Month: April 2021

ACTLA Presentation – Income Replacement Benefits

Posted on By economica

ACTLA Lunch & Learn

Prepared by:

Laura J. Weir, MA

Economica Partnership

March 25, 2021

Income Replacement Benefits

In the sections below, I provide the notes I used to discuss various types of income replacement benefits and issues that may arise with respect to these benefits when estimating a plaintiff’s loss of income. Please note that these are brief, somewhat informal, point-form notes.

1 Injuries outside of motor vehicle accidents

Typically, income replacement benefits (such as long-term disability benefits from an employer-sponsored plan) are not taken into account as it is assumed the plaintiff will need to repay these benefits. We also assume the insurer will not pay benefits into the post-trial period (i.e., once an action has settled), although this should be confirmed.

An exception to this is a retirement pension benefit from an employer-sponsored plan. This income source may arise when a plaintiff retires earlier than would otherwise have been the case, and will therefore begin receiving retirement pension benefits earlier than they would have without-accident. When this situation occurs, it is best to provide your expert with the annual pension statements, one from just before the accident and then the most recent statements (particularly if the plaintiff is already receiving their pension).

2 Injuries arising from motor vehicle accidents

Injuries arising from motor vehicle accidents differ in that the loss of income is estimated on an after-tax basis. Further, income replacement benefits (including those from an employer-sponsored plan) are deducted from the loss as the right to make a subrogated claim for these benefits has largely been eliminated. Below is a list of the income replacement benefits I have encountered when estimating a loss, and a discussion regarding some of the issues surrounding these benefits.

2.1 Section B benefits

These are usually fairly straight forward. The maximum benefit as of November 1, 2020 is $600 per week, $31,200 per year for two years (up from $400 per week prior to this time). These benefits are not subject to tax and therefore, this benefit is equivalent to approximately $38,550 in regular, taxable earnings. Due to the non-taxable nature of this benefit, this may lead to negative pre-trial losses, particularly if the plaintiff was receiving other wage replacement benefits in addition to the section B benefits (as coordination between plans is not always perfect).

2.2 Regular sick-time pay & short-term disability benefits

Regular sick-time pay (and often short-term disability benefits) are typically included with regular T4 earnings and can be deducted accordingly. However, I have been advised by some of the lawyers I work with that if a plaintiff has used vacation pay to fund additional sick leave as a result of the accident, and they would have otherwise received this vacation pay as a payout when their employment ended (most commonly occurring when plaintiffs work seasonally or on a project basis), then they are entitled to be compensated for this.

In order to account for this type of wage replacement, you will need to give your expert the amount of the vacation pay used to fund an accident-related leave of absence (either directly as a dollar value or with specific dates over which the vacation pay was used). This is because vacation pay will be included in the regular earnings and it will be very difficult for your expert to differentiate between it and other T4 earnings.

Indeed, anytime that it’s possible to provide your expert with documentation regarding pay received prior to the accident, and pay received after, it is very helpful (for example, paystubs from the time of the accident typically have this information).

2.3 Lump-sum severance payout

This type of benefit refers to a lump-sum payment that a plaintiff may receive from their employer if they are terminated from their position as a result of the accident (over-and-above pay for vacation, pay in lieu of notice, and other statutory payments). Often, the payment is structured as X weeks/months of salary for every Y years of service. While this appears to be rare (I have personally only seen it in a handful of cases), when it does occur the amounts in question tend to be significant.

The legal question is, of course, whether or not the defendant is entitled to benefit from the plaintiff having access to a severance payout. From an economic standpoint, this is income received as a result of the accident and would therefore be included in the calculation. However, if the plaintiff would have received this payout upon retirement in the absence of the accident, this should be taken into account in the calculations as well (i.e., a severance payout should be included in both the without- and with-accident calculations in this case).

When this replacement benefit occurs, you will need to provide guidance to your expert with respect to whether or not you think the payment should be included. If it is to be included, you will need to provide your expert with the documentation for this payout (usually included with the termination release documents).

2.4 Canada Pension Plan (CPP) disability benefit

This is usually a straight-forward deduction as these benefits are taxable and are indexed for inflation. However, there are a few things to watch out for.

First, the initial lump-sum payment (once the plaintiff is approved) may be made directly to the long-term disability (LTD) insurer, even though it will be reported as income by the plaintiff on their tax returns. It is therefore helpful to have the acceptance paperwork from the CPP (if not the actual file) and not just rely on the amounts reported on the tax return. In this case, deducting both the entire past LTD benefit and the lump-sum payment from the CPP would be double-counting.

Second, plaintiffs with children will receive both a disability benefit for themselves and one for each of their children. In 2021, the CPP children’s disability benefit is $3,090 per year, per child. Thus, the presence of children does have a significant effect on the total CPP disability benefit received (and therefore on the resulting loss).

I have not received guidance from counsel as to whether or not the CPP children’s benefit is deductible (and therefore usually provide two losses – one deducting the benefit and one not). However, I would note that from my experience, LTD plans typically do not deduct the children’s benefit from the LTD benefit payable.

While this situation is not common, I have had a case where the child benefit made the difference between a loss of income and a gain. The plaintiff was a relatively low income earner but had multiple children. Once the children’s benefits were added to the plaintiff’s, she was receiving more in CPP disability benefits than she would have earned through her job. Given the size of the CPP children’s benefit, and particularly if there is more than one child, the issue of whether or not the CPP child’s benefit is deductible from the loss of income is an important one.

Third, the CPP disability benefit is typically deducted from the monthly LTD payment (leaving the total disability benefit relatively unchanged). Again, I would note that the children’s benefit is not usually deducted. If the LTD benefit is both taxable and indexed for inflation, then the total disability benefit may be used without really differentiating between the two payments. However, if the LTD is not taxable or is not adjusted by inflation, then the LTD and the CPP benefits should be calculated separately (and your expert will require the documentation for both benefits).

2.5 LTD benefits

It is helpful to have the LTD file (or at a minimum the acceptance letter) to determine not only the benefit amount, but also whether or not it is taxable and how long it will be received. Under a typical employer-funded plan, the LTD will usually be received until age 65 (although this should be confirmed). Further, the LTD file should provide your expert with information regarding any deductions being made (such as for insurance premiums or pension contributions as discussed below).

One of the main issues with some LTD plans is that they fund the continuation of an employee’s pensionable service while they are on disability. That is, where the plaintiff may have contributed (say) 10% of their salary to the pension plan for each year of service, the plaintiff now receives that year of service at no cost. Therefore, while their pensionable salary (used to estimate their retirement pension) usually remains unchanged from the time they went on disability, the ability to accrue pensionable service at no cost will often more than compensate for this. In addition, most LTD plans run to the plaintiff’s age 65. If they would have retired earlier than age 65 in the absence of the accident, the plaintiff may end up with more years of service (at no cost) with-accident than without-accident. Again, when a plaintiff participates in an employer-sponsored pension plan, it is helpful to provide your expert with the annual pension statements from both before and after the accident.

2.6 Employment insurance (EI) & Workers’ Compensation Board (WCB) benefits

EI benefits are a straight forward deduction and I cannot really think of any issues surrounding this replacement benefit. However, WCB benefits are definitely not a simple deduction (in fact, are not a deduction at all).

It is my understanding that the WCB has retained the right to make a subrogated claim for any benefits paid. Therefore, these benefits are treated in the same way as benefits for non-motor vehicle accidents in that they are not to be included in the calculations. However, care should be taken to get a complete list of wage loss payments from the WCB.

I have had cases in which WCB benefits were paid both to the plaintiff as a direct wage replacement, and to the employer as reimbursement during a return-to-work program. However, the WCB will claim for the entire amount (i.e., both the payments made to the plaintiff and those made to the employer). If your expert has only the plaintiff’s tax returns to work with in this situation, they will underestimate the WCB benefit (and overestimate the regular earnings) as a portion of the benefit (the part paid to the employer) will not appear on the tax returns. Indeed, in several of the cases I have had with this payment scheme, the WCB benefits paid to the employer were also not included in the employee’s WCB file. Therefore, the list of wage loss payments from the WCB will be very important for properly dealing with these benefits.

2.7 Veterans Affairs disability pensions

This is a benefit that will only be encountered when the plaintiff is entitled to benefits from Veterans Affairs as a result of the accident (so, RCMP officers and members of the military). However, what makes this pension significant in these cases is that it is non-taxable, it is indexed for inflation, and it is payable for life (regardless of whether or not the plaintiff is working because it is related to the injury, not level of disability). Thus, even a relatively small Veterans Affairs pension may result in a non-taxable, accident-related benefit that will have a significant effect on the future loss of income (potentially leading to a gain in income, depending on the estimated annual loss).

For example, suppose that a 35-year old male is entitled to a Veterans Affairs disability benefit of (say) $500 per month, $6,000 per year. The present value of this pension over the course of this man’s life will be approximately $159,000. Thus, even a relatively small benefit will have a significant effect on the future loss of income.

2.8 Supported employment

It may be the case that a plaintiff has been rendered effectively competitively unemployable but has been given a “job” by a friend or family member, or by a charitable organization. In this case, the plaintiff is not performing actual productive work that an employer may reasonably profit from, but they are still receiving some form of pay or stipend by a benevolent individual or group.

This type of potential replacement income is quite rare in my experience. It is of course a legal question whether or not this type of income should be included in the calculations, and you should provide this guidance to your expert, but in my view it should likely not be included. It appears unreasonable to me to assume that a friend or family member is responsible for offsetting part of the plaintiff’s loss of income by providing supported employment.

Thank you for the opportunity to discuss these issues with you today.

Yours truly,

Laura J. Weir, MA

For a PDF version of this presentation, click here.

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ACTLA Presentation – Loss of Income for Self-Employed Plaintiffs

Posted on By economica

Derek Aldridge, Economica

derek@economica.ca

(I consent to redistribution of this unmodified document)

ACTLA Presentation – Lunch and Learn

March 25, 2021

Loss of income for self-employed plaintiffs

I will briefly discuss the approach that I use to estimate the loss of income for self-employed plaintiffs. Simply determining the true income of a self-employed worker can be challenging, and I will address some of these challenges. I will also discuss some approaches that can be used to estimate their loss of income.

Note that my tables and charts are based on actual cases I have worked on, but I have made various adjustments to simplify the presentation to preserve confidentiality.

Estimating the income of a self-employed worker

Determining the income of a self-employed worker can be much more complicated than for a regular employee.

For a plaintiff who is an employee and not self-employed, their income is simply the amount they are paid by their employer. Employment insurance income is also relevant for our calculations. Both of these sources of income are usually easy to determine by looking at the plaintiff’s income tax records. An employee might have income tax records that look something like this:

Usually, the income tax records will give us an accurate description of the income of an employee-plaintiff – at least for the pre- accident period. After the accident there can be income replacement benefits that do not appear in the income tax records.

For a self-employed worker, their personal income tax records usually only tell us part of the story of their income. The personal income tax records for a self-employed plaintiff might look something like this:

For the self-employed worker, the income reported on their personal tax returns will often not reflect their true income in each year. I will discuss this below.

For my purposes, there are two categories of self-employed workers: those who operate their business as a sole proprietorship, and those who operate a corporation.

Sole proprietorship

  • These are usually fairly straightforward.
  • All business income appears on the personal income tax returns – usually as gross and net business income.
  • There is a statement of earnings with the personal tax return that shows a detailed description of revenue and expenses.
  • All business income is paid to the business owner each year. There is no separate corporation where profit can be held separately from the owner. Because there is not a separate corporation, most of the information we need to estimate the plaintiff’s income is usually contained in their personal tax records.

Corporation

  • These are more complicated, and I will focus my discussion on cases when the plaintiff’s business is a corporation.
  • The plaintiff operates his business through a numbered or named corporation (for example, 1234567 Alberta Ltd, or Derek Aldridge Consulting Ltd). The corporation is a separate entity from the plaintiff, so income earned through the corporation will not necessarily appear on the plaintiff’s personal income tax records. That is why we need the corporate financial statements.
  • The business income statements show the revenue and expenses for each year. When I combine the income statements for several years, I create a table that looks something like this:

The income statements can get quite complicated, but in general, we see the revenue at the top, which is the income the business earned each year. Then we have various categories of expenses. The business owner usually pays himself a salary, and it is included here as an expense, because his salary is an expense to the business. The salary for other workers at the business is also likely included in that same expense category. The revenue less the expenses gives us the income from operations (profit), before accounting for corporate taxes. In principle, the business owner could pay himself a high enough salary so zero profit would remain. But usually what happens is some of the profit is left in the business as retained earnings, which is effectively savings (the corporation does not need to pay out all profit to the owner every year). The business financial records will show us how these retained earnings have accumulated over time, and will also show us when the owner draws down these savings by taking dividends.

When examining the corporate income statements, I am most interested in how much the business paid the owner in salary (part of the business expenses), and how much before-tax profit the business had after expenses, since that profit effectively belongs to the owner and could have been paid to him as part of his salary. The business owner’s income is the total of the salary (employment income) that the business paid him, plus the profit that the business earned. The salary is reported on his personal tax return, but the business profit is not. The owner might also report dividend income from the corporation, but I do not normally count this as part of his income. Because I am attributing all of the business profit to the owner in each year, this captures all of the dividend income that could be paid in future years.

Note that dividend income can cause some confusion because it does not necessarily reflect earnings from the year under consideration. If the business has accumulated significant retained earnings from previous years’ profits, the owner could still pay himself a large dividend in a year when business was poor.

Below I compare the income reported on this business owner’s personal income tax records with his true income:

We see that there can be quite a large difference between the business owner’s true income and the income that is reported on his personal income tax records. Another potential complication is that the corporation reports its income in a fiscal year, which may be different from a normal calendar year. So if fiscal 2019 for the corporation is the 12-month period from August 2018 through July 2019, it will make it more difficult to match up income reported on the personal tax returns with the corporate financial statements.

Documents and information required

Below I list some of the documents and information that I like to have when dealing with a self-employed plaintiff.

  • The business income statements show the revenue and expenses for each year.
  • The balance sheet is usually included with the income statement as part of the annual financial statements that are usually prepared by an accountant. However, there is usually not much useful for me in the balance sheet.
  • I need the plaintiff’s personal income tax records because they will show the salary (employment income) that he drew from the business.
  • Sometimes the business pays a salary to another family member. Perhaps the owner’s wife does bookkeeping and the business pays her a salary of $20,000 per year. That’s fine, but if she is being overpaid for this work (income-splitting) then I should account for this. For example, if she is being paid $20,000 but an arms-length bookkeeper would only be paid $12,000, then that extra $8,000 actually reflects the plaintiff’s income.

Approaches to determine a loss of income

Once we have a good estimate of the plaintiff’s true income in every year, the next step is to try to estimate his loss of income in each past year, and in the future. While I am focusing on cases when the plaintiff owns and operates a corporation, many of the same principles apply for sole-proprietorship cases.

One of the first things to consider is what is being claimed was the impact of the accident on the business income? This might look obvious from the financial records (for example, a sharp decline in revenue in the years following the accident), but there could be many other effects.

If business revenue declined following the accident, why was that? Is it because the plaintiff missed a few months of work? Is it because she reduced her work hours? Is it because she was less productive during the hours that she worked? Did she target jobs that were less physically demanding and less lucrative? Did she miss out on certain high-value contracts? In my view, answering these questions can be an important part of the narrative. There can be many reasons for a decline in revenue that are unrelated to an injury, so we want to know what is the reason for the revenue decline that we have observed.

Note that it could be the case that business revenue did not decline, but if the accident had not occurred, revenue would have been higher. That is, revenue might have been stable or increasing after the accident, but still less than it would have been absent the accident.

Sometimes business expenses increase because of the accident. This could happen if a worker or a subcontractor was hired to take on some of the duties that the plaintiff normally would have performed. This should also be accounted for in my calculations.

In some cases we can simply compare the plaintiff’s total business income in the years before the accident with her income after, and estimate a loss on that basis. However, because of the many factors that can influence business income, it is often preferrable to try to account for the specific impacts that the plaintiff’s injures had on her business revenue and expenses.

In one case, I had a self-employed worker who had a fairly straightforward business and she billed her services to several clients at an hourly rate. The claim was that because of her injuries, she was reduced in her ability to work and bill hours. Billing more hours would not have led to significant increased expenses. Fortunately, she had detailed records showing her billing and the pattern confirmed her claim:

As shown above, it appears that this plaintiff’s billed hours declined greatly following the accident. They have improved somewhat, but she continues to bill less than she did before the accident.

In this case I was able to estimate a loss of income by assuming that if the accident had not occurred, the plaintiff would have continued to bill her average monthly hours from before the accident, whereas with-accident, she will continue with her reduced billable hours. For the future calculations I can also include scenarios in which I assume that her billable hours will decline further (her condition declines), or that her billable hours will increase (her condition improves).

By examining the billable hours (instead of billings), this helps us account for revenue increases that are due to increases in the plaintiff’s hourly rate, versus increases due to billing more hours. For example, if the plaintiff has increased her hourly rate by 20 percent in the years following the accident, this could easily mask the revenue-effect of her average monthly hours having declined by 20 percent.

In another case that I worked on, the plaintiff was self-employed in a personal-services business and she charged an hourly rate for her services. It appeared that her total billable hours had decreased due to her injuries, and my client wanted me to simply provide a range of scenarios regarding the loss of income that would result from various reductions in billable hours. In the table below I show the potential annual loss that resulted from assumptions that her billable hours have been reduced by 5, 10, or 15 per week.

A case in which a plaintiff bills her services hourly, has no employees, and expenses that are mostly fixed (not increasing with additional billable hours), is almost an ideal scenario for estimating the loss. Her loss of income is directly linked to her ability to bill hours. Other cases can be much more complicated.

Another case that I worked on involved a plaintiff who was in the early stages of establishing his business when he was injured. Following the accident he was able to continue to grow his business, and his income increased accordingly. His business income was fairly complicated, with employees who also generated revenue, as well as numerous expenses. After estimating the income that he earned from his business, the potential loss of income was not at all obvious because his income had increased so much after the injury, as shown below.

Because the plaintiff was injured while he was in the early stages of establishing his business, I didn’t have a useful pre-accident history as a comparison. However, his business income was heavily linked to his ability to spend time at work, and to be productive during that time. Because of his injuries, it was claimed that he needed more many breaks at work and he was not able to perform some of the more lucrative jobs that would normally have been available to him. Effectively, the evidence was suggesting that if he was uninjured, his revenue and earnings would be much greater. The question of course, is how much greater? Ultimately I provided a range of scenarios, and one was that I assumed that his income has been reduced by 25 percent because of his residual deficits. (That is, he has only been earning 75 percent as much as he would have been earning if uninjured.) This is depicted in the chart below.

Clearly this is not as exact as we might hope, but providing a range of scenarios using this approach can at least provide an estimate of the loss if the Court accepts a certain set of assumptions. Dealing with a self-employed plaintiff can involve much more uncertainty than when we have (say) a teacher who is working three-quarters of full-time because of her injuries, rather than full-time.

Another approach that can potentially be useful is the replacement cost approach. In some cases it is possible for the plaintiff to hire a helper that will enable the business to continue as it would have in the absence of the accident, though with additional expenses (and reduced profit) due to the cost of the replacement worker. For example, an injured owner of a landscaping business might be able to hire a part-time labourer to assist him with some of the heavier tasks. If this helper is paid $40,000 per year, then business expenses will increase by $40,000 and profit will decrease by $40,000. That’s $40,000 that is not available to be paid to the owner, so his annual loss of income due to hiring the replacement worker would be $40,000 (not accounting for tax). In this case I am assuming that the self-employed landscaper can continue with the managerial aspects of his business, and he can perform some of the manual labour, but his residual deficits are preventing him from performing the heavier tasks.

The possibility of hiring a replacement worker is something that should especially be considered when the plaintiff is claiming that his income loss is particularly high. If the self-employed landscaper in my example above is claiming a huge annual loss, it is reasonable to ask why his loss is not capped at around the cost of a full-time labourer. But in other cases, the cost of hiring an assistant is not going to be a reasonable approach. For example, a surgeon with a back injury presumably cannot mitigate her losses by hiring a helper – her best option might be to take longer breaks in between procedures.

*   *   *

For a PDF version of this presentation, click here.

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ACTLA Presentation – Without- and With-accident income: Total Compensation

Posted on By economica

ACTLA Lunch & Learn

Without- and With-accident income: Total Compensation

Prepared by:

Kelly A. Rathje, MA

Without- and With-accident Income: Total Compensation

In the sections below, I provide notes that I used to discuss the different sources of earnings data experts can rely on to estimate an individual’s earning stream, and other sources, usually benefits, that make up an individual’s total compensation.

1 Sources of Earnings Data

When doing a loss of income calculation, we need to estimate both the without- and with-accident income streams. That is, we need to determine what the individual would have earned, had the accident not occurred, and what that individual will earn now, despite the injuries.

1.1 Average of past income

We can look at an average of the individual’s past income, both before and after the accident. If they have a well-established income stream prior to the accident, then assuming that they would have continued to earn the same level of income that had been achieved prior to the accident is usually a reasonable representation of what they will earn in the future. Similarly, if they have an established income stream after the accident, it is a good indicator of what they are capable of earning, despite their injuries.

However, there is a downside to relying on a average of past income, as it  may not account for future promotional wage growth. Also, it may reflect earnings during a boom time in the economy or a slower time (recession) during the economy. For example, if in the oil industry, relying on earnings during the 2010-2015 time frame, although we have 6 years, it may overstate the without-accident earnings since this was during a boom in the oil industry. Similarly, relying on average earnings for the 2015-2020 time frame may understate due to the significant decline in the oil industry.

1.2 Census data

Another source of earnings data is the Canadian Census. This source is the single most reliable source of earnings data in Canada. It provides earnings data for specific occupations, age categories, gender, and education.

Census data if very useful when an individual has just completed their education and are started a career; or only has been working for a few years in an occupation; or has changed occupations during their work. It is also useful when an individual does not have a well-established career (income) path, as in the case with younger individuals. In the with-accident scenarios, it is often the case that the injured party needs to retrain, so to estimate the earnings stream we can look at census data for individuals within the same occupation, and the same level of education.

The census data can also provide a baseline comparison when considering an individual’s average of their past income. It can help us determine if the individual’s earnings are consistent with what statistical averages would suggest, or if they are above- or below-average.

1.3 Salary grids/Collective bargaining agreements

Certain occupations have their salaries and/or wage rates specified by a collective agreement. Two examples of such occupations are teachers and nurses.

The collective agreements and salary grids are a useful source of earnings data as it exactly sets out how an individual’s earnings will progress. For example, the teacher’s salaries are specified for the first year of teaching through the tenth year of teaching – at which time they reach the top of the salary grid. Since teachers do not tend to receive overtime pay or shift differentials, if the school division the individual is going to work for is known, then we know exactly how the salary will progress with experience.

Another example of an occupation with a salary grid is nursing. As you gain experience, the wage rate increases such that after nine years of experience, the top of the salary grid is reached. However, with jobs like nursing, the salary grid reflects the base wage rate. A nurse’s wage if often higher than the base rate due to things like overtime, shift premiums, and education premiums. However, the base wage rate is still useful when estimating the income of a nurse.

First, if the individual has an established income stream as a nurse, the base wage rate, and the reported employment income, can be used to determine “straight-time equivalent hours” (STE). The STE hours are the number of hours a person would have to work, at their base hourly wage, in order to earn the same income they earned after receiving shift premiums, overtime hours, education premiums, lump-sum pay-outs, and so forth. The STE hours, and the base wage rate can then be used to estimate a future income stream.

Second, if there is not an established career, the base wage rates can be used to estimate a wage inflation index, and this index, specific to the nursing occupation, can be applied against the census data (which is reported in 2015 dollars), to determine an income stream, in combination with the census data.

2 Other sources that make up total compensation

In addition to money paid to an employee, an individual may also receive benefits as part of their total compensation for employment. These sources should also be taken into consideration when calculating the income streams for a loss of income assessment. These are usually included under the heading “fringe benefits”.

2.1 Insurance

Extended health, disability, dental, life. This is a benefits package that an employer provides to an employee, and is usually valued at approximately 2.5 to 3.5 percent of earnings, and we usually include the value of insurance as a percentage of income.

2.2 Car allowance

The employer may provide compensation for vehicle use, or provide a company car. This is usually a taxable benefit, and the value of the benefit is already included in the reported T4 earnings (box 34 of the T4 slip).

2.3 RRSP matching

This benefit arises when the employer makes contributions to an RRSP, matching the employee’s contribution to a certain percentage. This is also usually a taxable benefit, and already included in the reported T4 earnings (box 40 of the T4 slip).

2.4 Stock/security options

 This benefit is offered as an offer to purchase shares of the company, at some specified price. The individual may then choose to sell these shares, once they’ve vested, in order to realize a profit on the sold shares. If this option has been exercised in the past, then the net value of the sale is usually a taxable benefit and already reported in the T4 earnings (box 38 on the T4 slip). In this particular case, the cost of the stock option needs to be deducted in order to determine the net value of the sale. The cost is reported in box 41 of the T4 slip. For example, suppose the option to purchase 10 shares is offered at $5 per share. Once it vests, it is sold at a market value of $10 per share. The $100 (= $10 × 10 shares) would be reported as T4 earnings, but the cost of the option $50 (= $5 × 10 shares), which is reported in box 41, would need to be deducted.

There are also cases in which the stock options have no value. For example, suppose the option to purchase 10 shares is offered at $5 per share. Once it vests, the market value of the share is only $2.50 per share. In this case, the cost to purchase the option ($50) is more than what would be received for selling it ($25), so the option has no value.

Stock options do not seem to be that common, and when estimating the value of potential future stock options, we usually include the value of a percentage of income.

2.5 Employer-funded pensions

There are two types of employer-funded pensions. A defined-contribution and define-benefit.

Defined contribution

A defined contribution plan is simply whatever is contributed on the individual’s behalf is what is received out. If the employer contributes 10 percent of earnings, then the value of the employer-funded pension benefit in each year is 10 percent. This is included as a percentage of income.

Defined benefit

A defined benefit pension plan is when both the employer and employee make contributions to the plan, and upon retirement, a formula is used to calculate the pension benefit. Examples of a defined benefit pension plan are the Local Authorities Pension Plan (LAPP), the Alberta Teacher’s Retirement Fund (ATRF), police forces, and so forth.

The value of the defined benefit pension plan can be captured in two ways. First, the value of the employer’s contribution can be included as a percentage of income. Thus, the employee will receive the employer contribution as part of their loss of income. The amount that the employer would have contributed on their behalf can be invested in a private pension plan. Upon retirement, the reduced with-accident pension plus the top-up from the private plan investment, will equal the without-accident pension, thus ending the loss.

A second method to capture the value of the employer-funded pension is to actually calculate the without- and with-accident pension streams upon retirement, and compare the two to determine the loss of income.

2.6 CPP pension

It is assumed that the premiums an employee pays into the Canada Pension Plan (CPP), are roughly equivalent to what that individual will receive as a retirement pension. It seems logical that if an individual is earning less than they would have, had they not been injured, they will not be contributing as much to the pension plan. As a result, the with-accident retirement benefit will be less than in the without-accident scenario. This may not be the case.

For example, if the individual is receiving CPP disability, and will continue to receive disability until age 65, the CPP retirement benefit may not be impacted as all of the years on disability are ignored when calculating the benefit.

Second, if the individual would have earned, and will earn, an income at least as much as the yearly maximum pensionable earnings, then the contributions (and resulting retirement pension) will be the same in both the without- and with-accident scenario.

However, if there is a difference between the without- and with-accident CPP contributions, then it is reasonable to include a percentage of income to reflect the difference in premiums. As an example, suppose in the without-accident scenario, an individual would have earned $100,000, and after being injured, they earn $45,000. The CPP contribution in the without-accident scenario would be $3,166 (the maximum) but in the with-accident scenario would be $2,262. This is a difference of approximately $921 per year. In this particular case, it could be reasonable to include a 3 percent contingency in the without-accident scenario and a 5 percent contingency in the with-accident scenario to reflect the difference.

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