Millott (Estate) v. Reinhard – Reconciling “dependency” claims under FAA with “estate claims” under SAA

Posted on June 1, 2002April 18, 2017 By economica

This article was originally published in the Summer/Autumn 2002 issue of the Expert Witness.

In August of this year a decision was released in the case Millott (Estate) v. Reinhard (2002 ABQB 761). The decision was of interest to us, since Economica provided expert evidence for the plaintiff in this case – but there are some other aspects of the decision which will certainly be interesting to any lawyer who is involved in fatal accident cases in Alberta. In this article I will briefly discuss one of the most interesting findings.

The issue concerned how to reconcile “dependency” claims under the Fatal Accidents Act (FAA) with “estate claims” made under the Survival of Actions Act (SAA). Recall that the Brooks v. Stefura appeal decision (2000 ABCA 276) addressed the situation in which an heir to the estate (who is a potential recipient of the estate-claim award) is also one of the deceased’s dependants (and therefore is a potential recipient of an award for loss of dependency). Brooks offered the following guidelines at paragraph 14:

calculate the dependency award for each dependant, including prejudgment interest if it is granted;
calculate the lost years’ award, including prejudgment interest if it is granted;
allocate the lost years’ award to each beneficiary in accordance with the deceased’s will, or if the deceased died intestate, in accordance with the ISA;
compare the dependency award with the allocated lost years’ award for each claimant, and reduce the dependency award by the amount of the lost years’ award, which represents an accelerated inheritance;
if the lost years’ award is greater, the claimant receives only that amount; and
if the dependency award is greater, the claimant receives the full lost years’ award together with the difference between the two as the dependency award.

In other words, each surviving dependant is entitled to receive either his/her share of the estate claim or his/her loss of dependency claim, whichever is greater. This seems fairly straightforward, but there are some difficulties, which I addressed in an earlier article (“Estate Claims Following the Appeal Court Decisions in Duncan and Brooks“, Expert Witness Vol. 6, No. 1). The issue that was addressed in Millott is whether the loss of household services is to be considered separately from or together with the loss of dependency on income. This was answered in paragraphs 7 and 8 of Millott:

[7] … In the present case, there are, of course, dependency awards for both household services and transportation which had been provided by James Millott before his death. Despite the difference in the facts involved, Brooks is clear authority that the rationale for avoiding double recovery means that the dependency award amount used in the reconciliation process is only the loss arising from dependency on income, not from any other source (e.g., household services, which are not based on the deceased’s income level)….

[8] Only the dependency on income is generated by the deceased’s income stream. The dependency awards for household services and transportation are not linked to income, and should not be part of the reconciliation.

Thus, based on the Millott decision, it appears that if a dependant/heir’s share of the estate’s loss of income claim (under SAA) is greater than his loss of dependency on the deceased’s income (under FAA), then he is awarded the SAA amount, but can also receive any claim for loss of services under FAA. For example, we see at paragraph 15 of Millott, Mr. Millott’s two children received their shares of the SAA claim, in addition to an award for their loss of dependency on their father’s services (under FAA), as well as their statutory damages (under FAA).

Note that this situation will commonly occur when there is a surviving spouse and one or more teenaged children. I would expect that in most cases a teenaged child’s share of the SAA claim will exceed her loss of dependency on income (since the SAA claim continues for the remainder of her parent’s without-accident work-life, but the FAA claim continues only for as long as the child would have been dependant).

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

The Deduction for “Expenses Related to Earning Income” in Rewcastle

Posted on September 1, 2001April 18, 2017 By economica

by Christopher Bruce & Derek Aldridge

This article was originally published in the Autumn 2001 issue of the Expert Witness.

The recent case of Rewcastle v. Sieben (9801 16002, Calgary, July 20) concerned an estate claim brought under the Survival of Actions Act (SAA). In his decision in that case, Justice Hutchinson introduced a new method for calculating the deduction for “expenses directly related to earning income.” In this article, we summarise Justice Hutchinson’s method and comment on its broader applicability.

The Decision

As is true in many fatality claims brought under the SAA, Bryana Rewcastle was a teenager when she was killed. Hence, when determining the value of her estate’s claim, Justice Hutchinson first recognised that her family status would have changed a number of times over her lifetime.

He found that from her teenaged years until her mid-twenties, she would have been single. Then she would probably have married and had children. Eventually, her children would have grown up and left home, leaving her, with her husband, a part of a two-person family.

Following a number of previous Court of Appeal decisions, Justice Hutchinson concluded that the percentage of Bryana’s income that would have been available to her would have been smaller, the larger was her family. For example, this issue was addressed in the October 2000 Alberta Court of Appeal decision in Duncan Estate v. Baddeley (2000 ABCA 277):

…Under the Harris approach, the deceased’s proportionate share of joint family expenses are included in personal living expenses. Duncan bore a one-fourth share of joint family expenses based on the trial judge’s finding that had Duncan lived, he would have had a wife and two children; had it been four children, only one-sixth of the shared family expenses would have been deducted. (Duncan [2000] at paragraph 22.)

In particular, Justice Hutchinson accepted evidence that 100 percent of her income would have been available to her when she was single, 50 percent when she was married but had no children, and 25.8 percent when she was married with two children. (The latter figure was not 25 percent as it was assumed that the children would not share in family expenditures on cigarettes and alcohol.)

He also accepted evidence that she would have been single for 6 years of her life (ages 22-27), would have been married with no children for 14 years (ages 28-30 and 51-62), and would have been married with two children for 20 years (ages 31-50). He found, therefore, that across those three stages of her life, an average of 45.4 percent of her income would have been available for expenditure on goods and services that would have benefited her.

But not all of that income would have been spent on “expenditures directly related to earning income.” Specifically, he accepted evidence that only 72.8 percent of family expenditures are spent on such items. [See Rewcastle, para. 171].

Hence, the living expenses deduction in her case was calculated to be 72.8 percent of 45.4 percent, or 33.05 percent. It is the latter figure that Justice Hutchinson deducted from the present value of Ms. Rewcastle’s lifetime after-tax income in order to obtain her estate claim.

We accept Justice Hutchinson’s general approach. However, we do question some of the specific numbers that he has employed.

Personal Expenditures

Justice Hutchinson concluded that a woman would have 100 percent of her own income available to her when she was single, 50 percent when she was married with no children, and 25.8 percent when she was married with two children.

Clearly, the 100 percent figure is correct.

We also accept that the 50 percent figure is correct. Following from Harris, the usual assumption is that the husband and wife each benefit personally from approximately 30 percent of family income and benefit equally from the remaining 40 percent. That is, total personal benefit is 30 percent plus half of 40 percent, or 50 percent.

The 25.8 percent figure is more problematic, however. The reason for this is that it is usually assumed that children consume a slightly lower percentage of family income than do adults. Thus, for example, assume (as is common) that the deceased parent’s personal expenditure would have amounted to 22 percent of family income and that expenditures common to the whole family would have amounted to 30 percent of family income (with the remaining 48 percent being divided among the other spouse and the two children).

In that case, the deceased would have benefited from 29.5 percent of the family’s income – 22 percent plus one-quarter of 30 percent.

This is a relatively minor point, however: if 29.5 percent is used instead of 25.8 percent in the Rewcastle case, the percentage of income available over Bryana’s lifetime would only have increased from 45.4 percent to 47.25 percent.

Expenditures Related to Earning Income

We have greater concern with Justice Hutchinson’s conclusion that 72.8 percent of income is devoted to items that are “related to earning income.” In particular, that figure was obtained by summing the percentages of income spent on: food, shelter, clothing, transportation, household furniture, household operation, health care, personal care, and education. (The omitted categories were: recreation, reading, tobacco and alcohol, miscellaneous, security, and gifts and contributions.)

But take just one of those categories, transportation, on which Ms. Rewcastle was assumed to spend 15.7 percent of her after-tax income. As that income was assumed to average approximately $35,000 (after tax), the assumption is that the entire $5,495 (= $35,000 x 0.157) she would spend annually on transportation would be “related to earning income.”

More specifically, as the Court of Appeal has ruled that expenditures on luxuries and on discretionary items are not to be included in the items assumed to be “related to earning income,” Justice Hutchinson’s decision requires that none of Ms. Rewcastle’s $5,495 annual transportation expenditures represented discretionary or luxury items. None, for example, would have provided her with discretionary “extras” on her automobiles or with luxury trips to sunny resorts.

Similarly, his decision requires that none of her $5,285 expenditures on food (15.1 percent of after-tax income), $7,735 on housing, and $1,785 on clothing were for discretionary or luxury items.

This assumption appears implausible to us. Surely some of her expenditures on clothing would have been for luxury goods, some of her expenditures on food would have been for restaurant meals, and part of her expenditures on housing might have paid for a main floor family room or a luxurious en suite bathroom.

If, reasonably, it is assumed that as little as 25 percent of her expenditures were for discretionary or luxury items, the percentage of her income devoted to items “related to earning income” would fall from 72.8 to 54.6, and the overall deduction for those expenditures would fall from 33.05 to 24.79 percent.

Conclusion

The Rewcastle decision has provided additional information concerning the method that is to be used to calculate losses in Survival of Actions cases. Nevertheless, some important questions, particularly those concerning the evaluation of discretionary and luxury items, remain unanswered. It is our understanding that the defendants in Rewcastle have sought leave to appeal. If they are successful, it is possible that the appellate court will resolve some of these questions.

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).

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

The Deduction of Accelerated Inheritance

Posted on June 1, 2001April 18, 2017 By economica

by Christopher Bruce

This article was originally published in the Summer 2001 issue of the Expert Witness.

In Brooks v. Stefura, the Court of Appeal stated that “accelerated inheritances” should be deducted from each plaintiff’s dependency award. The Court did not, however, state clearly what it meant by “accelerated inheritances.” In this article, I offer a number of observations that may cast some light on this issue.

First, note that the “gain” in the present is to be reduced by the loss of the same amount in the future, at the deceased’s without-accident expected age of death. When the asset inherited “today” is physical in nature – for example, a house or piece of land – one must be careful to take into account the probability that the value of that asset would have increased significantly before the deceased’s natural death. The greater would this rate of increase have been, the lesser will the “gain” be from having inherited “early.”

For example, assume that a child inherits a house with a value of $100,000 (after payment of outstanding debts) today instead of at his mother’s natural date of death 20 years from now. If the rate of inflation of house prices is 3 percent per year, the house would have been worth $180,000 at the mother’s date of death. Assuming a rate of interest of 6 percent, it would be necessary to invest $56,300 today to generate $180,000 20 years from now. Thus, receiving $100,000 today instead of $180,000 20 years from now yields a gain of $43,700.

If, however, the rate of inflation of house prices is 4 percent, the house would have been worth $219,000 20 years from now. At a rate of interest of 6 percent, that amount could be replaced by investing $68,300 today. In that case, the receipt of $100,000 today, instead of $219,000 20 years from now, provides a benefit to the survivor of only $31,700.

More importantly, when the asset that is inherited today is financial in nature – for example, stocks or bonds – there is no gain at all from early inheritance. For example, assume that the asset is a secure bond that pays 8 percent per year for the next 10 years. Assume also that the deceased had a 10-year life expectancy. It is unlikely that the heirs could sell the bond and invest it in a secure financial instrument that pays more than 8 percent. Hence, they have gained nothing by receiving ownership of the bond today rather than 10 years hence.

Second, the deduction of “accelerated inheritances” results in the dependants of spendthrifts receiving larger awards than will the dependants of frugal individuals, everything else being equal. For example, assume that two individuals both earn $50,000 per year after taxes and both own houses valued at $200,000 that they purchased 10 years ago. Individual A has been devoting $20,000 per year to the payment of his mortgage, whereas individual B has been devoting only $10,000. As a result, at the time of his death A has paid off $140,000 of his mortgage while B has paid off only $60,000. The decision of the Court of Appeal would result in a much larger deduction from A’s estate than from B’s.

Third, in most cases, the most important inheritance will be the equity in the family home, left to the surviving spouse. It is not clear, however, that receipt of this equity “accelerates” the benefits enjoyed by the survivor. Assume, for example, that the home in question is worth $200,000. In most cases, the surviving spouse would have owned half of the home. Thus, it is the deceased’s half of the house that, presumably, the survivor has “gained.” But if the deceased had lived, the survivor would have had the benefit of that half of the house. It is difficult to see, therefore, what it is that the survivor has “gained” and, therefore, why there should be some deduction of the “accelerated’ inheritance.

The leading doctrine in damage assessment is restitutio in integrum, restoration of the plaintiff to his or her “original position.” The original position of the survivor is that he or she enjoyed use of 100 percent of the family home and some percent (usually, approximately 70 percent) of the other spouse’s (after-tax) income. For the Court to rule that some portion of the equity in the home should be deducted from the survivor’s claim against the dependency on income is tantamount to a ruling that the survivor should not be returned to his or her original position.

In a companion article, Scott Beesley considers these same issues, and offers a different perspective.

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).

The Deduction (?) of “Accelerated Inheritance” (Scott Beesley’s view)

Posted on June 1, 2001April 18, 2017 By economica

by Scott Beesley

This article was originally published in the Summer 2001 issue of the Expert Witness.

The Court of Appeal has stated that other “accelerated inheritances” should be deducted from each person’s dependency award (at paragraph [15] in Brooks). I have two comments to make on this topic.

First, as a relatively minor point I would mention that the deduction used must be the present value gain involved, not the amount inherited at the time. The “gain” now is reduced somewhat by the loss of the same amount in the future, at the deceased’s without-accident expected age of death. Of course for a young spouse this latter present value is small, but it is not zero. The Court was probably aware of this issue but as the paragraph was written one would simply deduct what was received shortly after the premature death.

Second, and far more importantly, I would argue that to deduct any accelerated inheritances would be an enormous and unjustified change to existing practice – note that for a middle-aged couple with significant assets, the deduction from a normal dependency award could be very large. For example, if they have assets of $400,000, the supposed gain to one spouse from early receipt of the partner’s half of those assets would be a large fraction of the $200,000 (about ¾ of it, or over $150,000, for a couple aged 40). Assuming a gross dependency award of perhaps $450,000 (= $30,000 times a multiplier of 15), the loss would be reduced by more than a third. I suggest with all due respect that this would be incorrect and unjust.

In a fatal accident case we have always been concerned with assessing the spouse’s (and children’s) loss of labour income. We are not supposed to consider the assets (or lack thereof) of the family, except to the extent they are relevant in estimating lost labour income. In particular it would seem quite unfair that two families who had suffered identical losses of labour income would receive very different dependency awards, should the Court’s suggestion be adopted. (It is perhaps even more bothersome to consider that between those two families, the one that had failed to save much of their income would be granted the larger award!) Similarly, a child who might normally be entitled to a dependency award in the tens of thousands could receive nothing, if his or her share of the estate’s assets was significant.

I have in fact seen at least one attempt to apply such a deduction, disguised within a cross-dependency methodology. The expert in question simply counted interest income along with each person’s labour income in estimating the family total, and of course this led to the survivor “gaining” something that partially offset the loss of dependency on labour income. I do not recall the exact figure but it was of the same order of magnitude as the following example: Assume interest income of $10,000 per year ($5,000 for each spouse). Using cross-dependency with 30 percent consumed by each person and 40 percent going to indivisibles, the survivor formerly benefited from $7,000 of that income. To be formal about it, the survivor received $4,000 (40 percent of their own $5,000 and the same amount from the deceased) for indivisibles and $3,000 (30 percent of each side’s funds) for exclusive personal consumption. After the death, the cross-dependency methodology presumes that she gains $3,000, consisting of the deceased’s supposedly saved personal consumption (30 percent x $5,000 x 2). All of these are annual figures only and the present values over decades would be much larger. The deduction of almost half the family’s assets (as opposed to just the interest on those assets) would be even worse. As discussed previously in this newsletter, we strongly disagree with the cross-dependency method – even when it is applied only to labour income it can imply that the survivor is better off without their spouse. The courts are free to use this method if and when they see fit, but I would ask that at the very least they refrain from allowing the deduction of accelerated inheritances, since that falsely reduces a future loss of labour income using assets the family already owns. In a great many cases this method would eliminate any dependency losses (consider a couple within ten or fifteen years of retirement – their assets are already substantial and there are relatively few years of labour left). One would like to think that survivors will not be asked to pay the defense the amount by which they have been made “better off,” but we have already seen cases where this has occurred across different years (i.e. a cross-dependency “gain” in some years is left in a multiyear calculation in order to offset losses occurring in others).

I hope that the Court will in the future clarify which, if any, accelerated inheritances they would like to see deducted from dependency awards. In addition, it would be preferable to have the sole vs. cross dependency debate settled definitively – it hardly seems fair when two otherwise identical families in similar fatal accident cases can receive very different awards, depending on the method favoured by each of the judges involved. The same discrepancy could be made even more pronounced if some judges deduct accelerated inheritance while others do not. Ideally, I would prefer to have the legislature consider each of these issues and impose some uniformity.

In a companion article, Christopher Bruce considers these same issues, and offers a different perspective.

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

Avoiding Overlap Between Fatal Accident Act and Survival of Actions Act Claims

Posted on June 1, 2001April 18, 2017 By economica

by Scott Beesley

This article first appeared in the summer 2001 issue of the Expert Witness.

In its October 17, 2000 rulings in the Duncan v. Baddeley and Brooks v. Stefura cases, the Court of Appeal was concerned about overlapping claims between the Fatal Accidents Act (FAA) and the Survival of Actions Act (SAA).

Although the Court set out explicit instructions for avoiding double recovery under these Acts – that is, awarding one plaintiff the “same” dollar of the deceased’s income twice – it also expressed concern about the possibility of double payment – that is, paying the “same” dollar to two different claimants.

The purpose of this article is to describe the Court’s method for avoiding double recovery, to discuss some of the circumstances in which claimants might obtain double payment, and to suggest a methodology for avoiding double payment.

Avoiding Double Recovery

At paragraph [14] of Brooks, the Court set out the following methodology for avoiding double recovery:

Calculate the dependency (FAA) award to each person. For example, a widow would receive a dependency claim for the length of her, or her husband’s, life expectancy and a dependent child would receive such a claim until he or she would have ceased to be dependent.
Calculate the lost years (SAA) award. For example, a widow and the deceased’s children (not just those who were dependent) would share in the deceased’s expected lifetime income, after deduction of taxes and the “personal consumption deduction.”
Allocate the lost years award using the will or the Intestate Succession Act (ISA). Under the ISA, the widow or widower would receive the first $40,000 of the lost year award and the remainder would be divided equally among the eligible family members.
Compare the dependency and lost years awards for each claimant and reduce the dependency awards by the amount of the lost years award (if the former exceeds the latter). For example, if the widow was eligible for $150,000 under the FAA and $80,000 under the SAA, this step would calculate a differential of $70,000. Whereas if the child’s dependency (FAA) claim was $30,000 and lost years (SAA) claim was $50,000, no differential would be calculated
If the lost years award is greater than the dependency claim for any plaintiff, that plaintiff receives only the lost years award. In the example developed here, the child would receive only his or her lost years award, $50,000.
If the dependency award is greater than the lost years award, the plaintiff receives the full lost years award plus the difference between the two as the dependency award. In the example developed here, the widow would receive her lost years award, of $80,000 plus the differential calculated in step 4, $70,000. That is, she would receive her full dependency award of $150,000.

Neither party has received the “same” dollar twice. The widow’s award has come strictly from the dependency claim and the child’s award has come strictly from the lost year’s claim.

Avoiding Double Payment

Note that in the example developed above, the maximum FAA claim (alone) would have been $180,000 (the widow’s $150,000 plus the child’s $30,000) and the maximum SAA claim would have been $130,000 (the widow’s $80,000 plus the child’s $50,000). Yet, applying the Court’s method, the claimants would receive $200,000 (the widow’s $150,000 FAA claim plus the child’s $50,000 SAA claim). That is, they would receive more than would have been allowed under either of the Acts alone.

This is one form of what the Court of Appeal called “double payment.” Most of the dollars in the $130,000 lost years claim come from the same source as the $180,000 dependency claim – that is, from the deceased’s income after-taxes and after-personal consumption. In that sense, the child’s lost years claim represents a second claim on the “same” dollars as the dependency claim.

It is even possible to imagine situations in which the sum of the plaintiffs’ awards would exceed the deceased’s total (after-tax) income. For example, assume that the present value of the deceased’s lifetime (after-tax) income was $500,000 and that the widow’s dependency on that amount was 70 percent, or $350,000.

Assume also that the deceased’s personal consumption deduction was 40 percent, leaving 60 percent, or $300,000, for the lost years claims. If the will divided the estate equally among the widow and her two (non-dependent) children, each of them would be entitled to $100,000. In this case, the Court of Appeal’s method would allocate $350,000 (the FAA claim) to the widow and $200,000 (the two SAA claims) to the children. The total, $550,000, would exceed the deceased’s entire income.

The Court, in its paragraph [19] appears to have recognised this problem; for there it notes that:

If the dependants and the heirs are not the same people, the lost years’ award would be paid to the beneficiaries of the deceased’s estate, rather than to the dependants…. [A] defendant could potentially pay double damages by having to pay full dependency and lost years’ awards, with no accounting.

The Court, however, offers no method for dealing with this problem. I suggest the use of a method that is based on a concept that I call the overall limit. The value of this limit is calculated in the following way. First, determine the total dependency claim of all dependent members of the family. In the first example developed above, for example, this value was $180,000 ($150,000 for the widow and $30,000 for the dependent child). Second, determine the total lost years claim of all beneficiaries of the deceased’s estate ($130,000 in the example developed above – $80,000 for the widow and $50,000 for the child). The overall limit is the larger of these two numbers – here, $180,000.

I assume that the total award granted under both the FAA and the SAA cannot exceed the largest award that would be granted by one Act – that is, it cannot be larger than the “overall limit.” Therefore, I propose that the following method be used to determine the parties’ awards. First, estimate the total FAA and SAA awards and define the overall limit as the greater of the two total awards. Second, award the surviving spouse his or her FAA or SAA entitlement, whichever is greater. Finally, award any children their FAA amount, plus their share of any greater SAA, up to the limit imposed by the overall limit. For one child this is simple, as I show in the examples below. For two or more I assume the extra SAA dollars would be allocated equally, in proportion to each child’s FAA award, or using some other formula.

Numerical Examples

In this section, I provide four examples of the application of my suggested method. For the purpose of these examples I will assume a personal consumption deduction of 35 percent. This was endorsed by the Court of Appeal in Duncan, and the approach used in Duncan was endorsed in Brooks, though a particular percentage was not specified. [I note with all due respect that, following these decisions, there remains a conflict between the idea that the estate’s award should not depend on the victim’s future spending decisions (Brooks at paragraph [29]) and the statement that the deduction does depend on the number of children in the victim’s hypothetical future family (Brooks at paragraph [28]). This conflict has been present since the original Court of Appeal decision in Duncan, and we have covered the issue in earlier newsletters.]

I also assume in my examples that the FAA awards are calculated using a 78 percent dependency rate for a surviving parent and two children, a 74 percent rate for a parent and one child and 70 percent for the parent only. The problem of double payment will be present at any conventionally used rates. Finally, note that the FAA award is calculated using joint mortality while the estate calculation uses only the mortality contingency of the deceased.

Example #1 – Without Divorce and Remarriage

The first example assumes that a man has died, leaving his wife and one child. For simplicity I consider only future losses, though the analysis is the same in the pre-trial period. The deceased would have been 50 years old at the date of settlement, the surviving spouse will be the same age, and the child will be 15. The child is assumed to be dependent until the age of 22, which is the parents’ age 57. The deceased would have earned a before-tax income of $40,000 and an after-tax income of $30,000, with no changes until retirement at 62. Contingencies are balanced and are therefore ignored, and I apply Economica’s usual 4.00 percent discount rate and 1 percent rate of productivity increase. Following the steps listed in Brooks, we would calculate the figures provided below:

The dependency awards are $171,897 to the parent and $33,818 to the child, for a total of $205,715. The present value of all after-tax income is $283,433, so the total FAA loss to the family is 72.58 percent of the deceased’s after-tax income.
The estate award is valued at $188,613, which is 66.55 percent of the joint mortality value of after-tax income.
Using the ISA, $114,306.50 is allocated to the surviving spouse and $74,306.50 is allocated to the child. (The parent receives $40,000 more than the child.)
For the parent, the dependency award is reduced to $57,590.50 (= $171,897 less $114,306.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
The child receives their lost years award of $74,306.50.
The parent receives $114,306.50 under the SAA and $57,590.50 under the FAA, implying a total equal to the original FAA award of $171,897.

Notice that the overall award to the family would be $246,203.50, which is 86.86 percent of the present value of joint mortality after-tax income. I would set an overall limit of $205,715 (since the combined FAA award is larger than the combined SAA award of $188,613). The difference between the given total and the overall limit is $40,488.50, and that is the amount of the double-payment in this example. That amount is deducted from the $74,306.50 awarded to the child at step 5, such that the child’s final joint award is simply their original dependency award of $33,818.

Example #2 – As in Example #1 but With Divorce and Remarriage

I now alter the above example to apply standard divorce and remarriage contingencies to the spouse’s FAA claim. All other assumptions remain unchanged. The revised figures are provided below:

The dependency awards are now $151,775 to the parent and $33,818 to the child, for a total of $185,593. Note that the total FAA loss to the family has been reduced to 65.48 percent of the deceased’s after-tax income.
The estate award is still valued at $188,613 (66.55% of after-tax income).
Using the ISA, $114,306.50 is allocated to the surviving spouse and $74,306.50 is allocated to the child.
For the parent, the dependency award is reduced to $37,468.50 (= $151,775 less $114,306.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
The child receives their lost years award of $74,306.50.
The parent receives $114,306.50 under the SAA and $37,468.50 under the FAA, implying a total equal to the “divorce and remarriage” FAA award of $151,775.

Notice that the overall award to the family would be $226,081.50, which is 79.75 percent of the present value of joint mortality after-tax income. I would set an overall limit of $188,613 (since the combined SAA award is now larger than the combined FAA award of $185,593). The difference between the given total and the overall limit is $37,468.50, and that is the amount of the double-payment in this example. It is not a coincidence that that is the amount of the spouse’s FAA award – by definition a double payment is that part of a combined award to one party in excess of the amount they would receive under the Act which sets the overall limit. (To go back to the no-divorce version, note that the double payment of $40,488.50 can also be calculated as the child’s FAA award of $74,306.50 less their SAA award of $33,818.) Of course, the double payment can be eliminated on either side – if the spouse’s FAA award is deemed to take precedence then the double payment is deducted from the child’s combined award, while the reverse should be done if the courts decide that the SAA amount takes precedence.

Example #3 – Without Divorce and Remarriage

The third example assumes that the deceased would have been 30 years old at the date of settlement, the surviving spouse will be the same age, and the child will be 5. The child is assumed to be dependent until the age of 22, which is the parents’ age 47. The deceased would again have earned a before-tax income of $40,000 and an after-tax income of $30,000, with no changes until retirement at 62. The resulting calculation is:

The dependency awards are $355,957 to the parent and $72,682 to the child, for a total of $428,639. The present value of all after-tax income is $589,892, so the total FAA loss to the family is 72.66 percent of the deceased’s after-tax income.
The estate award is valued at $390,215, which is 66.15 percent of the joint mortality (FAA) value of after-tax income.
Using the ISA, $215,107.50 is allocated to the surviving spouse and $175,107.50 is allocated to the child.
For the parent, the dependency award is reduced to $140,849.50 (= $355,957 less $215,107.50). In the child’s case the SAA award is larger and no reduced FAA is calculated.
The child receives their lost years award of $175,107.50.
The parent receives $215,107.50 under the SAA and $140,849.50 under the FAA, implying a total equal to the original FAA award of $355,957.

Notice that the overall award to the family would be $531,064.50, which is 90.03 percent of the present value of joint mortality after-tax income. I would set an overall limit of $428,639 (since the combined FAA award is larger than the combined SAA award of $390,215). The difference between the given total and the overall limit is $102,425.50, and that is the amount of the double-payment in this example.

Note that as in the first example, when one Act (here, the FAA) determines the limit then the double payment is the difference between what one person (the child, in this case) receives using the Brooks formula ($175,107.50 under the SAA) and what they would receive under just the Act which sets the limit ($72,682).

Example #4 – With Divorce and Remarriage

The fourth example assumes that the deceased would have been 40 years old at the date of settlement, the surviving spouse will be the same age, and that there are two children aged 8 and 12. The children are each assumed to be dependent until their age 18, which is the parents’ ages 46 and 50. The deceased would have earned a before-tax income of $60,000 and an after-tax income of $44,000, with no changes until retirement at 62. Divorce and remarriage apply. The resulting Brooks-Stefura calculation is:

The dependency awards are $274,407 to the wife, $37,217 to the older child and $62,027 to the younger child, for a total of $373,651.
The estate award is valued at $444,776.
Using the ISA, $174,926 is allocated to the surviving spouse and $134,925 is allocated to each child.
For the parent, the dependency award is reduced to $99,481 (= $274,407 less $174,926). In the children’s cases the SAA awards are much larger and no reduced FAA is calculated.
The children each receive their lost years award of $134,925.
The parent receives $174,926 under the SAA and $99,481 under the FAA, implying a total equal to the original FAA award of $274,407.

Notice that the overall award to the family would be $544,257. I would set an overall limit of $444,776 (since the combined SAA award is larger than the combined FAA award of $373,651). The difference between the given total and the overall limit is $99,481, and that is the amount of the double-payment.

Note that again, when one Act (here, the SAA) determines the limit then the double payment is the difference between what one person (the spouse, in this case) receives using the Brooks formula ($274,407 under the FAA) and what they would receive under just the Act which sets the limit ($174,926 under the SAA).

The correction for the given double-payment can again be made in either of two ways. If the SAA award is deemed to take primacy, then the spouse is simply awarded $174,926 while the children receive their estate amount. If the FAA is primary then the spouse receives the full $274,407 and the children’s SAA total of $269,850 (= $134,925 x 2) must be reduced by the overpayment amount. The children’s combined award would therefore be $170,369 (= $269,850 – $99,481). This could be divided between them equally or in proportion to the shares they would receive under the FAA (which I would argue is sensible, since the FAA is being deemed primary in this case). In that event the younger child would receive $106,481 and the 12-year-old would receive $63,888.

In considering the four examples presented, it is apparent that for younger surviving spouses, the amount available under the Survival of Actions Act will often be significantly larger than a “divorce and remarriage adjusted” Fatal Accidents Act claim. If we assume (as I would expect) that the courts will consider the FAA awards paramount, then in example #1 and the first part of example #2 the double payment will be deducted from the child’s SAA amount. For the children of a younger couple, the award available to them under the SAA can become very significant when their estate claim “recaptures” dollars lost to divorce and remarriage contingencies under the FAA.

The examples above suggest that when joint FAA/SAA claims are made, one way to proceed is as follows: First, estimate each person’s FAA and SAA award and define the overall limit as the greater of the two total awards. Second, award the surviving spouse their FAA or SAA entitlement, whichever is greater. Finally, award any children their FAA amount, plus their share of any greater SAA, up to the limit imposed by the overall limit.

Of course, when all of the family members involved receive higher awards under one act or the other, then there is no need for any further calculation. For example, when there are no children, and absent divorce and remarriage, the spouse’s 70 percent dependency under the FAA will generally be greater than their 65 percent entitlement under the SAA (though they are closer than the rates would seem to indicate because the SAA uses sole mortality while the FAA adds the survivor’s mortality as well).

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

Estate Claims Following the Appeal Court Decisions in Duncan and Brooks

Posted on March 1, 2001April 18, 2017 By economica

by Derek Aldridge

This article was originally published in the Spring 2001 issue of the Expert Witness.

Introduction

In October 2000 the Alberta Court of Appeal released its decisions in Duncan Estate v. Baddeley (2000 ABCA 277) and Brooks v. Stefura (2000 ABCA 276). These decisions helped clarify a number of questions that had arisen concerning the calculation of loss of future earning capacity under the Survival of Actions Act. Although these clarifications will be of great assistance to counsel, a number of questions remain outstanding. I consider some of these here.

Calculation of the deduction for “living expenses” (the “lost-years deduction”)

The October 2000 decision in Duncan was the second Court of Appeal decision in that case. In that decision, the Court confirmed its 1997 ruling that five principles were to be applied when calculating loss of future earning capacity for a deceased individual who had no dependants. These are:

The loss of earning capacity is to be calculated net of income tax.
The Court should deduct from after-tax income an allowance for “living expenses,” which are defined as “the expenses that the victim would have incurred in the course of earning the living we predict he would earn.” (Duncan v. Baddeley [1997], 196 A.R. 161 at 172.)
“The ingredients that go to make up ‘living expenses’ are the same whether the victim be young or old, single or married, with or without dependants.” (Harris v. Empress Motors, [1983] 3 All E.R. 561 at 575.)
“A deduction of expenditures made for the benefit of dependants, however strong the bond and obligation to support them, is not permitted.” (Duncan [2000], at para. [21].)
“[T]he deceased’s proportionate share of joint family expenses are included in personal living expenses.” (Duncan [2000], at para. [22].)

The Court then “concluded” that the appropriate living expenses deduction in the case of Dean Duncan was 35 percent (but noted the defendant had not submitted an alternative approach which followed the correct principles). I have two concerns with the latter result.

First, there are two components to the living expenses deduction – the portion of the deceased’s after-tax income that he would have spent on himself; and the deceased’s share of joint family expenses. We cannot find that these two factors add to 35 percent under normal assumptions.

When calculating losses in fatal accident claims, it is usually assumed that, in a family of two adults and two children (it was found that Dean Duncan would have had such a family), family income is divided approximately: 22 percent to each of the husband and wife, 26 percent to the children (together), and 30 percent to joint family expenditures. Under these assumptions, the living expenses deduction would have been, at most, 29.5 percent (22 percent plus one-quarter of 30 percent).

Second, there is reason to believe that the 22 percent figure used in fatal accident actions exceeds the figure that the Court of Appeal wishes to apply in estate claims. In fatal accident claims, the 22 percent figure represents the percentage of family income that is spent on (all) items that benefited the deceased alone. Thus, that percentage includes many “discretionary” or “luxury” items. It is clear from both Duncan and Brooks, however, that discretionary expenses and expenses on pleasure are not to be included in “living expenses”:

In its 1997 decision in Duncan, the Appeal Court rejected the so-called “lost saving” approach to the calculation of living expenses because “[m]y life-savings would not tell one what I spent during my life on pleasure, as opposed to what I had to spend in connection with the earning of my income.” (Duncan [1997], emphasis added.) That is, the Court distinguished “pleasure” from living expenses.
In its 2000 decision in Duncan, the Appeal Court again rejected the lost saving approach, in large part because it did “not differentiate between expenses incurred in order to earn a living, and discretionary spending.” (Duncan [2000] at para. [12], emphasis added.) That is, the Court ruled that expenses to earn a living do not include discretionary expenses.
In Brooks, the Court of Appeal explicitly excluded the deceased’s expenditures on a motorcycle and electronic equipment from his living expenses because they were “discretionary items that were not necessary to maintain Brooks in order to earn his anticipated level of income” (Brooks [2000] at para. [29]).
If the courts were to apply the reasoning used to construct the 35 percent figure in Duncan to a case of an individual who could have been expected to remain single, they would find that the living expenses deduction would approach 100 percent. That is, the “Duncan” method would approach the “lost saving” method. (A single individual spends all but his savings on his own consumption.) But the Court has explicitly rejected the lost saving method.

If the living expenses deduction is not to include discretionary or luxury expenses, that deduction could be expected to be somewhat less than 22 percent commonly used in fatal accident cases. If we select 15 percent as a “reasonable” estimate of non-discretionary expenses that (would have) benefited the deceased alone, then the living expense deduction becomes approximately 22.5 percent (15 percent personal expenses plus one-quarter of joint family expenses). Even this figure may be too high, because some of the joint family expenditures (30 percent of the deceased’s income) would have been discretionary expenses.

Varying the “living expenses” deduction over the deceased’s lifetime

The loss of income claim by the estate of Dean Duncan was 65 percent of the present value of his lifetime net employment income. Recall that Dean Duncan was 16 when he died, with no dependants – although the Court found that he would have eventually married and had two children. It remains unclear to what extent the 35 percent living expenses deduction might differ for people who were at a different stage of life. For example, would a 35 percent deduction also apply for a woman who was 45 years-old and single (without prospects of marriage or children) at the time of her death?

In the most recent decision in Duncan, the Court implied that the correct approach is to tie the living expenses deduction to the size of the deceased’s (without-accident) family at different stages of his life. Using this approach, the size of the living expenses deduction would be less in periods in which there is a large number of people in the household than in those in which there are few people in the household. (As the household size increases, less of the deceased’s income would have been spent on himself, leaving a larger portion to be claimed by the estate). For example:

…Duncan bore a one-fourth share of joint family expenses based on the trial judge’s finding that had Duncan lived, he would have had a wife and two children; had it been four children, only one-sixth of the shared family expenses would have been deducted. (Duncan [2000] at para. [22].)

This statement clearly suggests that the lost-years deduction will depend on the deceased’s family size. However, the message is mixed. One problem with tying the lost-years deduction to family size is that that approach does not appear to have been used in Duncan. As noted, in Duncan, the lost-years deduction was set at 35 percent and it was applied to Dean Duncan’s lifetime income. Employing the same reasoning that the Court used to obtain the 35 percent deduction, it is my understanding that a deduction of approximately 50 percent would have been appropriate for the period when Dean Duncan would have been married without children, 44 percent when he was married with one child in the home, and 35 percent when he was married with two children in the home. Since the Court did not use this approach in Duncan, it is not clear whether the Court has specified that a flat deduction should be used over the deceased’s entire (without-accident) life, or whether the deduction should vary over time. If the deduction should vary over time (with family size), then why did the Court not use that approach?

One might argue that, in Duncan, the Court chose a single unvarying deduction as a simple approach that would produce roughly the same result as using the slightly more complicated approach of varying the deduction over time. This argument fails, however, if it is found that the Court intended that the “conventional” deductions discussed above should be used as, in that case, the single deduction would have been much higher than 35 percent. Note that the “conventional” deductions are 50 percent for a one- or two-member family, 44 percent for a three-member family, and 35 percent for a four-member family. Given the findings of fact concerning Dean Duncan, if the Court had wanted to apply a flat lost-years deduction as a proxy for the time-varying deduction, it would have used a deduction close to 42 or 43 percent. If a 35 percent deduction applies to a four-person household, and the deductions are greater for households with fewer than four people, then the equivalent flat deduction must be greater than 35 percent. Since the Court used a flat 35 percent deduction, it is difficult to justify using a different approach, without contradicting the Duncan decision.

There is a circumstance in which a fixed 35 percent deduction might be justified, however. Earlier in this article, I argued that the appropriate deduction in a four person family was no more than approximately 22.5 percent, not 35 percent as is commonly argued. The equivalent figure for a three person family would be approximately 37.7 percent and for a two person family would be approximately 50 percent. It is possible that these figures could average 35 percent over the family’s life cycle.

If it is found that the living expenses deduction is to reflect non-discretionary expenses, then I believe that this would support a deduction that does not vary with family size. Although it is normally assumed that expenses on a spouse and children are “non-discretionary” (suggesting that the deduction would vary with family size), I believe that a case can be made for the supposition that they are discretionary.

Consider the example of a young couple that is deciding whether or not to have children. If they choose to have, say, two children, it is usually assumed that the children will create a new category of “non-discretionary” expenses. However, remember that the couple chose to have their children – in that sense, therefore, their expenses on those children are discretionary. That is, if one takes a short-run view, it appears that the parents have no choice but to spend a portion of their income on their children. But if one takes a lifetime view, it is apparent that the parents had a choice whether or not to spend that money, as they could have chosen not to have children. In this sense, expenditures on one’s spouse are also discretionary, in the sense that one could have chosen to remain single. According to this view, the portion of an individual’s income that would have been spent on truly non-discretionary expenses does not depend on whether he would have chosen to remain single, to marry, or to have children.

If the above rationale is ultimately rejected, and it is found that the size of the deduction does vary with family size, then in some cases great importance will be placed on the Court’s finding concerning a (deceased) young person’s without-accident lifestyle decisions. Suppose there is a case involving a deceased 17 year-old boy, who would have earned the income of an average university graduate. And suppose the Court is weighing two (drastically) alternative without-accident lifestyle scenarios for the boy: He would have remained single all his life, or he would have married and had five children. A finding for the latter scenario would lead to a loss probably more than double the result from the former scenario. And as noted above, I believe that (taking a long-term view) the deceased’s discretionary expenses would have been the same for either scenario (since he would have chosen to have zero or five children). Furthermore, although an “heir-centred” approach was explicitly rejected in Duncan in favour of a victim-centred approach, an approach which depends on without-accident family size is necessarily dependent on without-accident heirs.

Given the victim-centred approach, is it the case that a young victim who dies with (unfulfilled) plans to have a large family has lost more than if he planned to be forever single?

The choice between an award for loss of dependency and an estate-claim award

The Brooks v. Stefura appeal decision addresses the situation in which an heir to the estate (who is a potential recipient of the estate-claim award) is also one of the deceased’s dependants (and therefore is a potential recipient of an award for loss of dependency). Brooks offers the following guidelines at para. [14]:

calculate the dependency award for each dependant, including prejudgment interest if it is granted;
calculate the lost years’ award, including prejudgment interest if it is granted;
allocate the lost years’ award to each beneficiary in accordance with the deceased’s will, or if the deceased died intestate, in accordance with the ISA;
compare the dependency award with the allocated lost years’ award for each claimant, and reduce the dependency award by the amount of the lost years’ award, which represents an accelerated inheritance;
if the lost years’ award is greater, the claimant receives only that amount; and
if the dependency award is greater, the claimant receives the full lost years’ award together with the difference between the two as the dependency award.

First, when comparing an heir/dependant’s losses under the Fatal Accidents Act (FAA) and the Survival of Actions Act (SAA), it is not clear from Brooks whether the loss of household services is to be considered separate from or together with the loss of dependency on income. Thus, suppose the heir’s share of the estate claim (from the SAA) is greater than her loss of dependency on the deceased’s income (from the FAA), but less than her loss of dependency on the deceased’s income and household services combined. Should she receive an award amounting to her loss of dependency on income and household services? Or can she instead receive her share of the lost-years claim and her loss of dependency on the deceased’s household services?

One possibility is that the heir/dependant has an “all or nothing” choice. Either she claims under SAA and takes her share of the estate claim, giving up any FAA claim (dependency on income or household services); or she takes her full claim under FAA and forgoes her share of the SAA claim. Another possibility is that the deceased’s without-accident income and household services are claimable separately, with the income claimable either under SAA or FAA. The spouse would then be entitled to her household services claim (under FAA), as well as either her dependency on his income (FFA) or her share of the estate claim (SAA).

The second difficulty is that strict application of Brooks could lead to total compensation that exceeds 100 percent of the deceased’s lifetime income. Consider the case of a deceased man who leaves behind a dependant wife and two children. Suppose both children are 17 at the date of their father’s death and they will only experience a loss of dependency for one year. And suppose the wife and two children are each entitled to one-third of the deceased’s estate (which would roughly be the case if the deceased died intestate). In almost all cases the children will have a larger estate claim (SAA) than a dependency claim (FAA). (This is because their dependency claim extends for only one year of their father’s without-accident work-life, but their share of the estate claim extends for their father’s entire work-life.) However, if the children receive awards representing their share of the estate claim, and the wife receives an award representing her loss of dependency on the husband’s income, it is quite possible that more than 100 percent of the deceased without-accident income will be allocated to the survivors.

There are at least three possible approaches that the Court could ultimately approve to resolve this difficulty. First, it is possible that the Court will allow this potential “overclaiming” of the deceased’s potential income. This seems unlikely, given the Court’s concern with “double-damages” in Brooks (see Brooks [2000] at para. [19]). Note however, that in a loss of dependency claim where there is no household services loss, the tax gross-up could also lead to more than 100 percent of the deceased’s income being allocated, and the Court has not taken steps to prevent this. Second, the Court might impose a constraint, such that the total awards allocated as estate claims and as losses of income dependency cannot exceed the total present value of the deceased’s after-tax income. A third possibility is that the Court could decide that the heirs/dependants as a group must choose between claiming under FAA or SAA. So in the example above (surviving wife and two 17 year-old children), it would be decided whether to claim under SAA or FAA and each heir would make his/her claim under that head. This could lead to some difficult situations since in many cases one heir might prefer a claim under SAA while another prefers to claim under FAA.

This is an issue that we will deal with in greater detail in the next issue of The Expert Witness.

Single individual

A question that the courts have not faced is how they should deal with individuals who would have been expected to remain single for the remainder of their lives. This might reasonably be the case, for example, if the deceased had been a confirmed bachelor in his or her 50s or 60s.

In that case, the approach favoured by the Court would have calculated the living expenses deduction by adding the deceased’s expenditures on personal expenses to the deceased’s “share of joint family expenditures.” But in a one person “family” the individual’s share of joint family expenditures is 100 percent. Hence, the method favoured by the Court would find that the deceased had spent 100 percent of his or her income on “living expenses” and the deduction would be 100 percent (or close to 100 percent). But this is just the “lost savings” approach that the Court has explicitly rejected. In short, the method favoured by the Court produces a result that the Court itself does not support.

This is not a result that the Court could reasonably have been expected to recognise without expert advice. However, as far as I know, it has not been addressed by any other economist. Nonetheless, it will need to be considered in order to establish a defensible approach.

Further issues

There are two additional issues that warrant further consideration. I mention them here briefly.

Could household services play a part in estate claims? Clearly the estate claim is one for lost earning capacity, but consider the case of a person who would not have earned any income, but would have performed valuable services. Could his estate make a claim under SAA? For example, suppose a young female lawyer is killed, but had she lived, she would have been a stay-at-home mother for five years. Is the estate’s loss over those five years zero? Negative? Of course in such a case the primary claim would be for loss of dependency, but in light of Brooks it is probably necessary to compare the size of the estate claim to the dependency claim.

Should the living expense deduction be a percentage deduction or a dollar deduction? Given that 35 percent was used in Duncan, would that same percentage have applied if the Court had found that he would have worked as a specialist physician (earning far more than the $35,000 per year that Dean Duncan would have earned)? A flat dollar deduction might be more appropriate, but it would also lead to more complicated calculations than a simple percentage deduction. And we would still be left with the problem of how (or whether) to vary the deduction with a person’s age, income, occupation, and so on.

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

The Current Status of Survival of Actions Act Claims

Posted on September 1, 1999April 18, 2017 By economica

by Christopher Bruce

This article was originally published in the autumn 1999 issue of the Expert Witness.

In Duncan v. Baddeley, Alberta Court of Appeal ruled that claims for loss of earnings were to be permitted under the Survival of Actions Act. Since that time, two trial court decisions have commented on the method by which this claim is to be assessed – Duncan v. Baddeley (Justice Doreen Sulyma) and Brooks v. Stefura (Justice Paul Belzil). In this note, I will argue that, although these two decisions clarify many of the outstanding issues in this area, a number of crucial problems remain unresolved.

Issues Clarified

The Duncan and Brooks trial decisions provided clear signals concerning the elements of the Court of Appeal decision that would be given greatest weight. In particular, two paragraphs from the latter decision were quoted by both Sulyma, J. and Belzil, J.

[37] The flaw in the “lost saving” approach is that it is heir-centred, not victim-centred. It asks what the heirs lost, not what the victim lost. But the suit here is not for the loss to the estate, it is a suit by the victim for his loss, a claim that by operation of statute survives his death and can be made by his estate for him. Worse, it has the air about it of an attempt to undermine the statute. As a result of this flaw, the approach will fail to take into account what has been called “discretionary” spending, like holidays and entertainment and other “treats.” It will also fail to take into account gifts to children and spouses, and thereby underestimate even an heir-centred award.

[42] In sum, Ms. Taylor in her excellent submission persuades me to accept in large the “available surplus” approach accepted by the U.K. Court of Appeal in Harris v. Empress Motors; Cole v. Crown Poultry Packers, [1983] 3 All E.R. 561, and adopted by the British Columbia Court of Appeal in Semenoff et. al. v. Kokan et. al. (1991) 4 B.C.A.C. 191; 84 D.L.R. (4^th) 76. But it seems to me that it follows that a further deduction should be for expected income tax…

Lost Savings

In Galand, the Court of Appeal had directed that in Survival of Actions Act cases the estate was to be compensated for the value of the deceased’s (after-tax) income net of “personal living expenses.” Following Galand, some defendants argued that, as all expenditures could be considered to be directed to personal living expenses, the only portion of an individual’s income that would remain after deduction of those expenses was savings. Hence, the Survival of Actions claim was simply for lost savings.

Both Belzil, J. and Sulyma, J. concluded that the Court of Appeal decision in Duncan v. Baddeley required that “personal living expenses” were to be something less than total expenditures on consumption; and that the Survival of Actions claim was to be for something more than “lost savings.”

Available Surplus

In particular, that “something more” was to be calculated by deducting the “available surplus,” as calculated in Harris, from total after-tax income.

Justice Sulyma clarified that the “available surplus” approach was to be employed in the following manner. First, determine the deceased’s expected marital status and expected number of children. Second, estimate the percentage of the after-tax income of the deceased that would have been spent on: items specific to the deceased; and the percentage that would have been spent on items common to all members of the family (often called “indivisibles.”) Third, divide the indivisibles figure by the number of individuals in the family. Finally, deduct the sum of that figure and the figure for the deceased’s expenditures on him or herself from after-tax income. The result is the “available surplus,” that is, the amount to be compensated.

As an example, assume that it has been determined that a deceased male would have married and had two children. Assume also that evidence has been led to indicate that, of his after-tax income, 20 percent would have been spent on items that benefited the deceased alone (for example, expenditures on food and clothing) and that 30 percent would have been devoted to indivisibles. One quarter of the latter, or 7.5 percent, would be attributed to the deceased. Hence, it would be concluded that 27.5 percent of the deceased’s after-tax income would have been devoted to his maintenance and the estate would be compensated for the remaining 72.5 (= 100 – 27.5) percent, (the available surplus).

Two Technical Issues

At least two “technical” issues remain unresolved. First, the court has not turned its mind to the question of how to vary the available surplus over the individual’s lifetime. For example, if it has been assumed that the deceased would have had two children, it would seem reasonable to reduce the available surplus once the children left home. The general assumption is that, for a couple without children, 30 percent of family income is devoted to items that benefit one partner alone and 40 percent is devoted to indivisibles. Hence, once a couple’s children have left home, the available surplus should be assumed to fall from 72.5 percent to 50 percent (= 30 + (0.50 x 40)).

Second, it might be argued that the appeal court’s ruling that the available surplus was to be more than “lost savings” implied that all of the deceased’s expected “savings” should be included in the award. As a significant portion of the indivisibles represents purchases of capital assets, such as the family home, it might be argued that expenditures on those purchases are “savings.” As such, they should not be deducted from the award. This issue has not been resolved.

Two Conceptual Issues

In addition, the Court of Appeal decision in Duncan raises two conceptual issues that have not, as yet, been dealt with satisfactorily. First, that decision concludes both that the award should be something more than lost savings and that the available surplus approach is to be used. But, in certain circumstances, the latter approach yields results that are identical to the lost savings approach.

In particular, assume that the deceased was not married and that evidence has been led to suggest that he or she would never have married. In that case, the available surplus approach requires that all of the individual’s expenditures on personal items, plus all of his or her expenditures on indivisibles, be deducted from after-tax income. But the residual from that calculation is simply the individual’s savings. Does the Court wish us to compensate this individual’s estate for his/her savings, after explicitly rejecting the lost savings approach? The answer is not clear.

Second, note that the Court of Appeal ruled that the lost saving approach was flawed, in large part, because it “… will fail to take into account what has been called ‘discretionary’ spending, like holidays and entertainment and other ‘treats,’ … [and because it] … will also fail to take into account gifts to children and spouses.” [para. 37]

The simplest interpretation that can be given to this wording is that expenditures on holidays, entertainment, and other “treats” are not to be deducted from the estate’s claim. That is, if the lost saving approach is flawed because holidays, entertainment, and other treats are excluded, it surely must follow that, in the non-flawed approach, those items are to be included.

But the available surplus approach excludes these expenditures from the claim. The percentage of income that is devoted to expenditures exclusively for the benefit of the deceased includes expenditures that the deceased would have made on holidays, entertainment, etc. And the available surplus approach explicitly deducts expenditures made for the sole benefit of the deceased. Again, the Court ruling is found to be internally inconsistent.

Conclusion

The long saga that was initiated with the Court of Appeal ruling in Galand continues. Although the recent trial court decisions in Duncan and Brooks provide some clarification concerning the manner in which Survival of Actions Act claims are to be calculated, many issues remain to be resolved. Further rulings, perhaps from the Court of Appeal, will be required before a clear picture emerges.

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).

Issues Arising in the Calculation of Damages under the Survival of Actions Act (Part 2)

Posted on March 1, 1999April 18, 2017 By economica

by Scott Beesley

This article was originally published in the spring 1999 issue of the Expert Witness.

Note that this article is the second of a two-part article. You will find part 1 here

Methodology of the Calculation

Damages in fatal accident actions are calculated in two steps. First the lump-sum value of the deceased’s income after taxes and after deduction of personal expenses is determined. Then, to this is added a tax “gross up,” to account for the tax liability the survivors will incur when the settlement earns interest.

Injury claims, on the other hand, are calculated using before-tax income, but no gross-up is added. The law implies that the fraction of the injured party’s income which would have gone to tax will now roughly equal the tax liability incurred because of interest on the lump sum awarded (through all future years). This equivalence is only roughly correct, though, and it would in fact be more accurate to calculate injury claims in the same manner as fatalities.* One reason that this is not done is that the tax rate any one person would have paid would have depended on their choices in life, including the presence or absence of children, the amount they would have saved or donated, and even the occupation chosen itself (some allow income to be shielded from tax more easily). The injury protocol finesses this uncertainty by working in pre-tax income.

In the case of Survival of Actions (SAA) cases, there may be an alternative method of dealing with this uncertainty. First, recognise that, as income increases, the percentage of income required for “expenses incurred in the course of earning income” is likely to decrease. That is, the necessities component of the deduction (by which I now mean expenses other than tax) declines as a percentage with increasing income. Second, at the same time, the percentage of income devoted to income tax will definitely increase. The two components of the deduction are therefore moving in different directions as income is increased: The tax percentage increases while the percentage cost of other necessities decreases. The overall total could be relatively constant with respect to income, depending of course on what sort of dependence is assumed for the necessities cost as a function of income. In most cases the total deduction (and therefore the award) may not vary far from 50 percent of gross income.

If the courts wished to simplify loss calculations somewhat, the above argument would justify calculating damages under the SAA in the same manner as in injury cases (i.e. using before-tax income), but with a deduction on the order of 50 percent. Note that this would exactly split the difference between the former common law result, which would have awarded nothing in the absence of dependents, and the awarding of 100 percent of before-tax income that would occur in the case of a surviving but completely unemployable plaintiff. One could then say that the pro-deterrence and anti-windfall gains positions had been given approximately equal weight. The error of such a simplification is that the calculation would not account for differences in tax rates across the income scale, nor would it correctly deduct necessities, if it was determined that the true cost of necessities is a flat dollar figure, not some percentage of income. As discussed in the previous paragraph, across the broad centre of the income distribution, the error is actually quite small. At very low incomes, a flat deduction would overstate tax and understate necessities, while the reverse occurs at high incomes.

To Gross-up or not to Gross-up?

We note that in an opinion recently provided to Economica regarding a case in progress, former Justice Kerans stated that he felt that a gross-up continued to be appropriate as part of the process of capitalising the award, assuming the goal is to replicate the year-by-year loss. If it is eventually decided that the Survival of Actions Act should require that in each future year, the estate should receive (for example) 50 percent of pre-accident after-tax income, then a gross-up is necessary. If, on the other hand, it is decided that only a one-time lump payment is needed, then the gross-up should be omitted.

Some may object to the idea that the size of the final award should depend on the financial status of the recipients of the award, yet that is already the case in the current fatal accidents methodology. A surviving spouse whose income is higher receives a higher award because of a larger gross-up, even if all other case facts are identical.

Finally, we note that in the recent further Duncan decision, no gross-up was applied. Please refer to page 8 for details regarding this decision.

Simultaneous Fatal Accidents Act and Survival of Actions Act Claims

The Rationale and the Calculation

It may be possible to make a joint claim under the Survival of Actions Act (SAA), and the Fatal Accidents Act (FAA), to the extent that some part of a deceased person’s income is claimable under the SAA and not already claimed under the FAA. We provide an example of how such a claim might be estimated. First, assume that the dependency is the usual spousal figure of 70 percent, which, though not mandated in any way, appears to have been accepted as reasonable in most cases. That dependency consists of 40 percent (of the deceased’s after-tax income) for common expenses, and 30 percent for expenses that benefit the survivor alone. The 30 percent which is deducted from the FAA award represents the amount which would have benefited the deceased alone, and hence is not relevant for the FAA calculation. We assume a necessities deduction of 33 percent, with 15 percent contained in the 30 percent FAA deduction, and 18 percent within the 40 percent allotted for common expenditures. With these assumptions, half of the 30 percent deducted under the Fatal Accidents Act cannot be claimed under the Survival of Actions Act, since it covers necessities and is to be deducted. The remaining 15 percent, however, is claimable under the Survival of Actions Act, and has not already been claimed under the FAA, since it did not go to support dependents. (Of course, this entire interpretation is only possible if the courts eventually settle upon a lost years deduction which reflects some measure of necessities, and further clarify how that deduction overlaps with the division of after-tax income under the Fatal Accidents Act.)

Table 1 below will, hopefully, clarify the above example.

Table 1: Combined Claims under the Fatal Accidents Act and the Survival of Actions Act

Table 1

Divorce and Remarriage

Fatal Accidents Act calculations are commonly reduced by the use of contingencies for divorce and remarriage. A pre-accident divorce would obviously have ended a spousal dependency relationship (subject perhaps to a loss of support claim), while a post-accident remarriage may be presumed at times to reduce or eliminate the dependency by replacing the deceased’s income with that of a new spouse. Claims under the Survival of Actions Act are not subject to these reductions, it would appear, since the law allows claims by the estate, not FAA dependents. Of course, the beneficiaries of the estate and the dependents will often be one and the same. If SAA claims are interpreted as not subject to divorce and remarriage, then a large fraction of any amount deducted from an FAA claim because of those contingencies is simply added to the SAA claim. We note that not all of the deduction is added back, because the necessities component of common income (the 18 percent in Table 1) cannot be claimed under the Survival of Actions Act.

Continuing with the Table 1 example, assume that the 70 percent dependency claim had been reduced by 40 percent as a result of the divorce and remarriage contingencies. The reduction as a percentage of after-tax income is 28 percent (40 percent of 70 percent). Of that reduction, a fraction equal to 52/70 can be reclaimed under the SAA, since all but 18 of the 70 percent is claimable using that Act. Table 2 below provides an example of the calculation, presuming that after-tax income has a present value of $1,000,000. It continues the assumptions on Table 1 regarding dependency and the division of necessities across common and personal expenses (18 and 15 percent, respectively). Note that in addition to the divorce and remarriage reclamation under the SAA, we also include the 15 percent claim for the deceased’s personal non-necessities, as discussed in detail above.

Table 2: Reclaiming of Divorce and Remarriage Reductions Under the Survival of Actions Act

Table 2

Comments on the recent Brooks v. Stefura decision

In Brooks v. Stefura, Justice Belzil interpreted Duncan as suggesting that almost everything the deceased would have spent should be deducted from an estate award. He deducted: future spending by the deceased on vehicles and other discretionary items, the deceased’s own expenses on essentials, and also all the expenses the deceased would have incurred for a hypothetical second spouse and family. We would first note that this deduction of a large majority of spending is roughly equivalent to awarding savings only, an approach that was explicitly rejected by Justice Kerans. It is also difficult to understand how spending on, for example, motorcycles and electronic equipment could be said to constitute an obligation, in the sense of spending on family support. Surely such optional expenditures should be considered discretionary. The fact that they might have been debt financed is irrelevant, except that one might argue that the interest should perhaps be considered an obligation. After summing all these components, Justice Belzil arrives at an 80 percent deduction. As it is, this is roughly a savings-only award, with an effective deduction from before-tax income of roughly 85 percent.

A further issue is that, in fact, Brooks uses a lost years deduction larger than the stated 80 percent, without acknowledging as much. With all due respect, we note that there appears to be a logical inconsistency in Brooks. Having listed all the “obligations” of the deceased, and having made clear that he believes that 80 percent of spending would have gone to such items, Justice Belzil then takes the Fatal Accidents Act claim from the remaining 20 percent of after-tax income. Yet this implies that the true lost years deduction being applied here is over 95 percent of after-tax income, or 97 percent of before-tax income. This level of deduction is far beyond the 33 to 53 percent range seen in the previous cases in all jurisdictions. It would seem quite clear that spending on the deceased’s first wife and his children, as estimated under the Fatal Accidents Act, would be an “obligation” under Justice Belzil’s rationale. Justice Belzil in fact writes exactly that at paragraph 249. In that case the FAA award should be considered to be an additional component of the true lost years deduction, and Justice Belzil would then report having used a lost years deduction of roughly 95 percent of after-tax income, or even more as a percentage of before-tax income.

I would suggest that the actual deduction used should be reported correctly, inclusive of any FAA award, which is clearly all deducted under Justice Belzil’s methodology. The overall award would have more accurately been reported as the roughly 2 to 3 percent remaining under the Survival of Actions Act, plus the Fatal Accidents Act award. Alternatively, the plaintiff could have been awarded the FAA amount, from dollars which are within the 80 percent deduction, and also received the 20 percent granted under the SAA. The figures involved are shown in Table 3 below.

Table 3

If the Fatal Accident Act amount had been assumed to come from within the 80 percent SAA deduction, the total award would have been approximately $312,122, or the sum of $140,299 (FAA) and $171,823 (SAA).

It is difficult to understand why the FAA amount was deducted from the 20 percent which is deemed discretionary, without granting that what is really being done is presuming obligations of over 95 percent of after-tax income, or almost 100 percent of before-tax income. Finally, I note that the true lost years deduction in Brooks is actually well in excess of what would be used in a correctly estimated “savings-only” calculation, and that was rejected in Duncan as not generous enough.

A New Decision in Duncan v. Baddeley

On February 2, 1999 a decision was released in the Duncan v. Baddeley case. The Court of Appeal decision had returned the case to the lower court for calculation of the estate’s loss, using principles laid out in the judgment of Mr. Justice Kerans. Madam Justice Sulyma considered how to interpret the Court of Appeal’s judgment, and concluded that a moderate “lost years” deduction, equal to 35 percent of after-tax income, was appropriate. That was in addition to the deduction of tax itself, calculated to be 28 percent of before-tax income. The overall deduction from before-tax income is 53.2 percent. Two further contingency reductions of 5 percent each were also applied. The award was calculated as shown on Table 4 below. (No mention was made of a gross-up, so presumably such was not awarded.)

Madam Justice Sulyma rejected the suggestion that only savings should be awarded, clearly stating that some reasonable estimate of “personal living expenses,” for the deceased only, was what should be deducted from after-tax income. The Justice also confirmed what seems quite clear from a reading of Justice Kerans’ decision: that the estimated overall deduction, which he felt would be 50 to 70 percent of pretax income, includes personal expenses and tax. Justice Kerans slightly overestimated income tax, and when his figures are lowered to account for that, the implied range for the overall deduction is approximately 40 to 60 percent. Justice Sulyma’s estimated deduction of 53.2 percent is therefore right in the centre of the range suggested by the Court of Appeal.

We note that the size (in percentage terms) of the personal living expenses deduction by Justice Sulyma is consistent with many previous related cases. At the given level of income, it should also be noted that the personal expenses deduction is $8,820 (= $35,000 x 0.72 x 0.35). This is very similar to the necessities deduction which would be applied if an absolute dollar figure was chosen, based on estimates of the necessities of life. We have argued in the past that such a figure should be used, if it was found that a strict definition of necessities was all that should be deducted. (One implication was that a flat amount, not a percentage, would be the appropriate deduction.)

Finally, we note that the following issue appears in many injury and fatal cases, and seems to be misunderstood at times. One of the rationales for the second 5 percent deduction applied by Justice Sulyma is that “there should be a discount for the chance that the victim would not receive the optimal award calculated by the Plaintiff’s actuary.” If we are interpreting this correctly, it seems to mean the chance that the plaintiff would not have earned as much as was assumed in the calculation. But the proper method would then be to lower the income estimate itself, not impose an arbitrary reduction. If the figure of $35,000 per annum was agreed on as the most reasonable estimate of Mr. Duncan’s annual income for full-time work, that figure itself is already net of the chances that he might have made more or less – the only additional adjustments required are for fringe benefits, disability and the risk of unemployment. More commonly, in our work we often estimate pre-accident income using the level of education a young plaintiff was likely to reach. The income path we then use is an average across many thousands of individuals, and obviously some of those individuals earn more than that average and others less. Unless there is some good reason to deliberately use an income path above or below the average, only the three adjustments above should be used (though in some cases part-time and non-participation contingencies may also apply).

Table 4: The Calculation in Duncan v. Baddeley

Table 4

* The tax paid on this interest income could be more or less than the tax which would be payable on the annual withdrawal if it had been earned as income. In legal theory, these two deductions are similar in size over time. That is, the courts have assumed that tax on post-accident interest income lowers overall funds available to the plaintiff approximately as much as tax on pre-accident earned income would have, and the plaintiff’s after-tax loss of income has (presumably) been replaced. In practice, we find that it is more often the case that the tax on interest income has a more serious effect on funds available than pre-accident income tax would have had. [back to text of article]

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

Issues Arising in the Calculation of Damages Under the Survival of Actions Act (Part 1)

Posted on December 1, 1998April 18, 2017 By economica

by Scott Beesley

This article was originally published in the winter 1998 issue of the Expert Witness.

Note that this article is the first of a two-part article. You will find part 2 here

Under the Fatal Accidents Act, it is only the dependants of the deceased who can claim for loss of income. The recent Alberta Court of Appeal decisions in Galand and Duncan, however, have created the possibility that the Survival of Actions Act may be used to allow the estate to claim for loss of income.

A fundamental debate triggered by this interpretation of the Survival of Actions Act concerns the size of the “lost years” or “necessities” deduction. This concept arises from that class of personal injury cases in which the plaintiff has suffered a reduced life expectancy. In such cases, one portion of the award derives from the income that would have been earned in the years beyond the (now) reduced lifespan, i.e. in the “lost years.” In this calculation, a deduction is made to account for the fact that some expenses will not be incurred, once the plaintiff dies.

This is the original lost years deduction. The net amount left after that deduction represents, in principle, spending from which the plaintiff would have received pleasure or enjoyment. Note that while there is still room for debate about the appropriate size of this deduction (and it seems not to be a settled issue), the rationale for an award is very clear: The plaintiff has been severely injured, such that their expected survival is now reduced, but during their remaining years they can obtain pleasure from an award which replaces some of their lost income.

A fatal accident can be thought of as an event which results in a life expectancy of zero, i.e. as the limiting case of a reduced expectancy. Yet for any significant remaining life expectancy (beyond a few days or weeks?) these situations are fundamentally very different, and there is no reason why the lost years deduction in the two types of cases should be the same. One can only note that the award in a reduced life expectancy case should certainly be at least as large as a deterrence-driven award in an equivalent fatal case.

In the case of Survival of Actions Act claims, the intriguing fact is that the Court of Appeal made its precedent-setting decisions without stating any underlying rationale. Why should a claim continue when no survivors exist? Why should even a reduced claim, with a lost years or necessities deduction applied, continue? The traditional view, which obviously still has many adherents, suggests that indeed it should not continue, since to allow such claims would provide windfall gains to those who would not otherwise have benefited from the earnings of the deceased. The only obvious rationale for the continuance of these estate claims is deterrence and/or punishment, and I believe that does provide a sufficient rationale for such claims.

Each year, thousands die in traffic accidents in Canada, and to that we can add hundreds more in industrial mishaps and other types of accidents. The pain, grief and economic damage done is enormous, as are the health-care costs involved. One might also argue that the present system leaves parents and siblings under compensated for the loss of a family member, since in many cases children assist their relatives, and in particular the deceased might have helped his or her parents as they aged. It seems odd that if one victim had a spouse and three children, and another was single, the amount payable by the defendant’s insurer was (historically) very significant in the former case and negligible in the latter. Yet the negligence involved was the same, the annual income lost was the same, and the economic loss to society (usually a productive worker) was the same. If we wish to deter reckless driving, and careless behaviour in other areas of life, then it appears there should be consistent penalties for similar wrongs. At one extreme of opinion, this would imply virtually the same award in the two cases given, and no necessities deduction at all.

In the alternative, it has been suggested that a very large deduction should apply, with virtually all the projected spending of the deceased being deducted. The arguments advanced for this viewpoint have focussed on the “no windfall gains” argument, either by making that case directly or by citing precedents which in turn rely on that idea. This amounts to implying that deterrence should be only a minor consideration, and that compensation is to be the overriding standard in the determination of any award. This argument is often made by defendants, and the typical conclusion is that only lost savings should be awarded, or equivalently (as noted above), all consumption spending should be deducted. The sum calculated roughly estimates the present value of what the deceased would have left to his or her heirs, had there been any, which is often very little in current dollars.

I am unaware of any article or judgement that argues from first principles why all consumption spending should be excluded. In each case the discussion turns on interpretation of prior judgements with a view to justifying as small an award as is possible. I believe, in fact, that one would be hard pressed to find a rationale which supported any particular scale of deduction, because the balancing of the idea of no windfall gains with that of deterrence is inherently subjective. The extremes are pleasantly clear: Award nothing (deduct it all) if you virulently oppose windfall gains, and award all lost income (deduct nothing) if you want to put all the emphasis on deterrence.

(Like any economist, I should note that theory would say we should somehow tabulate the costs of accidents and the cost of prevention, and minimise overall social costs. But this in itself is extremely difficult, and very sensitive to assumptions which vary with the beliefs of the investigator. Further, minimising social costs would require knowing how people would react to each possible level of deterrence, and we cannot easily predict such behaviour. Finally, the problem cannot be converted to one of mathematics without assessing the intrinsic value of a life, and I for one would argue that lifetime income alone would provide too low a weighting in such a calculation.)

In Duncan, Justice Kerans provided some guidance regarding the size of the deduction, and the ration-ale involved. Note the following statement: “My life-savings would not tell one what I spent during my life on pleasure, as opposed to what I had to spend in connection with the earning of my income”. He referred also to the correct deduction as the “expenses that the victim would have incurred in the course of earning the living we predict he would earn” (emphasis added). The difficulty is that these phrases still leave enormous room for argument. Do they infer that only whatever is required to stay alive is to be deducted, since all other spending produces some pleasure? Perhaps a somewhat higher deduction is implied, assuming that success in a particular career path requires a certain standard of dress and even lifestyle. If Justice Kerans had written “expenses that the victim would have incurred in order to earn the living we predict he would earn,” then, clearly, a relatively minimal deduction would apply. But as written, it is not clear, for example, whether income which would have supported a family in the future is to be viewed primarily as a necessary expense (and deducted) or as something which would have provided pleasure (and should under some interpretations be compensated). Perhaps in another case it will be apparent that the deceased would never have married. Does that then imply much greater spending on him or herself, and again is that spending counted in the award or deducted? It is asking a lot of the courts to assess the marital prospects (and chance of divorce) of each fatal accident victim, if it is found that such considerations should be analysed in every case. Justice Kerans, referring again to the amount of the deduction, noted (in Duncan):

…That sum will vary with the kind of employment, and the state in life of the victim. Neither “poverty-line” expenses nor “lost savings” are a reliable indicator of that sum. Rather, it should be a fair calculation of the likely future cost of lives.

With respect, I note that the second amount Justice Kerans refers to (lost savings) should actually be described as “all expenses except savings,” since that is what is argued for by those who wish to minimise awards. (Most people involved in these cases know the respective positions of those at the extremes of the debate, but the quote as it is may confuse anyone new to the topic, so a clarification seems in order.) The idea that the deduction will vary with the state in life of the victim is at odds with the idea that the deduction reflects necessities, strictly defined, since the latter would not vary with income. If the deduction is to change with income, then should it be a fixed percentage, or some other form of variation? Should any other variables matter? The answer depends entirely on the rationale which is eventually settled upon.

After canvassing a number of alternative methods for calculating this deduction, in Duncan, Justice Kerans settled on an approach which he attributed to Constance Taylor, the plaintiff’s counsel. This method, which Justice Kerans refers to as the “available surplus” approach, was first enunciated in the U.K. Court of Appeal in Harris v. Empress Motors [1983] 3 All E.R. 561 and later adopted in one of the first Canadian cases concerning the “lost years deduction,” Semenoff v. Kokan (1991) 84 D.L.R. (4th) 76. In the latter case, the court concluded that the “conventional deduction” was 33 percent of before-tax income. But Justice Kerans also suggested that the income taxes the deceased would have paid should form part of the deduction, and he concluded:

…Cases suggest a discount of 50% to 70%. My sense of the matter is that this is an apt range. But I suggest that expert evidence could help the judge to assess this cost. The plaintiff actuary here did no calculation. He instead accepted 50% or that “suggested by the cases”. Again, that calculation should include one for tax.

Justice Kerans, then, appears to be suggesting a discount of 50 to 70 percent of before-tax income (i.e. composed of 30 to 40 percent in tax and, presumably, 20 to 30 percent for necessities). Note that for Albertans at average income levels, income tax is lower than Justice Kerans suggested, at approximately 25 percent of gross income. Using a necessities deduction at the midpoint of Justice Kerans’ range, 25 percent, the implied total deduction is 50 percent of before-tax income.

We note also that Justice Kerans explicitly rejected an approach which awards only lost savings, stating:

…The flaw in the “lost savings” approach is that it is heir-centred, not victim-centred. It asks what the heirs lost, not what the victim lost. But the suit here is not for the loss to the estate, it is a suit by the victim for his loss, a claim that by operation of statute survives his death and can be made by his estate for him. Worse, it has the air about it of an attempt to undermine the statute. As a result of this flaw, the approach will fail to take into account what has been called “discretionary” spending, like holidays and entertainment and other “treats”. It will also fail to take into account gifts to children and spouses, and thereby underestimate even an heir-centred award.

Finally, if it is eventually decided that only savings will be awarded in these cases, it should be realised that an accurate definition of savings should include the principal component of mortgage payments, as well as financial and capital asset accumulation. We note that the Harris decision cites another English case, Sullivan v West Yorkshire Passenger Transport Executive, which used a savings-only award but (in my view correctly) included mortgage principal payments in assessing the relevant percentage.

Case Review

I cited earlier a quote from Duncan in which Justice Kerans implied that spending which would have provided pleasure is to be compensated. Assuming that expenditures which are necessary for the maintenance of life do not provide “pleasure,” restitution implies that compensation is to be provided only for that portion of income which remains after the deduction of necessities. A clear statement of this principle is found in Toneguzzo-Norvell v. Burnaby Hospital [1994] 1 S.C.R. 114 where Madam Justice McLachlin concluded at page 127:

…There can be no capacity to earn without a life. The maintenance of that life requires expenditure for personal living expenses. Hence the earnings which the award represents are conditional upon personal living expenses having been incurred. It follows that such expenses may appropriately be deducted from the award.

The deduction used in Toneguzzo was 50 percent of before-tax income, a figure confirmed by the Supreme Court of Canada.

I note that the dispute would not be resolved by any clearer statement that pleasure is to be compensated, while necessities are not, since the line between the two is subjective. Is one car a necessity, a pure luxury beyond transit, or something in between? How much of spending on food provides pleasure? Housing? And so on through virtually all common purchases. Only a few luxury items, gifts, expensive vacations etc. seem to clearly have no necessities component, while conversely almost every ordinary expense for an average income person contains an element of pleasure (i.e. a component of cost which is the excess over the “necessities-only” equivalent). In defending a large deduction, what is implied is that either there is no pleasurable component in ordinary spending, or (and this seems to be the case) that pleasure lost is not what is being compensated. What is being replaced, according to Duncan, is what would have been the deceased’s “available surplus.” As mentioned above, Justice Kerans suggested that a 50 to 70 percent total deduction seemed correct, and after adjusting for his slight overestimation of tax, a 40 to 60 percent range results. The implied surplus is the remaining amount, roughly “60 to 40” percent, of before-tax income. Alternatively, one can deduct estimated tax and then deduct another 20 to 30 percent of before tax-income for necessities. We can compare the roughly 50 percent (from before-tax) deduction implied in Duncan with the figures cited in other cases (below).

A March 20, 1997 judgement from the Alberta Court of Queen’s Bench, in the case Brown v. The University of Alberta Hospital, concluded that the 50 percent deduction of Toneguzzo was not a strict precedent but instead a rough guideline, to be altered as evidence suggested in each case. Mr. Justice Marceau wrote:

…Having rejected the lost savings approach, I turn now to determine the proper deduction that should be made for personal living expenses. In this regard, it is significant that all four of the post-Toneguzzo decisions find that the latter does not stand for the proposition that a 50% deduction must be made; rather, the cases all take the position that the proper deduction must be assessed on a case-by-case basis.

Mr. Justice Marceau went on to cite an Ontario case, Dubé v. Penlon Ltd., in which a 33 percent lost years deduction had been applied under circumstances similar to those in the case he was judging, and he referred to that deduction as “conventional.” We note that the deductions in Toneguzzo and Dubé were from before-tax income, implying that the deductions from after-tax income were quite modest, along the lines of 15 to 35 percent.

Note that a 50 percent deduction from before-tax income is consistent with the decisions in Andrews v Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229, Harris, Toneguzzo, Bastian v Mori [1990; BCSC], and an Ontario case, Duncan v Kemp [1991]. The 33 percent deduction from before-tax income was used in Semenoff, Dubé and Brown.

Expert Evidence

In Brown v. The University of Alberta Hospital, Justice Marceau noted that a 33 percent lost years deduction is “conventional,” but he also stated, “the proper deduction must be assessed on a case-by-case basis.” In Duncan Estate v. Baddeley, Justice Kerans suggested, “expert evidence could help the judge to assess this cost.” Also, he noted, “the plaintiff actuary here did no calculation.”

To determine the appropriate lost years deduction, a calculation must be made of the amount of income that is necessary to maintain the person at a reasonable standard of living. Note that this does not suggest that one can simply add together a person’s expenditures on traditional “necessity” items such as food, clothing, and shelter; then conclude that this is the amount required to maintain a reasonable standard of living; then claim that it is therefore an appropriate lost years deduction. What this approach fails to recognise is that a significant percentage of Canadians’ expenditures on these items provide pleasure.

For example, whereas Canadian families earning $20,000 spend approximately 19 percent, or $3,800, of their incomes on food, families earning $50,000 spend approximately 15 percent, or $7,500, on that category. Any claim that all expenditures on food are “necessary” suggests that none of the extra $3,700 spent by high income families provide pleasure. Clearly this is not the case. When families’ incomes rise from $20,000 to $50,000 they do not “need” additional food. Instead, they increase their expenditures on “non-essential” items. Similar arguments can be made with respect to shelter, clothing and transportation.

Recognizing that, in our view, “basic necessities” (and therefore, the lost years deduction) do not vary with income, the question remains: how are they to be measured objectively? Fortunately, an economics professor, Christopher Sarlo, has calculated detailed measures of the “personal expenses required for the maintenance of life” for families of various sizes in different regions of Canada. He defines an expenditure to be “necessary” if it is

…required to maintain long term physical well-being. For able-bodied persons, the list would consist of a nutritious diet, shelter, clothing, personal hygiene needs, health care, transportation, and telephone. . . . It is assumed that the type and quality of each item . . . is at least at the minimum acceptable standard within the community in which one resides. (Sarlo 1992, page 49)

The above definition coincides extremely closely with the use of the phrases “basic necessities” and “. . . expenditures necessary to earn . . . income” used by the courts. Therefore, the estimates which he provides can act, we submit, as objective measures of those concepts.

In Alberta, Sarlo found that, in 1994, a single person could meet his or her needs with approximately $6,351 per year (approximately $6,964 in 1999 dollars). This implies that if an individual’s after-tax income would have been $20,000 per year during the lost years, 34.38 percent would have been spent on necessities; whereas if the individual’s after-tax income would have been $50,000, only 13.75 percent would have been spent on those items. The remainder – 65.62 percent in the first case and 86.25 percent in the second – would have been available to purchase goods and services which have provided pleasure. It is this amount which has been lost to the estate, if it is assumed that it is a loss of pleasure which is to be compensated.

In light of the above information, a smaller deduction, on the order of 20 percent of after-tax income, could be supported. As noted above, this lower deduction finds support in Semenoff, Dubé and Brown, each of which used 33 percent from before-tax income as the entire deduction. Justice Kerans’ comments, as noted earlier, imply that a deduction of 20 to 30 of before-tax income should be made for necessities, in addition to the deduction of income tax itself. Given average earnings of approximately $40,000, the implied necessities deduction of $10,000 (25 percent of pre-tax) is noted to equal 33 percent of the $30,000 in after-tax income. (Coincidentally, the tax and necessities components of the overall deduction are equal at roughly $10,000, given an average person’s income and following the percentages suggested in Duncan.) The figure of 33 percent is therefore the after-tax “necessities” fraction which, when combined with tax on an average income, produces an overall deduction of 50 percent of before-tax income, as used in Toneguzzo and closely matched in Harris, Andrews, Bastian and Duncan v. Kemp. Finally, it is possible that the courts may wish to use a larger necessities percentage, such as a deduction of 40 percent of after-tax income. In our recent cases, we have therefore used an annual deduction which ranges from 20 to 40 percent of after-tax income, as well as providing the figure at 33 percent.

One final comment regarding the previous cases is in order. The cases cited generally involve either a reduced life expectancy or the existence of dependants. In the former event, we noted earlier that a reduced life expectancy case is fundamentally different from one in which the person is dead. The injured party can at least enjoy any funds awarded for their remaining lifetime. When actual (as in Harris) or hypothetical (as in Semenoff) dependants are involved, some courts have considered funds which support a family to be eligible under the Survival of Actions Act, (SAA), while other decisions treat all such funds as part of the deduction.

This question is the source of a good part of the uncertainty in these estate claims. In a case which actually has dependants, this difference is not too important, since the family support in question is going to be paid under a dependency claim. It is in cases such as Duncan itself that this issue is important – should income (or much of it) which would have gone to a hypothetical family for support be awarded under the SAA, on the grounds that it would have provided pleasure to the deceased? Or, in the alternative, should such income be deducted, on the grounds that as a necessity or obligation, it would not have been part of available surplus, however defined? Semenoff, for one, analysed a severely injured, newly married man as if he would have had two children, and deducted 25 percent which he would have spent on himself only, plus a further 8 percent, representing roughly ¼ of common expenses of 33 percent. Note that the implication is that a large majority (a fraction of 67/75) of the funds that the deceased would have spent on his wife and children was awarded, even though no children will ever exist. But Semenoff was a reduced expectancy case, not a case exactly like Duncan, so it is not clear what sort of precedent it sets.

Though I cannot claim to have searched for all relevant prior cases, the examples commonly cited during the debate on this issue are remarkable in that no cited case appears to match the circumstances of Duncan. That is, there are no precedents which address the question of what is a reasonable estate award in the case of an unmarried person who has died immediately as a consequence of an accident, and why that award is reasonable.

It is intriguing that this discussion has continued with repeated references to cases which are so different from the “pure” estate claim Duncan represents. I would suggest that, ideally, the legislature should address this issue from first principles, and resolve the conflict between compensation and deterrence.

In our next issue, I will discuss the methodology of these calculations and the issue of dual claims under the Survival of Actions and Fatal Accidents Acts.

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

Unresolved Issues in the Valuation of Estate Claims Under Survival of Actions

Posted on March 1, 1998April 18, 2017 By economica

by Derek Aldridge

This article was originally published in the spring 1998 issue of the Expert Witness.

It has been nearly a year since the Duncan v. Baddeley court of appeal decision (Alberta Appeal #9503-0408-AC) allowed the estate of the deceased to claim for loss of income on behalf of the deceased. In that time we have been involved in estimating the estate’s losses in several of these cases. Discussions among our own staff (at Economica) and with our clients have raised numerous questions about the correct economic approach to valuing these losses.

As most of our readers know, the Duncan decision allowed the estate of a deceased individual to make a claim for the loss of the deceased’s income, under the Survival of Actions Act. This is in contrast to the usual claim under the Fatal Accidents Act in which it is only the surviving dependants who can make a claim for loss of dependency on income and household services.

Unfortunately, it remains quite unclear exactly how an estate’s loss is to be calculated. The guidelines offered in Duncan suggest that we should estimate what the deceased’s lifetime income likely would have been, deduct an amount for tax, and deduct a further amount representing what the deceased would have spent on necessities – or expenses incurred in the course of earning an income (The latter deduction is often referred to as the lost years deduction). However, although this general approach is outlined in Duncan, there remain many uncertainties.

First, consider the situation in which a deceased has left no dependants to make a claim for loss of dependency under Fatal Accidents. (Later I will address the situation in which there are dependents, leaving open the possibility of overlapping claims under Fatal Accidents and Survival of Actions.)

Fatal accident cases without dependants

The most important unresolved issue concerns the appropriate deduction from the deceased’s potential income. What should the size of this deduction be? Why is there a deduction at all?

It appears that the courts have endorsed the idea that a deduction should be made for cost of “necessities” that the deceased would have purchased, in the course of living and earning an income. This is similar to the “lost years” deduction that has been accepted in personal injury cases in which the plaintiff’s life expectancy has been reduced. (In these cases, the plaintiff is compensated for the income that he would have earned in the years that he is now not expected to be alive, less the portion of income that would have gone toward his basic necessities.) However, under Survival of Actions claims, we are not compensating the income-earner, so the logic behind this deduction is unclear. By allowing these estate claims, the court seems to have the goal of deterrence, rather than compensation, in mind. If so, then perhaps there should be no necessities deduction at all. Presumably if an “income-generating machine”, owned by the deceased, was destroyed in the same accident which killed the deceased, the estate would receive full compensation for the value of the income-generating machine – without any deduction.

If the goal is to compensate the estate for the deceased’s “lost pleasure” (analogous to compensation for “lost years” in a personal injury case), then we should deduct an amount corresponding to the basic necessities of living. Expenses beyond this surely would have provided pleasure to the deceased.

Without a goal of compensation in mind, it seems that any calculation of a lost-years deduction (and hence, the fraction of income payable to the estate) is arbitrary. In my view, it sounds equally reasonable to compensate the estate for half of the deceased’s income; or the amount by which his income would have been above-average; or the amount by which it would have been above the “poverty-line”; or any other amount.

Are we attempting to compensate the estate for what the deceased’s economic contribution to the world would have been, as if he had been an income-generating machine? If so, then we should be measuring something quite different than after-tax income less some deduction. And of course, the deceased’s economic contribution would have included non-market household services.

Household services is an issue that has not been addressed in these estate claims. So far it seems that only an amount corresponding to the deceased’s potential income is claimable, and the value of his or her services is not. However, it may be found that the deceased would not have ever been employed in the labour force, never would have earned a salary, but would have made significant labour contributions within his or her own home. The traditional homemaker role for women immediately comes to mind as an example. If it is believed that a deceased woman would have worked strictly as a homemaker, does her estate have a claim for a loss? From an economic standpoint it seems that it might. If the woman would have worked exclusively in the home, then she most likely would have had a spouse who was employed outside the home. There would be an implicit transfer of the spouse’s employment income to the homemaker (the homemaker is, to some extent, trading her household services for a share of her spouse’s employment income), and this income might be claimable.

Another way of looking at it is this: Suppose two young unmarried women died in an accident. The court finds that the first woman would have eventually worked as a full-time homemaker and mother in her own home, but would not have worked outside the home. The court also finds that the second woman would have worked for someone else, as a full-time nanny and homemaker, and would have earned $30,000 per year. Even though both of these women would have added similar economic “value” to society, the current economic approach which compensates for the lost labour market contribution would only allow a claim by the estate of the second woman.

Even if we ignore the issue of what deduction to make and assume that only employment income is to be considered, we still face uncertainty regarding tax. Under the Fatal Accidents Act, the award is based on the deceased’s after-tax income, to reflect that the dependants would have benefited from a share of after-tax income. Then the total award is “grossed-up” for tax that the dependant will pay, so that in every year of the future, he or she will have available the same income that he or she would have benefited from if the deceased had lived. The Duncan judgment suggests that we should also deduct tax, but there is no mention of a gross-up. Of course, the estate (whoever that might be) will face an increased tax burden due to the interest generated by the award and will therefore receive insufficient compensation without a gross-up. However, how do we gross-up an award to the estate? That would require that we know who (and how many) will benefit from the award, and we would need to make assumptions regarding their future income and tax situation. However, if the award is paid to the estate, then it seems that the court may not even know who will eventually receive the award, so a gross-up at the time of judgment would be impossible.

In an earlier Expert Witness article (“Implications of Duncan v. Baddeley“, The Expert Witness 2[2]) Christopher Bruce argued that a tax gross-up is not necessary for estate claims if there is no presumption that the estate is expected to invest the award in order to replace a future stream of lost income. However, without a gross-up, the estate will need to spend the entire award almost immediately in order to avoid tax-attracting interest, which would result in under-compensation. And if compensation is not the goal, then what is the purpose of deducting tax at all? Why not base the estate’s claim on gross income?

Fatal accident cases with dependants

In circumstances in which there are surviving dependants after a fatal accident, two additional questions arise. First, “What sort of claim would be more valuable, one under Fatal Accidents or one under Survival of Actions?” The second obvious question is, “Can there be two claims, one under Fatal Accidents and one under Survival of Actions?” The answer to the first question, under most (if not all) circumstances is that a loss of dependency claim under Fatal Accidents would be more valuable (see Christopher Bruce’s “Implications of Duncan v. Baddeley“, The Expert Witness 2[2]). The answer to the second question may seem clear, but is not.

Most would probably not expect that the courts will allow surviving dependants to receive compensation for their loss of income and household services dependencies, and at the same time allow the estate to receive compensation for a portion of the income that the deceased would have earned. However, it may be possible for these two claims to co-exist if they do not overlap. That is, the survivors could be compensated for their loss of dependency, and the estate could be compensated for its loss, to the extent that the estate’s loss has not already been claimed by the dependants. For example, under a sole-dependency claim (where, say, there is only a dependant spouse), the spouse receives compensation for approximately 70 percent of the deceased’s after-tax income. The 30 percent that the spouse does not receive is the component of the deceased’s income that benefited the deceased exclusively. However, not all of that 30 percent would have been for necessities and therefore a portion may be claimable by the estate.

Also, if the court decides to apply a divorce (or remarriage) contingency to the dependant spouse’s loss, his or her award may be reduced dramatically. The part of the spouse’s award that is “lost” due to the divorce/remarriage contingency may be claimable by the estate. Taking this a little farther, it is possible that the estate could claim the component of the dependant’s award that is “lost” due to the application of a contingency for the survivor’s probability of survival.

If there is no surviving spouse but there is a surviving child, then under Fatal Accidents, we usually see that the surviving child’s claim only extends to his or her age of financial independence (usually age 18-22). Since the deceased may well have continued to earn income after this point, it seems plausible that for the period after the child’s “independence age”, the estate may be able to make a claim under Survival of Actions. For example, we could observe a case in which a surviving child claims an income and household services dependency loss over the period during which the deceased would have been age 35-45; and then the estate claimed a loss of income from the deceased’s age 46 to retirement.

Despite the difficulties involved in calculating the estate claim under Survival of Actions; from an economic (and, I would hope, logical) standpoint, it seems reasonable that we should be able to incorporate these estate claim “add-backs” after determining an appropriate award for loss of dependency.

Conclusion

The Duncan decision has left us with many questions about how to deal with estate claims. Before these can be answered, it seems that the Court will need to determine whether the goal of these claims is one of compensation or of deterrence. If compensation is the goal, then our task is to determine how to fairly compensate a deceased person’s heirs (the estate), when their financial loss due to the death is (in many cases) minor. If the goal is one of deterrence, then damages should reflect what the deceased’s contribution to society would have been – still a difficult task.

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

Implications of Duncan v. Baddeley

Posted on June 1, 1997April 18, 2017 By economica

by Christopher Bruce

This article first appeared in the summer 1997 issue of the Expert Witness.

The recent decision in Duncan v. Baddeley (Alberta Appeal #9503-0408-AC), provides important direction for both fatal accident and “lost years” claims. In this article, I review a number of the implications of this decision for the assessment of tort damages. The first part of the article deals with fatal accident claims. The remainder discusses “lost years” claims.

Fatal Accident Claims

Justice Kerans ruled that, regardless of whether the deceased had any dependants,

. . . in Alberta a claim for loss of future earnings does survive the death of the victim. And, with two important qualifications, that claim should be assessed as would any claim for loss of future earnings (Duncan, at 2).

The two qualifications to which he referred are that deductions are to be made from the deceased’s projected annual income for (i) income taxes and (ii) the “cost of personal living expenses.”

The purpose of this section is to assess the impact of the Duncan decision on the calculation of damages in fatal accident cases. This assessment is conducted in three parts. In the first of these, I review the calculation of the two deductions. In the second, I consider the arguments concerning a “tax gross up” in calculations based on Duncan. Finally, in the third, I identify whether there are any cases in which dependants, who are eligible to sue under the Fatal Accidents Act, might find it advantageous to base their claim on Duncan (that is, on the Survival of Actions Act).

Method of Calculation

Justice Kerans ruled that the income taxes which would have been paid by the deceased must be deducted from gross income when calculating the loss to the estate. Although he appears to believe that the deceased would have paid “. . . taxes in the area of 30 to 40 percent of his income,” Statistics Canada data suggest that the average Canadian household pays only 20 percent of its income as income taxes — with a range from about 10 percent to 30 percent.

Second, an amount is to be deducted from after-tax income for the “costs of personal living expenses.” After canvassing a number of alternative methods for calculating this deduction, Justice Kerans settled on an approach which he attributed to Constance Taylor, the plaintiff’s counsel. This method, which Justice Kerans refers to as the “available surplus” approach, was first enunciated in the U.K. Court of Appeal in Harris v. Empress Motors (1983) 3 All E.R. 561 and later adopted in one of the first Canadian cases concerning the “lost years deduction,” Semenoff v. Kokan (1991) 84 D.L.R. (4th) 76. In the latter case, the court concluded that the “conventional deduction” was 33 percent of income.

Kemp and Kemp on the Quantum of Damages explains how the available surplus approach is to be applied, using an example similar to the following: assume that a deceased male would have married and had two children. Of the family’s after-tax income, approximately 22 percent would have been spent on items which benefitted the deceased alone. In addition, approximately 40 percent of family income would have benefitted all members of the family equally. Thus, if one-fourth of that portion of income, or 10 percent, is allocated to the deceased, the total fraction of family income which would have benefitted the deceased is approximately 32 percent.

Two points need to be made with respect to the available surplus approach. First, it should be noted that if this approach was to be applied to an individual who had no reasonable prospect of being married over the period of her or his loss, the value of the damages which would be calculated would equal those calculated using the “lost savings” approach. That is, as all of a non-married individual’s expenditures are spent on him or herself, once personal expenditures have been deducted from after-tax income it is only savings which will remain. As Justice Kerans was highly critical of the lost savings approach, it appears that the available surplus approach may not stand up to scrutiny. Indeed, although Justice Kerans indicated that it was the plaintiffs who had argued for the available surplus approach in Duncan, a review of their submissions suggests that it is the “conventional approach” which they preferred. (See the discussion of “lost years,” below.)

Further, as Scott Beesley argued in “Shortened Life Expectancy: The ‘Lost Years’ Calculation” (Vol. 1(1) of The Expert Witness), it is difficult to argue that wealthy individuals spend as much as 32 percent of their incomes on the “costs of personal living expenses.” Rather, as incomes rise, an increasing portion of expenditures is devoted to items which could only be categorized as “luxury”. Thus, at least for high income earners, one would assume that the appropriate deduction would be less than 32 percent — and for low income earners it would be greater than 32 percent.

Income Tax “Gross Up”

Whereas an income tax “gross up” is allowed in most fatal accident cases, it is not allowed in personal injury claims for lost earnings. The usual rationale which is offered for this is that the effect of basing (personal injury) damages on gross (before-tax) income is to produce an award which is approximately equal to that which would have been obtained by “grossing up” a lump sum award based on after-tax income.

In Duncan, even though income tax was deducted, as in other fatal accident cases, no allowance was made for a tax gross up. It is my view that no gross up will be allowed in cases brought under a Duncan type of claim. The reason for this is that the tax gross up is only required if the plaintiff is expected to invest her or his award in order to replace a future stream of lost income. In Duncan claims, however, there is no presumption that the estate will invest the award in such a way as to replace the deceased’s income stream on a year-by-year basis. Hence, it appears that no gross up will be necessary.

Distinction Between the “Fatal Accidents Act” and the “Survival of Actions Act”

It appears from Justice Coté’s concurring decision in Duncan that overlap between Fatal Accidents Act and Survival of Actions Act claims will be possible in only extremely exceptional circumstances. Hence, it will be important to determine which of these Acts will yield the higher award to the plaintiffs in those cases in which they are eligible to select between those two causes of action — that is, in cases in which the plaintiffs are also dependants of the deceased.

It appears that in most circumstances dependants would receive a higher award under the Fatal Accidents Act than under the Survival of Actions Act. There are three reasons for this. First, whereas it is only that portion of family income which the deceased spent directly on him or herself which is deducted in a traditional fatal accident claim, in a Duncan type of claim, it is this amount plus the deceased’s share of common family expenses which is to be deducted. Second, no claim for loss of household services can be made in a Duncan claim. Finally, it appears that no tax gross up will be allowed in the latter claim.

There are, however, two factors which might make it advantageous for dependants to file their claim under the Survival of Actions Act. First, if the Alberta courts should decide that it is the cross dependency approach which is to be employed when calculating losses under the Fatal Accidents Act, a deduction will be made for the portion of the survivors’ incomes which was spent on the deceased. No such deduction was contemplated in Duncan. As this deduction can be very substantial — particularly when the survivors earn more than the deceased — high income survivors may be able to make a larger claim under the Survival of Actions Act than under the Fatal Accidents Act. (It should be noted, however, that many experts recommend use of the sole dependency approach. See, for example, my article, “Calculation of the Dependency Rate in Fatal Accident Actions” [Vol. 1(4) of The Expert Witness].)

Second, damages in fatal accident claims are reduced for the possibility that the surviving spouse may remarry. In cases in which this possibility is very high — usually those involving individuals less than 35 years old — the survivor may find it advantageous to claim under the Survival of Actions Act.

Alternatively, it has recently been suggested to me that it may be possible to add together a “standard” claim under the Fatal Accidents Act and some portions of the deceased’s income which cannot be claimed by dependants under the Fatal Accidents Act but which are permissible under the Survival of Actions Act. One such portion might be the “non-necessary” element of the deceased’s expenditures on him or herself. This portion would be deducted in a standard fatal accident claim but might be claimable under the Survival of Actions Act.

“Lost Years” Actions

Duncan also has important implications for the assessment of damages in “lost years” claims; that is, in personal injury claims in which the plaintiff’s life expectancy has been shortened significantly. In these cases, the courts have ruled that a deduction for the cost of necessities is to be made from the income which the plaintiff would have earned during his/her lost years.

Although Justice Kerans appeared to accept the “available surplus” approach to the calculation of this deduction, this approach necessarily becomes identical to the “lost savings” approach when the deceased could have been expected to remain single — and Justice Kerans had explicitly rejected the latter approach. With respect, I suggest that Justice Kerans’ discussion in Duncan is more consistent with the application of what is known as the “conventional deduction” approach than it is with the “available surplus” approach.

First, Justice Kerans expressed his approval of the B.C. Court of Appeal’s reasoning in Semenoff v. Kokan, in which the court appeared to have had in mind the “conventional deduction” approach. Second, the 20-30 percent deduction recommended by Justice Keran in Duncan was consistent with the 33 percent deduction adopted only two months earlier in the Alberta trial division decision: Brown and Fogh v. University of Alberta Hospital. In that decision, Justice Marceau explicitly adopted the “conventional deduction” approach.

Together, it appears that Semenoff, Brown, and Duncan signal a preference for a conventional deduction of approximately 30 percent in both fatal accident and lost years actions.

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).

Damage Calculations in Fatal Accident Actions After Galand

Posted on September 1, 1996April 18, 2017 By economica

by Christopher Bruce

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

In an article published in the summer 1996 issue of this newsletter, I reviewed the theoretical arguments raised by Coté, J. A. in Galand Estate v. Stewart (1992), 6 Alta. L. R. (3d) 399 (Alta. C.A.). What Justice Coté concluded in his decision was that, in certain circumstances, the estate of a deceased could rely on the Survival of Actions Act to make a claim for loss of earnings. What was less clear in Galand were the types of cases in which such claims would be allowed; and the methods by which damages were to be calculated. The purpose of this article is to identify some of the issues which can be expected to influence the decisions concerning these two issues.

Cases in which Claims will be Allowed

There are at least four types of cases for which it appears that claims will be allowed. First, it appears that an estate will be able to claim under survival of actions legislation when a plaintiff dies after a personal injury trial but before legal proceedings have been completed. In the British case of Pickett v. British Rail Engineering Ltd. (1980), A.C. 136 (H.L.), for example, the plaintiff died after a personal injury trial but during the appeal process; and in the Canadian case of Hubert v. De Camillis (1963), 41 D.L.R. (2d) 495 (B.C.S.C.), the plaintiff died after trial but before the decision had been rendered. In both cases, the estate was successful.

Second, in Galand, Justice Coté noted that

…by the date of trial some of the wage loss of a deceased person may well be past and already incurred and exactly quantified…. So even on the respondent’s view of the law, this cause of action may exist and survive (at 405).

Third, Justice Coté also argued that in a case in which a beneficiary of the deceased was not a dependent and

…the premature death of the deceased clearly deprived the beneficiary of part of his inevitable inheritance… [t]here is a plain financial loss (at 406).

Finally, two of Justice Coté’s examples pointed to the conclusion that he would have been willing to award damages under the Survival of Actions Act in a case in which the deceased had a “…completely secure salary and employment … at the time of his injury or death” (at 403). He referred specifically to the case of a tenured university professor (at 403) and to Wayne Gretzky when he was single (at 406).

The only Alberta case to award damages for lost income under the Survival of Actions Act since Galand is McFetridge Estate v. Olds Aviation Ltd. (unreported, Edmonton, April 12, 1996). In that case, the deceased had been a successful businessman whose future income stream Justice Lee found to be easily quantifiable. That is, it appeared to have fallen into the fourth of the categories identified above.

What is not yet known is how the Appeal Court will deal with cases of a more speculative nature, such as those involving the loss of lifetime income of an individual who was a minor at the time of his or her death. This issue may be decided later this year when the appeal is heard in Duncan Estate v. Bradley (1994), 161 A.R. 357 (Alta. S.C.).

Assessment of Damages

Section 5 of Alberta’s Survival of Actions Act states only that:

5. If a cause of action survives under section 2, only those damages that resulted in actual financial loss to the deceased or his estate are recoverable… (emphasis added)

What is not indicated is how the courts are to assess “actual financial loss” to an estate. Nor does the decision in Galand offer a great deal of assistance as the court was asked only to consider the issue of whether a cause of action survived a plaintiff’s death – not what that “action” might be.

Nevertheless, the courts have provided some information concerning the approaches which they prefer. Three of these will be considered here.

The loss of inheritance approach: In Toneguzzo-Norvell v. Burnaby Hospital, [1994] 1 S.C.R. 114, Madame Justice McLachlin (at 127-128) cited approvingly from Cooper-Stephenson and Saunders (Personal Injury Damages in Canada (1981) at 244) who argued that:

…the award of damages to a very young child for prospective loss of earnings during the lost years should reflect only that portion of the entire lifetime earnings which the court estimates would have been saved by the child for his estate, at the end of his pre-accident life expectancy (emphasis added).

The rationale which Cooper-Stephenson and Saunders offered for this position was that “…the prime purpose of the award during the lost years is to make provision for [the deceased’s] dependants” (at 243). In short, as the purpose of tort damages is to compensate the plaintiffs, an award based on a more liberal approach would result in a “windfall” for the dependants.

In Alberta, there is a number of weaknesses to this approach. First, the “windfall” argument has already been rejected by the majority in Galand. Second, as will be noted below, there is reason to believe that Galand sets a precedent for use of the “lost years” approach.

Also, Section 5 of the Act states that “…damages that resulted in actual financial loss to the deceased or his estate are recoverable” (emphasis added). On a plain reading, “loss to the deceased” would appear to imply something more than “loss of inheritance.” Finally, in Galand Justice Coté cited Pickett as precedent for the view that an estate should be able to “…recover for tortious loss of earnings or earning capacity of the deceased” (at 407, emphasis added).

The lost years approach: Assume that the plaintiff’s injuries have reduced her life expectancy from 40 years to 10 years. During the 30 years which have been “lost,” the plaintiff would have received income which would have been offset, to a certain extent, by expenditures on “necessities.” The theory behind the “lost years approach” is that, during those 30 years, the plaintiff has lost the pleasure associated with the difference between her income and her living expenses. (This issue was discussed in greater detail in the first issue of this newsletter.) During the remaining 10 years, she will be entitled to her full loss of earnings (as she will have to incur her full living expenses during those years).

Now assume that, instead of having a reduced life expectancy of 10 years, the plaintiff’s life expectancy has been reduced to two years. In a personal injury action, she would be entitled to damages equal to her income during those two years plus the difference between her income and her expenses in the remaining 38 “lost” years.

By simple extrapolation, it is seen that if the plaintiff’s life expectancy has been reduced to one year, or one month, or one week, a similar calculation can be made. And if we take the argument to its logical conclusion, if the plaintiff’s life “expectancy” has been reduced to one second, the “lost years” approach would suggest that damages should equal the difference between her projected lifetime earnings and her projected lifetime expenses in the 40 years which have been “lost.”

Both the Pickett and Hubert cases discussed above offered support for use of the lost years approach. If the estate of a plaintiff who has died soon after a trial is to be awarded damages based on the lost years approach, it would seem to be difficult to justify a different approach in the case of a plaintiff who has died soon before (or during) a trial. Furthermore, both Justice Coté’s approval of Pickett and his comment that “…the deceased had a cause of action for loss of future earnings because life expectancy was shortened.” (Galand at 404, emphasis added) seem to suggest that the Alberta Court of Appeal is prepared to employ the lost years approach.

Nevertheless, an inconsistency arises when the lost years approach is extrapolated from personal injury cases to fatal accident cases. One rationale for the lost years approach in the former is that the plaintiff could, in principle, replace the pleasure foregone during the lost years by spending her award during her remaining years. That is, the award in such a case can be seen as compensatory to the plaintiff. This rationale is missing in fatal accident cases (although it is also missing in personal injury cases involving plaintiffs who have become “vegetables”).

Loss of a capital asset: In a leading Supreme Court of Canada case, The Queen v. Jennings ((1966), 57 D.L.R. (2d) 644), Judson, J. concluded that if a plaintiff “…has been deprived of his capacity to earn income… [i]t is the value of that capital asset which has to be assessed” (at 656, emphasis added). Further, in Andrews v. Grand & Toy (1978) D.L.R. (3d) 452 (S.C.C.), Mr. Justice Dickson argued that this asset should be assessed at the value which it possessed before the injury; that is, unreduced for the lost years.

The controversial question then arises whether the capitalization of future earning capacity should be based on the expected working life span prior to the accident, or the shortened life expectancy…. When viewed as the loss of a capital asset consisting of income-earning capacity rather than a loss of income, the answer is apparent: it must be the loss of that capacity which existed prior to the accident (at 469-70).

But if one’s future earning capacity is to be treated as a capital asset, how is that asset to be valued? Two possibilities present themselves. First, as Mr. Justice Dickson implies, one could simply capitalize the future stream of income into a commuted value.

Alternatively, however, one could recognise that the value of a physical asset is not the capitalized value of its future stream of total earnings, but the value of those earnings net of the expenses of operation and maintenance. In that case, the loss of the capital asset, “future earning capacity”, would be found by capitalizing the individual’s future stream of earnings net of expenditures on necessities. That is, the capital asset approach may produce a result similar to that obtained using the lost years approach. Interestingly, this rationale for the lost years method does not encounter the objection raised above – that it assumes the plaintiff will live long enough to consume the award.

Implicitly, Justice Lee accepted the capital asset approach in McFetridge. There, the estate was awarded damages equal to the reduction in the value of the deceased’s businesses.

Comment

If the Court of Appeal does not reverse the Galand decision entirely when it hears the Duncan appeal, I believe that the law will develop as follows: First, the arguments made in the preceding section seem to suggest that it is the lost years approach which will be used to value damages, although the court may couch its decision in terms of the capital asset approach.

Second, over time, I believe that the courts will apply survival of actions legislation to all types of cases, including those involving minors. The reason for this is that once the courts allow actions in cases involving plaintiffs with “well-established” career patterns, such as tenured university professors, they will encounter difficulty distinguishing those situations from cases in which the deceased was “secure” in his or her career, such as a 35 year-old mechanic or engineer. This will give the courts difficulty distinguishing the latter from recent university or technical school graduates, graduates from high school students, and high school students from infants. Eventually, therefore, the estates of all fatal accident victims will be able to claim under the Survival of Actions Act.

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).

Fatal Accident Cases After Galand

Posted on June 1, 1996April 18, 2017 By economica

by Christopher Bruce

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

The Alberta Court of Appeal decision in Galand Estate v. Stewart (1992), 6 Alta. L. R. (3d) 399 opened the possibility that the estate in a fatal accident action could claim for the deceased’s loss of earning capacity (both past and future). Subsequently, two trial decisions – Duncan Estate v. Bradley (1994), 161 A.R. 357; and McFetridge Estate v. Olds Aviation Ltd. (unreported, Edmonton, April 12, 1996) – have been rendered which offer interpretations of the Galand decision.

In this, the first of two articles on the Galand decision, the arguments raised in these three decisions are summarised. A second article, to be published in the next edition of this newsletter, will discuss the implications of these decisions for the calculation of damages in fatal accident actions.

Galand Estate v. Stewart

In Galand, the estate of the deceased based a claim for the “…value of the present capital loss of earning capacity of the deceased…” on sections 2 and 5 of Alberta’s Survival of Actions Act:

2. A cause of action vested in a person who dies after January 1, 1979, survives for the benefit of the estate….

5. If a cause of action survives under section 2, only those damages that resulted in actual financial loss to the deceased or his estate are recoverable… (emphasis added)

The defendants raised two substantive arguments against the existence of the plaintiff’s cause of action. First, they argued that a loss of earnings could not constitute an “actual financial loss,” as required under section 5; and, second, they questioned the policy of providing a “windfall” to persons who are not dependents, on the ground that such a provision was not consistent with tort law’s fundamental goal of compensation.

Actual Financial Loss

In Galand, Coté J.A. (with Belzil J.A. concurring) considered and rejected three versions of the defendant’s position concerning actual financial loss. First, he did not accept the argument that a loss of future earnings was not “actual” because it was necessarily “speculative” or “contingent.” He countered with the example of a fatal accident victim with no dependents who had a completely secure salary and employment, such as a tenured university professor. Second, he rejected the proposition that “actual” and “real” necessarily implied “present,” not “future.” Finally, he did not agree that s. 5 barred claims for “general damages,” such as losses of future earnings. In his words, “[h]ad the Legislature meant ‘special damages’, it would have said so” (at 407).

Hembroff J. made it clear in Duncan that he did not agree with the majority reasoning in Galand. In particular, he quoted Black’s Law Dictionary as defining “actual” to mean

“… having a valid objective existence, opposed to that which is merely theoretical or plausible; opposed to hypothetical or nominal…”

[Randolph Langley, in a paper entitled Wrongful Death Claims, prepared for the Legal Education Society of Alberta, notes, however, that Black’s definition of “Damages: actual damages” includes:

“… Synonymous with “compensatory damages” and with “general damages” (emphasis added, Black’s 6th Edition, at 390).]

Windfall Gain

Coté J.A. also rejected the argument that actions for loss of future earnings should be denied because they represented a windfall to the beneficiaries of the estate rather than compensation. First, he noted that in some circumstances an individual who was the beneficiary of an estate might not be a dependent under the Fatal Accidents Act. Such an individual would be deprived of part of his inheritance from the deceased if he could not make a claim based on the Survival of Actions Act. Second, he noted that if the deceased had lost an income-producing machine at the moment of death, there would have been no doubt that his estate was entitled to claim full compensation for destruction of that machine. Yet such compensation might also represent a windfall to his estate.

Again, Hembroff J. dissented, citing Madam Justice McLachlin’s argument, in a case involving a young girl who had a severely shortened life expectancy, (Toneguzzo-Norvell v. Burnaby Hospital [1994] 1 S.C.R. 114), that

“… the award for lost earning capacity will serve but one purpose: to enrich her heirs” (at 127, emphasis added).

Similarly, Hembroff J. concluded that the “..tragic loss of a son should not be the notional income producing machine that puts money, ‘windfall or otherwise’ into the hands of his parents” (at 83).

Comment

Justice Hembroff’s objections notwithstanding, Justice Coté’s decision concerning “actual financial loss” was enunciated sufficiently clearly that most lower courts will find they are forced to conclude that estates do have a cause of action for general damages – it is only the measure of damages (to be discussed in the next issue of this newsletter) which remains uncertain.

A similar conclusion must be reached with respect to the treatment of beneficiaries of the estate of a deceased who are not also dependents. Here, Justice Coté was also clear, that the estate’s claim is to survive.

The decision in Galand with respect to “windfall gains” was stated much less clearly, however. The only assistance which Justice Coté provided to the trial courts derived from his analogy between the earning capacity of Wayne Gretzky and that of an “income-producing machine;” and from his decision that a loss of earning capacity could be considered to be an actual financial loss.

Two conclusions seem possible from this ruling. The first is that compensation is to be awarded only in those cases in which the deceased had a well-established earnings stream. The second is that compensation is to be awarded in all cases in which it can be shown, on balance of probabilities, that the deceased would have been a productive member of society. (Justice Coté’s decision concerning actual financial damages would appear to preclude the conclusion that damages are never to be awarded.)

Of these possible interpretations, Justice Coté appears to prefer the former. The examples which he provides in support of his conclusion that a loss of earnings is an actual financial loss all concern situations in which the individual’s earning capacity was well established – see his examples concerning tenured professors and Wayne Gretzky. Furthermore, his apparent reluctance to award damages “…in the case of the death of young children without a job or other source of income…” (at 407) could reasonably be interpreted to result from the difficulty of calculating such damages.

To conclude, it appears that the estate will be able to claim damages for loss of earnings when the deceased had a well-established earnings stream. It is not yet known, however, where the line will be drawn between these cases and those in which no clear earnings pattern has been established. The Court will have an opportunity to clarify this issue later this year when it is scheduled to hear an appeal of Duncan.

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).

Economica

Assessment of damages in personal injury and fatal accident litigation

Category: Survival of Actions Act