McGILL LAW JOURNAL
[Vol. 26
Loss of Future Income In Actions for Damages
I
Four judgements assessing the loss of future income were
rendered by the Supreme Court of Canada in 1978.1 In three cases
the plaintiff had sustained serious injuries, and in the fourth a
widow had submitted a claim under The Fatal Accidents Act of
Ontario.2 The Court’s approach to the capitalization rate 3 in these
cases has led to a more flexible method of assessing damages, and
it is now possible to review how lower courts have applied the
judgements of the Supreme Court in this regard.
In principle, persons who suffer total loss of earning capcity,
or persons who lose the benefit of their spouse’s earning capacity,
are entitled to compensation for their loss. Since 1978 the courts
have attempted to measure the loss of earnings for the victim’s
entire estimated working life. The loss is capitalized on the assump-
tion that the capital amount will be spent by the victim or his sur-
vivors during their lifetimes. If, during the victim’s life expectancy,
salaries increase at a faster rate than returns on investment, there
would be a negative discount rate; but in recent economic history
salaries have increased at a lower rate. Hence, to arrive at the
discount rate, the courts have predicted the future rate of return
and deducted from that an estimated rate of inflation.
Speaking for a full and unanimous bench in the Andrews case,
the Supreme Court’s method in these
Dickson J. summarized
matters as follows:
‘Andrews v. Grand & Toy Alberta Ltd [1978] 2 S.C.R. 229; Thornton v.
Board of School Trustees of School District No. 57 (Prince George) “1978]
2 S.C.R. 267; Arnold v. Teno, Jackson v. Teno [1978] 2 S.C.R. 287; Keizer v.
Hanna & Buch [1978] 2 S.C.R. 342.
2R.S.O. 1970, c. 164.
3 It may be predicted that in this area of the law of damages courts will
increasingly use such phrases as “capitalization rate”, “discount rate” and
“net discount rate”, though at present there is some ambiguity in these
terms. The “capitalization rate” is the rate of return on a portfolio fully
invested, less a percentage for investment expenses, portfolio distribution
and the like, which in some cases is referred to as a “discount rate”. But
in most cases, including several Quebec cases discussed below [infra, notes
10, 11-15], the “discount rate” contemplated is a net discount rate, which
is determined by deducting a rate of inflation from the rate of return on
investments.
1980]
COMMENTS – COMMENTAIRES
The approach which I would adopt … is to use present rates of return
on long-term investments and to make some allowance for the effects
of future inflation. Once this approach is adopted, the result, in my
opinion, is different from the five per cent discount figure accepted by
the trial judge. While there was much debate at trial over a difference
of a half to one percentage point, I think it is clear from the evidence
that high quality long-term investments were available at time of trial at
rates of return in excess of ten per cent. On the other hand, evidence
was specifically introduced that the former head of the Economic Council
of Canada, Dr. Deutsch, had recently forecast a rate of inflation of
three and one-half per cent over the long-term future. These figures
must all be viewed flexibly. In my opinion, they indicate that the
appropriate discount rate is approximately seven per cent. I would
adopt that figure. It appears to me to be the correct result of the
approach I have adopted,
investment
market conditions and making an appropriate allowance for future
inflation. I would, accordingly, vary to seven per cent the discount
rate to be used in calculating the present value of the awards for
future care and loss of earnings in this case. The result in future cases
will depend upon the evidence adduced in those cases. 4
The prediction of 3 / % for long-term inflation was originally
advanced in 1973 by the Commission of Inquiry which the Minister
of Labour had appointed to study an agreement between the unions
and the railway companies on increased pension benefits. In his
report the Commissioner, the late 3.3. Deutsch, stated that
i.e., having regard to present
in order to determine the expected long-run average rate of earnings
on the new funds that will be required to finance the pension improve-
ments, and also the future rate of increase in wages on which pension
contributions and benefits will be based, it is first necessary to make
an assumption about the long-run future rate of inflat.on. I have taken
the assumption of an average annual rate of increase in consumer prices
of 31/ per cent a year as a reasonable working basis over the next
several decades. 5
Dr Deutsch estimated a 3% cost average annual rate of increase in
real output per employee in the industrial composite for Canada,
and 3% as an average annual rate of inflation. With these assump-
tions he estimated that the long-run average rate of increase in
earnings per employee would be 61/2% per annum.0
Dr Deutsch used a rate of 7% to estimate the long-term return
on money invested in Canada bonds. 7 He then increased this to 8%
!.Andrews, supra, note 1, 258-9.
5 Report of the Commission of Inquiry, Appointed by the Minister of
Labour relating to an Agreement reached on Increased Pension Benefits
by the Unions and the Railroad Companies, Presented to the Honourable
John Munro, Minister of Labour, 27 December 1973, p. 5.
6 Ibid., 7.
7Ibid., 9.
McGILL LAW JOURNAL
[Vol. 26
by assuming that private pensions would continue to invest in a
diversified portfolio of equities, premium corporations, municipal
bonds, provincial bonds, real estate and mortgages. He believed
that such a portfolio could be expected to earn a net rate of return
on new money at about one percentage point higher than the
estimated Canada bond rate. For other reasons he concluded that
one could expect 9% in the net rate of earnings on new money and,
while keeping the assumed rate of increase in employee earnings
at 6/ %, he arrived at a margin of 2/ % between the annual
average rate of increase in employee earnings and the net rate of
return on new money.
While some courts have continued to apply Dr Deutsch’s prin-
ciples, albeit varying the discount rate as the predicted inflation
rate rose, few have taken notice of the following quoted passage
in his report:
Whatever the official text of the pension plan may say, the long term
purpose of the pension fund is not to provide so many paper dollars
many years hence but to provide a slice of the country’s productive
capacity; so much food, clothing and shelter when the employees are
too old or too disabled to produce goods and services
themselves.
The real problem is how to accumulate the purchasing power of the
contributions made at any time by employer and employee as purchas-
ing power to be utilized many years hence. With these considerations
in mind, money should be regarded as a medium of exchange rather
than a store of value.
It is here that so much conflict arises with the concept of the “trust”.
The trustee of public imagination is somebody who protects dollars with
miserly care. The modem trustee applies his energy
to protecting
purchasing power. This may be achieved either by purchase of equity
in some form or fixed securities with a sufficiently high yield to offset
probable long term inflation and still give an attractive real return.8
II
Since 1978 several judgements in the Superior Court of Quebec
have been rendered using a variety of discount rates; on the strength
of Mr Justice Dickson’s statement in Andrews that the appropriate
discount rate in calculating awards for future care and loss of
earnings should depend upon evidence adduced in each case.9
In Daoust v. Bdrub910 Ryan J. awarded $126,000 for loss of future
income in a total award of more than $400,000 to a paraplegic of
8Ibid., 10, quoting from Mercer and Coward, Canadian Handbook of
Pension and Welfare Plans, 4th ed. (1972), 84-5.
DSupra, note 4.
10 [1978] C.S. 618 [under appeal].
19801
COMMENTS – COMMENTAIRES
twenty-one years. While the Court referred to the Andrews judge-
ment,” no actuarial evidence was tendered; an arbitrary retirement
age of sixty was postulated and the working years multiplied by a
presumed annual salary of $6,000, from which 40% was deducted
for the contingencies of life. Similarly, in Dugal v. Le Procureur
gdngral de la province de Qudbec’ 2 Letarte J. awarded $1,015,315.14
for the loss of future revenue in a total judgement of $1,575,301.40
to a paralyzed twenty-five-year-old male student. The Court in
this case used a capitalization rate of 3%, but the parties had
previously agreed to this figure. However, notwithstanding the trend
in Quebec courts to use a capitalization rate of 3%, Johnson J.
gave judgement in Gendron v. Lignes Agriennes Canadien Pacifique
Ltde which rejected actuarial evidence in support of that figure
and returned to the rate of 7% which was approved by the Supreme
Court in the Andrews case.’3 Actuarial evidence concerning the
assessment of future earnings was accepted by Nolan J. in Therrien
v. Therrien & Paquette,4 in so far as it related to the cost of an
annuity which would compensate the plaintiff for the loss of wages
he would suffer as a result of his disability. But, even where a fixed
capitalization rate is agreed or accepted, obvious difficulties in the
evaluation of actuarial evidence arise when expert witnesses submit
markedly different figures for the capital amount necessary to
replace lost earnings, as was the case in Campeau v. La Socigtg
Radio Canada.’5 Another jurisprudential incident of this question,
which may affect the disposition of awards in Quebec, is illustrated
by the dictum of Nadeau J. in Lapierre v. Le Procureur gendral de
la province de Qugbec that judgements such as the damage awards
rendered by the Supreme. Court in 1978 do not have the same
binding effect as the Court’s decisions on matters arising under
the Civil Code, though they may have a persuasive influence in the
provincial courts.””
In Ontario, the High Court of Justice gave judgement in Cobean
v. Northern & Central Gas Corp. Ltd with heavy reliance on the
evidence of an actuary, Ron Walker, who has testified in some
fifteen cases of this kindY.1 Callaghan J. adopted economic studies
showing that approximately 70% of the net income of a man with a
“Ibid., 623.
12 [1979] C.S. 617.
13 C.S. (Montreal, 500-05-024226-761),
17 March 1980;
in appeal, 500-09-000
410-803.
14 C.S. (Montreal, 05-013-843-766), 8 May 1979.
15 [1979] C.S. 637.
16 [1979] C.S. 907, 919-20.
17 Unreported judgement, 3 July 1979.
McGILL LAW JOURNAL
[Vol. 26
family is allocated to the support of his wife and home, with an
additional 4% for the support of each child up to the age of
three.”8 Mr Walker projected an increase of 7% per annum in the
deceased’s salary, which he described as a conservative prediction
of long-term inflation in Canada, 19 but this prediction was challeng-
ed by two academic economists. Professor Parkin of the University
of Western Ontario opined that a rate of inflation of 2 to 3% could
be achieved in the 1980’s, and Professor Carr of the University of
Toronto claimed that monetary and fiscal trends can only be
accurately predicted over a period of two or three years. He was
of the opinion that current investment rates were in the region of
10% per annum and, since historical real interest rates were 3%,
an inflationary premium was charged in the marketplace in order
to guarantee investors a real interest rate of 3%: accordingly, said
Professor Carr, the marketplace was trading on the expectation of
7% as the long-term rate of inflation. Clearly, this nearly doubles
the rate projected by Dr Deutsch and accepted by the Supreme
Court in the Arnold and Jackson cases However, Professor Carr
added that if Dr Deutsch had had the historical rates for 1969 to
1978 instead of only those for 1963 to 1972, he would have arrived
at the same conclusion, and Callaghan J. accepted this opinion.
There was also an issue in this case as to whether the courts
should consider an investment portfolio of mixed bonds and selected
Canadian common stocks of the blue-chip variety, or whether it
should restrict itself to what could be expected as a total return
from Canadian or government bonds. Despite evidence that the
market was ripe for investment in equities in order to hedge against
inflation, because of rising dividends and capital appreciation of
common stocks, the court rejected this suggestion, claiming that it
would not be without risks.
In summary, the court accepted that 10% was an appropriate
long-term interest rate, less 1% for investment expenses and port-
folio distribution. Callaghan J. also analyzed the possibility of
marriage breakdown, of re-marriage, of the plaintiff widow’s pre-
mature death, and of the deceased retiring or becoming incapable;
he ruled that none of these possibilities was likely to be realized,
and thus that no amount should be deducted for contingencies. In
conclusion he awarded $697,077 to the widow and two children of
a thirty-year-old optometrist with average earnings of $40,000.
A discount rate of 3% was applied by the Ontario Court of
Appeal in two other cases, but in a more recent decision, Julian v.
18Ibid., at p. 21 of the transcript of reasons.
19 Ibid., 14.
20 Supra, note 1.
1980]
COMMENTS – COMMENTAIRES
Northern & Central Gas Corp.,2 the Court applied a rate of 2%. In
this case, Morden J.A. awarded $470,000 to the widow of a thirty-
year-old dentist whose net income was assessed at $41,250. Once
again Mr Walker appeared for the plaintiff and argued for a 7%
long-term inflation rate and a 9% gross discount rate. Deducting
one from the other, the Court ruled that a 2% net discount rate
would be reasonable; a deduction of 20% was made for contingen-
cies of marriage breakdown, early retirement and the additional
risk of the dentist being a part-time pilot, but no order was made
that the widow invest in common stocks. Morden J.A. noted that
the expert evidence given by actuaries and economists appeared to
describe economic conditions existing at the time of the trial in
1978, but their calculations were applied to conditions at the time
of the accident. The Court recommended the approach taken by
the House of Lords in Cookson v. Knowles,22 and described it as
follows:
This approach involves splitting the damages into two parts: (1) the
pecuniary loss which it is estimated the dependents have already sustain-
ed between the date of death and the date of the trial; and (2), the
loss which it was estimated they would suffer from the trial onward.
If this approach had been followed in the present case, there would
have been no need to reach back to the date of death to see to it that the
fund contemplated in the evidence is actually established. There are
other obvious advantages in approaching the assessment in this realistic
and logical way.2 3
The Court took the present value of the loss of earnings as cal-
culated by the actuary and used a discount rate of 3% and, rather
than deducting a percentage from the rate of return for investment
expenses, awarded a lump sum of $26,222.48 under this heading.
In the Supreme Court of British Columbia, Ruttan J. gave judge-
ment in Malat v. Bjornson (No. 2)? to award $260,201.97 for the
loss of a fifty-one-year-old fishing skipper whose assessed annual
earnings were $21,500, after careful analysis of expert advice sub-
mitted by actuaries and investment counsellors. The Court con-
cluded that it should use a long-term interest rate of 10.5% and a
long-term inflation rate of 6.5%, thus arriving at a discount factor of
4%. Then, deducting a productivity rate of 1.5%
(allegedly an
average figure over the entire work force), the Court assessed the
loss of future earnings using a net discount rate of 2.5% and
deducted 10% for contingencies.
21 (1979) 11 C.C.L.T. I (Ont. CA.).
22 [1979] A.C. 556 (H-.L.).
23Supra, note 20, 30.
24 [1979] 4 W.W.R. 673 (B.C.S.C.).
McGILL LAW JOURNAL
(Vol. 26
III
The long-term inflation rate of 7 to 8% which has been accepted
by various courts is, according to many economists and most
historical analyses of inflation, a very pessimistic figure; but
others predict double-digit inflation for some years to come. The
future rate of inflation will depend on developments in three main
areas: the Bank of Canada’s monetary policy, the measure of the
federal government’s budgetary deficit, and the rate of productivity.
Widespread public concern over high inflation rates has compelled
governments and the Bank of Canada to adopt more restrictive
monetary policies. There is also broad public support for a reduc-
tion in the federal government’s large budgetary deficit, which en -:
hances the growth of inflation. The rate of inflation, therefore, may
not continue to grow and the predictions presently being made by
the courts may turn out to be exaggerated. Certainly, the courts’
insistence on restricting the total return that can be expected on
money to the total return on government bonds is unrealistic. If
the courts are going to allow a percentage point for investment
counselling or money management, then surely it should be assum-
ed that that counselling will be wisely given. It does not take an
expert to teach us that few today, with a portfolio in the order
of $200,000 and more, would consider investing solely in long-term
government bonds.
It is generally recognized that by investing in a combination of
short-term securities and long-term government and corporate
bonds for income and high-growth common stocks, a portfolio
manager would create the best hedge against inflation.
As interest rates or dividends from equity stocks vary, and as
economists predict different rates of inflation, the theories will
change. But, if the courts continue to assess damage on the basis
of actuarial expert opinion, the principles set out in the Andrews
and Keizer cases will have to be re-examined in order to reduce the
multitude of imponderables and unscientific predictions now enter-
ing into judicial calculations.
From an analysis of the aforementioned cases, there appears to
be a consensus of the judicial opinion in at least three provinces
that a discount rate of 3% at the present time is reasonable. How
long such a rate will remain depends on the ingenuity or sophistica-
tion of lawyers, actuaries, economists and investment counsellors.
Alex K. Paterson*
* The author is an Auxiliary Professor in the Faculty of Medicine, McGill
University, and a practicing attorney representing several hospitals associated
with the University.
