria.

John Tobin, CA, is a partner with Kenway Mack Slusarchuk Stewart LLP Chartered Accountants.

Calculation of the Dependency Rate in Fatal Accident Actions

Posted on By economica

by Christopher Bruce

This article first appeared in the winter 1996 issue of the Expert Witness.

In a fatal accident action, the surviving spouse is entitled to claim for any loss of pecuniary advantage which would have been derived from the deceased. There is considerable uncertainty, however, concerning the manner in which this loss of dependency is to be calculated. The purpose of this paper is to discuss three alternative approaches to the calculation of the dependency and to argue that selection among them depends upon the nature of the couple’s marriage. The three approaches are defined in the first part of the paper. In the second, three types of marriage are defined and each type is matched with an associated method of calculating the dependency.

Theoretical Approaches to Calculation of Dependency

Assume that the husband of a childless couple has been killed. The husband was earning $30,000 per year (after taxes) and the wife $20,000 per year. Assume also that the wife’s dependency on family income has been found to be 70 percent – composed of 30 percent of family income spent on items which benefitted the wife alone and 40 percent spent on items which benefitted the husband and wife equally. Three different approaches to the calculation of the wife’s loss can be identified.

a) The sole dependency method

In this approach, the wife receives 70 percent of her husband’s projected income.

b) The “traditional” cross-dependency method

In this approach, the wife receives 70 percent of the family’s income net of her earnings:

(0.70 x $50,000) – $20,000 = $15,000 (2)

The source of the difference between these approaches can readily be seen if the cross-dependency equation is rewritten in a form which makes it equivalent to that used in the sole dependency method. In doing this, it is first necessary to recognise that the family income figure, here $50,000, is composed of the sum of the wife’s and husband’s incomes, that is, $30,000 + $20,000. Thus, the equation for the wife’s dependency in the cross-dependency approach, (equation (2)), may be rewritten:

0.70 x ($30,000 + $20,000) – $20,000 = $15,000 (3)

Furthermore, with rearrangement, equation (3) can be represented as:

(0.70 x $30,000) + (0.70 x $20,000 – $20,000) = $15,000 (4)

or as:

(0.70 x $30,000) – (0.30 x $20,000) = $15,000 (5)

That is, the difference between the sole dependency approach and the cross-dependency approach is that in the latter, the element (0.30 x $20,000), which is the portion of the wife’s income which had previously been devoted to the husband, is deducted from her loss of dependency.

c) A “revised” cross-dependency method

In this approach, the wife receives the husband’s total income net of the total amount devoted to his personal expenditures. Thus, as it has been assumed that the husband’s personal expenditures accounted for 30 percent of family income (and family income is $50,000), the wife would receive:

$30,000 – (0.30 x $50,000) = $15,000 (6)

Recognising, again, that the $50,000 family income figure in this equation is the sum of the husband’s and wife’s incomes, equation (6) can be rewritten:

$30,000 – (0.30 x ($30,000 + $20,000)) = $15,000 (7)

or:

$30,000 – (0.30 x $30,000) – (0.30 x $20,000) = $15,000 (8)

which, with simplification, becomes:

(0.70 x $30,000) – (0.30 x $20,000) = $15,000 (9)

Equation (9), however, can be seen to be identical to equation (5), the method for calculating a “traditional” cross-dependency. Hence, although the rationale for using equation (9) is different from that for equation (5), the two approaches yield the same result. It is for this reason that I used the term “revised” cross-dependency to describe the approach which was used to derive equation (9)

Three Types of Marriages

In this section, I discuss three types, or “styles,” of marriage and identify the appropriate dependency approach associated with each.

a) The idealised marriage. In what might be called an “idealised view of marriage”, the couple marries for love and shares all family income (approximately) equally. That 30 percent of family income is spent on items which benefit the husband alone implies that 30 percent of each of the husband’s and wife’s income is devoted to those expenditures. (And, conversely, 30 percent of each spouse’s income is devoted to items which benefit the wife alone.) The wife is assumed to spend 30 percent of her income on her husband because she loves him and, hence, derives pleasure from expenditures which benefit him.

In such a marriage, the pecuniary impact of the husband’s death is as follows: First, the wife has lost the 70 percent of the husband’s income (0.70 x $30,000 = $21,000) which he had spent on joint, family expenditures and on her personal consumption. Second, the wife now “saves” the 30 percent of her income, here $6,000 (= 0.30 x $20,000), which she had previously been spending on her husband’s personal consumption. However, it is not correct to say that she is “better off” by that $6,000. In the “idealised” marriage, her “gift” of $6,000 to her husband was voluntarily made because that use of her money gave her greater pleasure than any other use available to her. Thus, when the death of her husband “freed” her to spend the $6,000 on herself, she was not made better off. The “freeing” of the $6,000 forces her to purchase something – goods and services for herself – which she values less than the items she was purchasing before – goods and services for her husband.

A less emotion-laden example might help to explain this point. Assume that individual A has been leasing a car for $500 per month. The tortious intervention of individual B has destroyed the car and $1,500 of contents belonging to A. Although two months had remained on the lease, A has been excused from further payment (perhaps on the ground that the contract was frustrated). B admits that he owes $1,500 to A, to compensate him for the loss of his personal belongings, but argues that this should be offset in part by the $1,000 A has “saved” because he no longer has to make two months of lease payments. B’s argument is wrong. Although A now has $1,000 which he did not have before; he has been deprived of the use of a car, a use on which he had placed a value of at least $1,000. Instead of being made better off by the “gain” of that $1,000, he will actually be made worse off by the difference between the value of the car and the value of the “next best” set of goods and services which he can now purchase. Similarly, the wife who was previously devoting some of her income to her husband is not better off when she is prevented, by the tortious action of some third party, from spending that money. Rather, like the individual deprived of his car, she is worse off. Hence, in the idealised form of marriage, it is the sole dependency approach which is justified.

b) The marriage of convenience. The couple may not have married for reasons of love, but for reasons of financial gain. From a purely financial perspective, the marriage described above cost the wife $6,000 – the amount which she spent on items which benefitted her husband alone. In return, however, she received the benefit of the expenditures her husband made on her – 70 percent of his income, or $21,000. That is, she may be thought of as having “paid” $6,000 in order to receive $21,000. In such a marriage of convenience, the wife loses only the difference between these two figures – $15,000 – when her husband dies. (Note: the husband has also gained from this marriage, as he has “paid” 30 percent of his income, or $9,000, in order to obtain the benefit of 70 percent of his wife’s income, $14,000.)

In such a marriage, it is the “traditional” cross-dependency approach which is justified – subject to the following caveat: The 30 percent of the wife’s income which benefitted the husband alone must have been less than the 70 percent of the husband’s income which benefitted the wife, (and vice versa), otherwise the marriage would not have provided a financial gain to the wife. For example, if the wife’s income had been $50,000 and the husband’s $20,000, the wife would have spent (0.30 x $50,000 =) $15,000 on the husband in return for only (0.70 x $20,000 =) $14,000. Such an outcome would have been possible in an “idealised” marriage, but not in one which had been entered for financial gain.

c) A marital partnership. Although the couple may have married for love, they may have agreed to maintain separate bank accounts, with each spouse paying for those items which benefitted him/her alone. In this case, it is only that portion of the deceased’s income which was spent on joint household expenditures which the surviving spouse will have lost. In the example developed above, the husband was assumed to have earned $30,000 and the wife $20,000. Thirty percent of total family income, or (0.30 x $50,000 =) $15,000, was for the husband’s benefit alone. In the “marital partnership” model, the husband is assumed to have paid for all of the latter expenditures. What remained of his $30,000 income, after deduction of this figure, was the husband’s expenditure on items which benefitted the couple jointly. That amount is also $15,000 (= $30,000 – $15,000). It is the “revised” cross-dependency approach which would compensate the wife for the loss of this amount.

It will be noted that the loss of dependency calculated on this basis, $15,000, is identical to that calculated according to the “traditional” cross-dependency approach. This is not a coincidence. Mathematically, the two can be shown to be identical to one another. Hence, the use of the cross-dependency approach can be justified on the basis of either the “marriage of convenience” or the “marital partnership” model. It should be cautioned that both suffer from the reductio ad absurdum that individuals earning relatively high incomes will be found to be “better off” when their spouses are killed.

Conclusion

It is now seen that there is not a unique approach which can be applied to all marriages. Rather, one must consider the nature of the relationship which had been shared between the deceased and the plaintiff. Two types of evidence can be led: subjective and objective.

a) Subjective evidence. Subjective evidence concerns the nature of the personal relationship which had existed between the husband and wife. If evidence is led to indicate that the marriage in question had been based on love and mutual respect, a prima facie case would appear to have been made for use of the sole dependency approach. Only if it could be shown that the marriage was one of “convenience” would it be appropriate to employ the traditional cross-dependency approach.

b) Objective evidence. Objective evidence concerns the extent to which the couple had intermingled their incomes and paid for personal and household items jointly. Even when the court is reluctant to rule on the basis of the presence or absence of a “loving” relationship, use of the sole dependency approach can be justified on the pragmatic ground that many couples combine their incomes in a single pool, within which it is impossible to distinguish one individual’s contribution from the other’s. Hence, if 30 percent of the (family) income in this pool is spent on the husband, for example, it would not make sense to argue that 30 percent came entirely from his income. Rather, the more reasonable conclusion would have to be that 30 percent derived from his contributions to family income and 30 percent from his wife’s contributions – that is, that the sole dependency approach should be employed.

On the other hand, if the couple had carefully kept their accounts separate from one another, a strong presumption would appear to have been made for use of the “revised” cross-dependency approach – unless the individuals had markedly different incomes. (If the wife’s income was $10,000 per year and her husband’s $50,000, for example, it would be extremely unusual to find that the husband had spent 60 percent of “his” $50,000 income on items specific to himself; while only 60 percent of the wife’s $10,000 income had been spent on items specific to her.)

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Christopher Bruce is the President of Economica and a Professor of Economics at the University of Calgary. He is also the author of Assessment of Personal Injury Damages (Butterworths, 2004).