IN THE SUPREME COURT OF BRITISH COLUMBIA
Citation: | Hodgins v. Street, |
| 2010 BCSC 455 |
Date: 20100406
Docket:
M46479
Registry: Nanaimo
Between:
Kiley Hodgins
Plaintiff
And
Kristin Marie Street
Defendant
Before: The Honourable Mr. Justice Kelleher
Reasons for Judgment
Counsel for the Plaintiff: | J.A. A. |
Counsel for the Defendant: | R.K. P.J. |
Place and Date of Trial: | Nanaimo, February Vancouver, March |
Place and Date of Judgment: | Nanaimo, April |
[1]
This is an action for damages arising from a
motor vehicle accident. In a judgment released on May 26, 2009, I awarded
damages totalling $650,936.42. Of this amount, $280,000 was awarded for future
loss of earning capacity and $160,700 for future care. My reasons for this
award are indexed as 2009 BCSC 673.
[2]
There remain two matters to be assessed: tax
gross-up and management fees and investment counselling. I have had the
benefit of two expert reports from two economists: Robert Carson for the
plaintiff and Mark Gosling for the defendant.
[3]
Mr. Carsons calculation of tax gross-up is
between $21,000 and $25,450. He calculates fund management fees at between
$93,300 and $94,200.
[4]
Mr. Gosling, on the other hand, calculates tax
gross-up at $5,100 and fund management fees at $29,800.
[5]
Counsel for the plaintiff argues that the report
of Mr. Gosling ought to be rejected in its entirety. He contends that Mr.
Gosling is a partisan advocate. Mr. Goslings opinion should be rejected, says
the plaintiff, because Mr. Gosling has not discharged his duty to assist the
court.
[6]
In Tsilhqotin Nation v. Canada (Attorney
General), 2005 BCSC 131 at para. 32, the court referred to the duties and
responsibilities of expert witnesses discussed in National Justice Compania
Naviesa S.A. v. Prudential Assurance Co. Ltd. (The Ikarian Reefer), [1993]
2 Lloyds Rep. 68:
1. Expert
evidence presented to the court should be and should seen to be, the
independent product of the expert uninfluenced as to form or content by the
exigencies of litigation.
2. An
expert should provide independent assistance to the court by objective unbiased
opinion in relation to matters within his or her expertise. An expert witness
should never assume a role of advocate.
3. An
expert should state the facts or assumptions on which the opinion is based and
should not omit to consider material facts which detract from that opinion.
4. An
expert should make it clear when a particular question or issue falls outside
of the experts expertise.
5. If
an experts opinion is not properly researched because insufficient date is
available, this must be stated with an indication that the opinion is no more
than a provisional one.
…
[7]
Counsel argues that the first two of these considerations
are in question here: Mr. Goslings methodology leads to a lower award and is,
presumably, therefore influenced by the exigencies of litigation. As I said,
Mr. Gosling is accused of being an advocate.
[8]
The basis of the objection is that Mr. Goslings
firm has historically been retained by defendants in motor vehicle litigation.
The firm uses a model which results in lower tax gross-up and lower management
fees.
[9]
Counsel argues that in Mr. Carsons broad
experience, he has never encountered anyone but the three economists at
Columbia Pacific Consulting (Mr. Goslings firm) who employ this methodology.
I am asked to infer that this methodology has been adopted because it reduces
the amount that defendants have to fund.
[10]
I am in respectful agreement with the guidelines
put forward in the Ikarian Reefer. As trial judges, we must be wary of
advocacy dressed up in the guise of an experts report.
[11]
I am not persuaded, however, that Mr. Goslings
report should be rejected. The point of view of Mr. Gosling and his colleagues
may differ from the mainstream. That has never been the basis for rejecting an
expert opinion. The report of Mr. Carson may similarly be seen by defendants
as advocating a more generous approach than they think appropriate. Yet, Mr.
Carsons views are routinely accorded respect by this court.
[12]
Moreover, the approach of Mr. Gosling and his
colleagues has been adopted by this court on a number of occasions. See Sammartino
(Guardian ad litem of) v. Hiebert, [1996] B.C.J. No. 2650, 68 A.C.W.S. (3d)
86; Lee (Guardian ad litem of) v. Richmond Hospital Society (c.o.b. Richmond
Hospital), 2002 BCSC 862, 3 B.C.L.R. (4th) 91, 114 A.C.W.S. (3d) 230, affd
2003 BCCA 678; and Li v. Sandhu, 2006 BCSC 949, 56 B.C.L.R. (4th) 316,
150 A.C.W.S. (3d) 615.
[13]
Mr. Goslings report, like that of Mr. Carson,
must be given consideration.
1. Tax
Gross-Up
[14]
Investment income on the cost of future care
award is subject to income tax. An income tax gross-up compensates a plaintiff
for the income tax he or she will pay on the investment income. That is, it
counteracts the distorting effect of taxation on awards for costs of future
care.
[15]
The plaintiffs income is stacked to protect
the cost of care award from grossing-up with an assumed tax rate that is too
low. Stacking treats the income from sources other than the cost of care
component as first dollars, and income from investment of the cost of care
component as second dollars, so the second dollars will attract the highest
applicable marginal tax rate.
[16]
The items covered by Part 7 benefits are to be
deducted for purposes of determining the tax gross-up. The amount is agreed to
be $50,000. The net future care award, then, is $110,700.
[17]
There are a number of issues between the parties
with respect to tax gross-up.
(a) Portfolio Mix
[18]
The parties experts make different assumptions
about the proposed investment mix for the plaintiffs future care award and
loss of earning capacity award.
[19]
Mr. Carson allocated investment income as 87
percent interest, 6.5 percent dividends and 6.5 percent capital gains. Mr.
Gosling has assumed a breakdown of 60 percent interest, 20 percent dividends
and 20 percent capital gains.
[20]
The significance of the difference is that
dividend income from Canadian corporations and capital gains receive more
favourable tax treatment than interest income. The investment mix therefore
affects the assessment of the appropriate tax gross-up.
[21]
Mr. Carsons approach is consistent with a
formula set out in a publication of the Law Reform Commission of British
Columbia, Report on Standardized Assumptions for Calculating Income Tax
Gross-up and Management Fees in Assessing Damages (1994). However, one of the
reasons put forward by Mr. Gosling for his approach bears consideration. It is
based on the unusually low level of interest rates over the past few years:
[R]ecent market
turmoil has elevated public awareness about the the risks of equity
investments. The risks associated with holding bonds (long-term bonds in
particular) are perhaps less apparent, but are very real nonetheless. Bond
prices are inversely related to yields and current bond yields are low. If
interest rates increase to something more in line with the historical average,
then the price of long-term bonds may fall dramatically.
[22]
This factor should be reflected in the proposed
investment mix. My conclusion is that the appropriate assumption is that the
income from the portfolio would be 70 percent interest, 15 percent dividends
and 15 percent capital gains.
(b) Child Care
and Housekeeping
[23]
I awarded $80,000 for child care and
housekeeping as part of the award for cost of future care. Ms. Verbeek, the
plaintiffs expert, had recommended child care assistance of $208,681 and
$82,500 for assistance with housework. The total, then, was $291,181. The
judgment said this with respect to housekeeping costs and child care
assistance:
[131] Ms. Hodgins is concerned about her
ability to care for children. Her concerns include endangering a child through
her forgetfulness. The plaintiff points to the fact that Dr. Anton and Dr.
Allison recommend childcare assistance. The net present value of childcare
assistance as recommended by Ms. Verbeek is $208,681. In addition, after the
nanny is employed, the plaintiff argues that she will need assistance with
housework. An award of $82,500 is sought for that purpose. Thus, the total
claim under this heading is $291,000.
[132] I do not disagree with Dr. Anton
and Dr. Allison. However, they do not say that a full-time nanny is required.
There are, as well, many contingencies which should reduce any award. First,
the plaintiff may not have children. Second, she may have children but wish to
handle the demands of childcare herself. Third, she may have a child and only
need part-time assistance. Fourth, her partner may stay at home. Fifth, she
may have a partner who works part-time. There is also the fact that Ms.
Hodgins had depression, anxiety and fatigue quite apart from the accident.
There is a measurable risk that the plaintiff would have required nanny service
even in the absence of the accident.
[133] As far as housekeeping is
concerned, the plaintiff was previously able to carry this out while working
full time. I accept that her fatigue makes this difficult and unpleasant. It
will be that much easier to deal with if part-time employment is located.
[134] Having
regard to Ms. Verbeek’s report and the many contingencies which would make the
full award otherwise excessive, I conclude that $80,000 should be awarded under
this heading.
[24]
The experts and counsel read the judgment in
different ways.
[25]
The plaintiff argued:
35. The Court held that Drs. Anton and
Allison did not indicate that a full-time nanny was required. Implicit in
that, plus the fact that nowhere near its cost was awarded, is that the Court
found that a fulltime nanny was not justified. The Court (RFJ 132) then went
on to list a number of contingencies that would reduce any award regarding
child-care services. These included that Ms. Hodgins may not have children,
that she may wish to handle the demands of childcare herself, that she may only
need part-time assistance, that her partner may stay at home, that he partner
may work only part-time or that she may have needed child-care services even
absent the accident. Mr. Carson considered these findings. Mr. Gosling did
not.
36. The
Court made no finding that the plaintiff would have required housekeeping
services absent the accident. It is, therefore, apparent that the bulk of the
$80,000.00 award under these combined heads was for housekeeping rather than
child-care services.
[26]
For these reasons, I take it, Mr. Carson based
his calculation on an assumption that of the $80,000 awarded, 25 percent was
for child care and 75 percent was for housekeeping.
[27]
The defendant, on the other hand, argued that 70
percent of the award would be for childcare expenses and 30 percent would be
for housekeeping.
[28]
As I say, Ms. Verbeeks recommendation, and the
plaintiffs claim, was for a total of $291,181. I found both aspects of the
recommendation far in excess of Ms. Hodgins needs, although my reasons for
awarding substantially less than the claim were different.
[29]
With respect to childcare, there were a number
of reasons, outlined in the judgment for awarding substantially less than what
was claimed. With respect to housekeeping, the plaintiff had been faring well
enough without housekeeping and if she were able to secure part-time
employment, would be able to handle much of this herself.
[30]
For tax gross-up purposes, the assumption should
be $60,000 for childcare and $20,000 for housekeeping.
(c) Child
Care Deductions
[31]
The defendants submission on this point can be
reduced to the following:
The plaintiff
specifically claimed childcare expenses as part of her cost of future care
package. Therefore, it must have been found that the plaintiff would not have
required this assistance but for the accident. The plaintiff is only entitled
to be placed in the position she would have been in but for the accident, and
is not entitled to be placed in a better position. To award the plaintiff funds
for childcare expenses without including the tax benefits she will receive from
those expenses in calculating tax gross-up would result in the plaintiff
receiving more than her actual loss.
[32]
At first blush, there appears to be merit to
this submission. The child care assistance award is of course causally linked
to the effects of the accident. If the plaintiff would not have required
childcare but for the accident she therefore would also not have received the
accompanying tax credit but for the accident. However, in my view paragraph 40
of the plaintiffs submissions provides a complete answer to this submission:
Furthermore, Mr.
Gosling applies the child-care expenses to second dollar income (income derived
from investing the award) rather than first dollar income (earned employment
income). Virtually all working mothers need childcare irrespective of an
accident and the tax benefit recognizes that. Mr Carson testified that childcare
expenses are claimable against earned income, not investment income and
that, absent the accident, she would have been able to claim the tax deduction
from income which she would have earned. The Court found that she had residual
employability of some 64% (RFJ 95-97). Therefore, this is first dollar
income and has nothing to do with the fund being managed. He points out
that the award did not change her right to claim these expenses nor the fact
that, whether the accident happened or not she would be generating
income from earnings and that she, not the defendant, should get the
benefit of the tax savings realized independently of her injury claims, from
her earned income.
[33]
The fundamental purpose of a tax gross-up is to
ensure that the amount awarded to a plaintiff as a lump sum for the cost of
future care will not be eroded by tax payable on income earned from the award: Townsend
v. Kroppmanns, 2004 SCC 10 at para. 6, [2004] 1 S.C.R. 315.
[34]
The plaintiff is employed as an administrative
assistant at Service Alberta. If and when she has children, she will be
entitled to claim the childcare tax credits to offset income tax levied against
that employment income. As the childcare expenses are claimable against earned
income (first dollar income), not investment income (second dollar income),
there is no link between this credit and the income derived from the cost of
future care award. Second dollar income is the proper subject of a tax
gross-up. First dollar income is not grossed-up to offset the expected future
taxes to be incurred because of it, though it may impact the marginal tax rate
which will apply to second dollar income.
[35]
The tax credits offset taxes payable on
employment income. The defendant is not entitled to claim the benefit of a
deduction which does not apply to the income earned from, and bears no link to,
the cost of care award or the tax gross up.
(d) Medical Expense Tax Credits
[36]
It is common ground between the parties that
Part 7 benefits are to be deducted from a cost of future care award before tax
gross-up is calculated. The parties agree that a $50,000 deduction on account
of the occupational therapy and psychiatric counseling awards made at trial
ought to be made. However, the attribution of medical expense tax credits
(METC) to this deduction is a ground of dispute between the parties.
[37]
For the defendant, Mr. Gosling assumes that the
$50,000 Part 7 benefit deduction agreed upon by the parties can be applied to
any costs falling within the entirety of the future care award. In his initial
report, Mr. Gosling states that amounts spent on the psychologist,
occupational therapy, and prescribed medication are assumed to be eligible for
the Medical Expense Tax Credit. However, in a footnote to that report, Mr.
Gosling states that the plaintiff cannot claim the Medical Expense Tax Credit
on amounts covered by Part 7 benefits.
[38]
Conversely, Mr. Carson specifically applied the
$50,000 deduction to the awards made for occupational therapy and psychological
counseling which are clearly covered under Part 7. Mr. Carson then extended the
duration of these costs until the year 2044, when he calculated the $50,000 sum
would be exhausted.
[39]
The plaintiff argues that the result of Mr.
Goslings logic is that the plaintiff is deemed to be claiming METC while
simultaneously receiving Part 7 benefits which have already been deducted from
the cost of future care award. As the plaintiff isnt paying for these expenses
since they are covered by Part 7, she is receiving no METC on their account.
Pursuant to Mr. Carsons calculation the plaintiff would not be able to take
advantage of METC on these items until 2045.
[40]
In my view, Mr. Carsons approach makes sense.
Because the $50,000 attributable to the occupational therapy and counseling
awards made at trial is deemed to have been removed from the cost of care fund
and paid pursuant to Part 7, the plaintiff is not entitled to deduct METC
against this sum. Mr. Carson correctly points out that Mr. Goslings logic is
premised on a mistaken assumption that the METC is available to the plaintiff
for items covered by Part 7 benefits. Accordingly, the METC attributable to the
Part 7 deduction should not be applied to reduce the tax gross-up awarded on
the basis of the remainder of the fund.
(e) Methodology
for Tax Gross-up
[41]
As indicated above, Mr. Carson and Mr. Gosling
have differing views as to the methodology to employ in computing tax gross-up.
[42]
Mr. Carson takes what is called the life
probability approach. Mr. Gosling uses a method based on the plaintiffs life
expectancy. The latter approach was adopted in Sammartino:
17 Finally,
the parties disagree on the appropriate calculation of life span. Mr. Carson,
for the plaintiff, has used the probability life expectancy method, Mr.
Hildebrand the life certain method. Mr. Carsons only reason for preferring
his method is that it is consistent with his other calculations. Mr.
Hildebrand says his method is regularly used in such calculations, and manifest
a more conservative approach. I note Mr. Hildebrand testified that where a
young person is involved, the end result is not very different. Mr. Carson
seemed to echo this. I conclude the method used by Mr. Hildebrand should be
used.
[43]
This approach was followed in Lee (Guardian
ad litem of) v. Richmond Hospital, supra, where Mr. Justice Wong concluded:
14 As the
life-certain method considers the actual annual amounts required to be
withdrawn for care, I think it makes more logical sense and I would adopt that
approach.
See also Li v. Sandhu, supra.
[44]
In Whetung v. West Fraser Real Estate
Holdings, 2008 BCSC 182, 80 B.C.L.R. (4th) 342, 164 A.C.W.S. (3d) 449, Grist
J. had the two models before him for consideration. In adopting the
plaintiffs approach, he said:
[7] The two actuarial models proposed
by counsel to account for depletion of the cost of care differ in that the
approach employed by the plaintiffs expert, Mr. Struthers, suggests the cost
of care funds would be accounted for as being depleted by the sum judged
necessary to cover the monthly expenditures, less a probability factor needed
to discount for negative contingencies, notably survivability. The method
employed by the defendants expert, Mr. Szekely, would deplete the fund by the
full cost of care required each month, with no application of this probability
factor.
[8] The probability accounting method
matches the method employed to assess costs of future care and depletion of the
fund on the probability basis, at least notionally, makes the fund available
through the plaintiffs lifespan.
[9] The accounting on the basis of a
full reduction each month for the cost of care judged appropriate, will result
in a depletion of funds at a considerably earlier point in time. The
additional effect of this full deduction model is a shorter period of time
during which funds are available for investment, and a reduced requirement for
a tax gross-up.
[10] In my
view, there should be a consistent basis employed for the calculation of
damages and in accounting for the depletion of funds. Theoretical
symmetry is not the only question. I think it is likely that a person
suffering a disability, knowing that the cost of care needs to be sustained
will make economies, accepting a lower standard month-to-month, so that the
funds applied each month will be sustained as far into the future as can be
reasonably managed, or will use other resources to help defray costs. In
either case this form of management is better and more equitably described by
the method proposed by the plaintiff.
[45]
The reasoning of Mr. Justice Grist commends
itself to me. This is not a matter of comity. In Lines v. W & D
Logging Co. Ltd., 2009 BCCA 106, 90 B.C.L.R. (4th) 203, leave to appeal
refd [2009] S.C.C.A. No. 197, the trial judge had preferred the approach of
Mr. Gosling. This was based on the principle of comity. The Court of Appeal
pointed out that a decision on tax gross-up, even where based on choosing an
expert opinion, is a question of fact.
[46]
For substantially the same reasons as Grist J.,
I prefer the approach of Mr. Carson in this matter.
[47]
In light of the conclusions I have reached, I
assess tax gross-up at $12,000.
2. Fund
Management Fees
[48]
This heading covers a wide range of possible
expenses: record keeping and accounting for various investments, professional
advice and commissions and fees associated with the buying and selling of
investments. The rationale for management fees and some basic principles were
set out in the Law Reform Commissions 1994 Report cited above:
The reason why courts occasionally award
management fees is that if the plaintiff is forced to pay for investment
assistance from the awards for cost of care and loss of future earnings, those
funds will be exhausted prematurely. The projected cost of the management
assistance is therefore added to the damages so that the fund will subsist for
the required length of time. Unlike the gross-up, management fees are allowed
with respect to the awards for both cost of future care and the loss of future
earning capacity. Research conducted on behalf of the Committee indicated that
while principles were developing in the case law with respect to the
circumstances in which a management fee should be allowed, there appeared to be
little uniformity in the size of management fees in relation to the total award
for future loss. The basis for arriving at a particular amount was rarely
stated adequately.
Award of a management fee is not automatic.
A case for it must be made out. The leading case is I.C.B.C. v. Mandzuk,
[1988] 2 S.C.R. 650, 36 B.C.L.R. (2d) 371, in which the Supreme Court of Canada
upheld an award of a management fee to a quadriplegic plaintiff who, though
mentally unimpaired, lacked the education and ability to invest the future loss
award so as to produce the necessary income needed for lifetime care. The Supreme
Court held that a management fee should be awarded when a plaintiff is unable
to manage his or her affairs or lacks the ability to invest the fund to produce
the required return for the fund to be self-sustaining for the proper length of
time. It laid down a requirement for a factual basis to support a claim for a
management fee. Specifically, the evidence must show:
·
a necessity for management assistance;
·
a necessity for investment advice in the
circumstances;
·
the expected sot of these services.
The Supreme
Court did not go as far as the majority in the British Columbia Court of
Appeal, which stated in its judgment in Mandzuk that most people would
need professional advice to manage a large fund for a lifespan of care. This
difference between the judgments highlights an unresolved problem. It is
whether or not a fee should be allowed to a plaintiff who has normal
intelligence and ability, but who lacks investment experience. Some courts
have taken the position that anyone can buy bonds and guaranteed investment certificates
without assistance, so no fee is required for a plaintiff in this category.
Others have awarded nominal sums to allow for some initial investment planning
and accounting services.
[49]
The quantum of management fee will depend upon the
degree of assistance required by the plaintiff. The Law Reform Commission
suggested there are four levels of fees:
Level 1 The plaintiff requires only a single session of
investment advice and the preparation of an investment plan at the beginning of
the period the award is to cover.
Level 2 The plaintiff will require an initial investment
plan and a review of the investment plan approximately every five years
throughout the duration of the award.
Level 3 The plaintiff will need management services in relation
to custody of the fund and accounting for investments on a continuous basis.
Level 4 The plaintiff will require full investment
management services on a continuous basis, including custody of the fund,
accounting, and discretionary responsibility for making and carrying out
investment decisions. Such a plaintiff is likely to be mentally incapacitated
or otherwise incapable of managing personal financial affairs.
[50]
The plaintiffs position is that she requires
assistance at Level 4. Mr. Carsons recommendation is based on this assumption.
[51]
Counsel points to several pieces of evidence
which establish the following:
·
The plaintiff has acquired very few assets.
·
She has no credit card.
·
She forgets to pay bills.
·
Ms. Verbeek recommended a financial planner.
·
The plaintiff has no experience managing a fund.
·
The plaintiff had significant difficulties even
in the absence of the accident.
·
The plaintiff may need to withdraw amounts when
market conditions are unfavourable. This requires skill.
[52]
The defendant, on the other hand, points to
evidence indicating the plaintiff has no significant deficit or need for
assistance. The psychiatrist, Dr. OBreasil, testified that the plaintiff told
him that her day-to-day financial situation was satisfactory. There is other
evidence that when she worked at Easy Home, she carried out numerous
administrative duties. She made bank deposits, handled accounts payable and
accounts receivable and saw to other administrative duties. The plaintiffs
supervisor at Service Alberta at the time of the trial gave evidence that the
plaintiff was performing well as an administrative assistant.
[53]
I am not persuaded that the plaintiff requires
assistance at Level 4. She is injured; she suffered a mild-traumatic brain
injury. But she is not incapable of managing personal financial affairs.
[54]
I conclude the plaintiffs needs are somewhere
between Level 2 and Level 3.
[55]
Damages, including allowances for tax gross-up,
require an exercise of judgment and are to be assessed, not calculated. Similarly,
a management fee award depends on the evidence adduced in each particular case:
Lee (Guardian ad litem of) v. Richmond Hospital Society, 2003 BCCA 678.
The fundamental question to be addressed in each particular case is the level
of management assistance which is required by the injured plaintiff to achieve
the requisite rate of return: Bystedt v. Hay, 2007 BCCA 84.
[56]
Having reviewed the calculations put forward by
Mr. Carson and Mr. Gosling, in the circumstances of this case i fix the
management fee at $40,000.
[57]
I summarize. The tax gross-up will be $12,000.
The investment counselling and management fees are $40,000.
Mr. Justice Kelleher