IN THE SUPREME COURT OF BRITISH COLUMBIA
Citation: | Cikojevic v. Timm, |
| 2012 BCSC 1688 |
Date: 20121115
Docket: S79530
Registry:
New Westminster
Between:
Adriana Cikojevic
Plaintiff
And
Ryan Timm
Defendant
Before:
The Honourable Mr. Justice N. Brown
Reasons for Judgment
Counsel for Plaintiff: | R. Pawliuk |
Counsel for Defendant: | K. G. Grady |
Place and Date of Hearing: | New Westminster, B.C. February 23 and 24, April 4 and 5, 2012 July 6, 2012 |
Place and Date of Judgment: | New Westminster, B.C. November 15, 2012 |
Table of Contents
II. Discussion of specific calculation model issues. 7
A. Potential for
Funding Shortfall 7
B. Criticism of
Life Certain Method. 8
D. Mr. Szekelys
Mortality Adjustments for Management Fees but not Taxes. 9
E. 1994 Law
Reform Commission recommendations on methodology. 10
III. Conclusion on Tax Gross-Up Calculation Method.. 15
B. Townsend
v. Kroppmans and hearing evidence on
management fees. 19
C. Discussion of
Requirement of External Fund Manager 25
1. Foundational
requirements to be eligible for award of a management fee. 25
D. Does the
plaintiffs trustee require the services of an external fund manager?. 27
E. The effects
of Townsend on the plaintiffs position. 28
F. Evidence on
real rates of return achievable. 30
1. Mr. R.
Blackmer, Solus Trust 31
3. Evidence of
Ms. A Harkness. 37
V. Management Fees – Conclusion.. 39
I.
Overview of issues
[1]
I awarded the plaintiff these damages for personal injuries she suffered
in a motor vehicle accident; Cikojevik v. Timm, 2010 BCSC 800:
§
Non pecuniary damages, net of mitigation $152,000.00
§
Past loss of income $2,000.00
§
Delayed entry into work force $55,000.00
§
Loss of work capacity $1,000,000.00
§
Special damages $20,726.16
§
Special damages in trust $5,000.00
§
Cost of future care $251,525.00
§
Total $1,486,287.16
§
Plus court order interest by consent $1,828.69
§
Total $1,488,115.85
[2]
The parties have raised post-judgment issues that required further
findings. An earlier decision dealt with deductibility of Part 7 accident
benefits under the Insurance (Vehicle) Regulation B.C. Reg. 156/2010; Cikojevic
v. Timm 2012 BCSC 574.
[3]
These reasons deal with three questions:
1. What assumptions and method of calculations should economists
use when they estimate the tax gross up of the plaintiffs cost of care award.
A tax gross-up is an award that compensates the plaintiff for future taxes she
will have to pay on income she will be earning from her cost of care award.
2. Whether to compensate the plaintiff for the fees of both the
trustee she has retained and an external investment manager the trustee wishes
to retain to advise him on appropriate investments for the plaintiffs trust
fund.
3. What method of calculation should economists use to calculate
the tax-gross up for whatever amounts are awarded for those services.
[4]
I will dispose of the first set of questions first.
[5]
In his May 11, 2012 report, Mr. Szekley described the two main
mathematical models Canadian courts use to assess future losses or expenses.
The first he calls a deterministic, or life certain, model. It assumes a fixed
funding term, usually equal to the length of the plaintiffs life expectancy at
trial. Although readily grasped by non-experts, this method has fallen out of
favour. The second model is a probabilistic model. It treats the funding term
as a random probability, defined by the plaintiffs average life expectancy.
[6]
In recent decades, most judges in Canada have based their assessments of
future pecuniary loss on some version of the probabilistic model. Both Mr.
Carson and Mr. Szekely propose probabilistic models; but they use different
specifications (i.e. assumptions) in their calculations.
[7]
The plaintiff urges calculation of the tax gross-up based on the
probability of survivorship method used by economist Mr. R. Carson. When Mr.
Carson calculated the tax gross-up; he based the yearly cost of care amounts
discounted for the chances of her surviving each year. The discount is based on
actuarial life expectancy tables for Canadian women, which extend to 110 years.
This method of calculation foresees the plaintiff withdrawing less than the
base sum awarded in the judgment each year to reflect the declining probability
of the plaintiff remaining alive.
[8]
Against this method, the defendant urges the court to accept the
calculation model used by economist Mr. Szekley. He assumes the plaintiff would
withdraw the undiscounted amount of her award each year, that is, with no
adjustments for mortality. However, Mr. Szekley reduces the tax payable in each
give year to reflect the probability of the plaintiffs death that year until
the fund eventually sinks to zero or six years before her anticipated life
expectancy of 83.5 years.
[9]
The probability of survivorship and probability of death methods of
calculating a tax gross-up sound alike but are conceptually different. Even so,
if the calculations are based on identical assumptions they should produce the
same results. Two distinguished 18th C. mathematicians, Jan De Witt and Edmond
Halley, conceived of the two mathematically formulas used by Mr. Szekely and
Mr. Carson to calculate the effects of mortality on future streams of income and
expenses. Mr. Carson used the Halley method of calculation while Mr Szekley
used the De Witt method of calculation.
[10]
At trial, I heard evidence about the theories of Jan de Witt and Edmond
Halley, which framed the larger conceptual issues at play; while it was worth
hearing at trial, discussing it here is not necessary except to note both
methods are mathematically valid. I understand, however, that the DeWitt method
involves more complex computing interactions, which allows introduction of more
refined calculations, and it can produce more empirically rich results than the
Halley method does. Until recently, the complex computing iterations of the
DeWitt method exceeded the capacity of most commercially available computers.
[11]
Mr. Carson agrees the results Mr. Szekely obtained using the DeWitt
method, set out Table D of his May 3, 2011 report, are equivalent to those
obtained using the Halley method. He disagreed, however, with the way Mr.
Szekely implemented the DeWitt model, particularly in his specification of
undiscounted figures to represent what the plaintiff would spend each year for
her future care needs.
[12]
Whichever mathematical model is used to calculate future care needs, one
fact nearing mathematical certainty is that the amount awarded will likely be
wrong, as noted in Mr. Szekelys May 3, 2011 report. The risks of over or under
compensation are always present. If a plaintiff receiving an award for future
loss of income or care expenses dies earlier than expected, the defendant has
no recourse to recover what has become an overpayment. However, neither can a
plaintiff who has lived past the date of their predicted death return to court
to replenish the fund; Thornton v School District No. 57, (Prince George) et
al, [1978] 2 S.C.R. 267.
[13]
This reality is an inherent trait of lump-sum awards and reflects the
impossibility of accurately predicting death or other future events in a
persons life. To address such existential realities, the law has turned to
averages and probabilities. However, economists calculations remain only aids
to judicial assessment.
[14]
The main issue between Mr. Carson and Mr. Szekelys methods of
calculation is as follows:
·
As Szekely holds, should the annual amounts assumed in the tax
gross-up calculations equal the annual amounts for care the judgment specifies,
independent of mortality?
·
Or, as Mr. Carson holds, should the yearly amounts assumed in the
tax gross-up calculations first be subject to mortality, with survival
rates applied to the amounts specified for cost of care in the judgement?
[15]
With Mr. Carsons specifications, [a] small proportion of the recipient
of the income dies in each year, [and] the percentage of the expected payment
made each year reduces accordingly. With Mr. Szekelys assumptions, the recipient
receives the undiscounted amount the judgment states the plaintiff needs each
year to meet her care needs. But to reflect the chances the plaintiff will no
longer remain alive in a given year (and no longer need to pay tax) he
accordingly reduces the amount of tax payable in a given year.
[16]
Mr. Carsons calculations run to age 110, which is the maximum in the
life expectancy tables. But over the years of the life table, from the date of
judgment to the maximum 110 years, Mr. Carsons calculations see the
plaintiffs spending for care needs diminishing each year. Mr. Szekelys
method, on the other hand, sees the plaintiff, having spent the maximum annual
amount the judgment awards her, exhausting the cost of care fund by age, 77.4,
six years before her probable death at approximately 83.5 years. According to
Mr. Carsons calculations, at age 77.4, the plaintiff has a 73% chance of
remaining alive and presumably still needing care, an artefact of Mr. Szekelys
calculations that the plaintiff says clearly evidences their flawed nature. Mr.
Szekely, however, points to the unrealistic scenario in Mr. Carsons
calculations that foresees the plaintiff spending a few dollars on care needs
in her 109th year.
II.
Discussion of specific calculation model issues
[17]
The court heard several hours of direct and cross-examined testimony
from Mr. Carson and Mr. Szekely. Some of if it touched on mathematical matters
that one might expect to be beyond controversy. But the two experts, both very
well qualified, at times could not even agree on nomenclatures: finally,
however, the key differences between the experts narrowed to those few outlined
below.
A.
Potential for Funding Shortfall
[18]
Mr. Szekely criticizes what he sees as specification errors in Mr.
Carsons use of the probabilistic model: first, treating the plaintiffs
funding needs while she is alive as a function of survival; and second,
treating the funding term as what Mr. Szekely calls a deterministic
(non-random) parameter of 110 years. This refers to the number of years over
which Mr. Carsons model assumes the plaintiff could make withdrawals to meet
her care needs. Therefore, Mr. Szekely says, Mr. Carsons approach overstates
the fund balance. The model foresees the plaintiff drawing less income from the
fund each year than she needs to pay for her costs of care, thus increasing
amount of income that would be subject to tax. It also foresees the plaintiff
claiming fewer deductable care expenses, thus reducing her taxable income.
Further, Mr. Szekely claims this model sees the fund lasting far longer than is
realistic, to the plaintiffs 110th year, thus requiring her to pay
taxes for a longer period. In summary, this model calculates a significantly
higher tax gross-up than Mr. Szekleys suggested model.
[19]
As mentioned earlier, Mr. Szekelys calculations assume the plaintiff
will withdraw yearly the exact amounts awarded her for various care needs.
Assuming the plaintiff will withdraw this much yearly makes the plaintiffs
fund sink to zero about six years before the plaintiffs life expectancy of
83.5 years. The plaintiff submits this shortfall reveals a fundamental flaw
in Mr. Szekelys approach. The defendant points out, however, that the reasons
say nothing about the funds having to last to the plaintiffs eighty-third
year. Neither do they say anything about lasting until the plaintiff is 110,
the age to which Mr. Carsons calculations extend. The defendant further argues
that Townsend v. Kroppmanns 2004 SCC 10, para. 21 (Townsend)
obliges the economists to simply specify the yearly amounts awarded in the
judgment, which Mr. Szekely has done. The defendant stresses Mr. Szekelys
method assumes, logically he submits, that the plaintiff will have to spend
what she needs to pay her annual care costs while still alive. And, given the
plaintiff faces a 27% chance she will die before her life expectancy, the
funds exhaustion six years before the plaintiff reaches her life expectancy is
reasonable.
B.
Criticism of Life Certain Method
[20]
As for the plaintiffs accusation that Mr. Szekely effectively used a
life-certain method, I cannot find he did so. Mr. Carsons definition of a
life-certain method as one where the plaintiff withdraws with certainty
specified yearly amounts from the fund is conceptually different from the
classic definition of a life certain model, which specifies a term of
withdrawals equivalent to the plaintiffs life expectancy. Still, I
agree that without any discount of yearly withdrawals to account for mortality,
Mr. Szekelys method somewhat resembles a term certain model.
[21]
In addition, the plaintiff also submitted Mr. Szekelys statement he had
used the DeWitt method when making his calculations is not tenable because,
according to both Mr. B. Burnell, an actuary whose article, Grossing up For
Income Tax was introduced at the hearing, and Mr. Carson, using the DeWitt
method would produce a higher gross-up figure for taxes. I note, however, that
Mr. Burnell stated that a higher gross up figure would only occur in the case
of a plaintiff who pays high marginal tax rates.
C.
Conceptual Clarity
[22]
The defendant submits Mr. Szekelys approach fairly balances the risks
of under compensation with the risks of over compensation. He submits Mr.
Carsons approach to calculating tax gross-ups, which sees the plaintiff die a
little each year and be taxed accordingly, does not make sense conceptually. I
see his point, but Mr. Szekelys method is conceptually inelegant too, because
he assumes that while the plaintiff will be withdrawing full yearly amount
awarded to her for her cost of care, he has reduced the annual tax by adjusting
for the probability of the plaintiffs death. As for the defendants argument,
it is unrealistic to see the plaintiff notionally purchasing services for more
than 20 years past her life expectancy; the chances of her doing so are nearly
zero.
[23]
The defendant submitted I should accept Mr. Szekelys evidence and find
that his model more fairly adjusts the risks of under and over compensation. He
points to Mr. Carson remarks at a 2006 personal injury conference of valid
criticisms of the survival probability method, i.e. that the model assumes certain
taxes apply to probable income while in the real world, taxes apply to certain
income. Even so, Mr. Szekely acknowledged Mr. Carsons approach ultimately
did balance the risks of overcompensation and under compensation.
D.
Mr. Szekelys Mortality Adjustments for Management Fees but not Taxes
[24]
The defendant also challenged Mr. Carsons calculations making mortality
adjustments for management fees, but not taxes. Mr. Carson explained he adjusted
management fees because they were on the cost of care side of the ledger,
whereas taxes are calculated against interest income generated by the fund. He
testified,
[with taxes] you are not taxing certain income. The income is
already conditioned by the fact that [the plaintiff] might be alive or dead.
In each year, the capital
balance in the fund is a probable capital balance. And it produces probable
income, and if you apply a tax rate on probable income, you will get probable
taxes. The tax rates are certain. The taxes you calculate are probable.
[25]
In effect, in Mr. Carsons calculations the plaintiff pays tax on income
the fund will probably generate; the plaintiff points out her care awards are
already discounted for the probability of her survival. Thus, she submits, to
discount the tax gross-up amount would be double-counting death.
[26]
However, I find, the plaintiffs contention Mr. Carson should not have
discounted the tax gross-up for mortality is not totally convincing. As Mr.
Szekely points out, this reasoning fails to consider that once a fund of any
amount is set up to receive an award, the risk remains over time that the
recipient could die and not receive taxable income the probability of her death
within a given year. On the other hand, I note that Mr. Carsons calculation
produces a benefit for the defendant because a discounted award will produce
less income to tax.
[27]
Weighing all the evidence adduced, the competing contentions of the
experts on this point do not fully persuade in either direction. But neither
does the evidence establish that Mr. Carsons method is unreasonable or
produces an unfair result.
E.
1994 Law Reform Commission recommendations on methodology
[28]
The Law Reform Commission of British Columbia (LRC) issued a 1994
report titled Report on Standardized Assumptions for Calculating Income Tax
Gross-up and Management Fees in Assessing Damages. (the LRC report.) The
investigation was chaired by Justice Finch, as he then was, assisted by two
personal injury lawyers, two actuaries and two economists, one of them, as it
happens, Mr. Carson. As between the life certain method and the survival
probability method, the commission proposed:
9(1) A gross up calculation must be carried out using the
actuarial style of calculation known as the survival probability method
in conjunction with the Canada Life Table.
(Emphasis
of committee)
[29]
Section 10 of that same report requires that calculation of the tax
gross-up must account for the benefit of the tax deduction that accrues to the
plaintiff, which must be adjusted for the actuarial survival probability.
F.
Authorities
[30]
The plaintiff submitted that although Sammartino v. Hiebert,
[1996] B.C.J. 2650 BCSC (Sammartino), and cases that followed it,
stand against her position, the weight of recent authority still favours the
method of calculation used by Mr. Carson. In Sammartino, Justice
Williamson accepted the defence position that an economist calculating tax
gross-up should assume the plaintiff will withdraw the full yearly amounts
awarded to her for cost of care, without any adjustments for survival. The
practical effect of making this assumption is that for tax purposes the
plaintiff claims a higher deduction and becomes subject to less tax. As a
result, the fund sinks faster.
[31]
But both experts in Sammartino, one of them Mr. Carson, confirmed
that the plaintiffs youth meant either specification for deductions would
produce similar results. By contrast, in the present case, depending on
findings made regarding an external fund manager, the difference between the
two methods lies in the range of $40,000 to $50,000. In Sammartino Justice
Williamson stated,
[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. Carson’s 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
manifests 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.
[32]
In Lee (Guardian ad litem of) v. Richmond Hospital Society, 2003
BCCA 678 (Lee) and Li v. Sandhu, 2006 BCSC 949 (Li)
the judges followed the method endorsed in Sammartino.
[33]
Against this line of cases, the plaintiff urges that Whetung v. West
Fraser Real Estate Holdings, 2008 BCSC 182 (Whetung) should
prevail. Deciding between the two methods of calculations, Justice Grist
preferred Mr. Carsons method. He stated:
[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.
[34]
In Lines v. Gordon (Lines), 2009 BCCA 106, the Court of
Appeal addressed a situation where the trial judge, Lander J. stated he felt
obliged to follow the Sammartino line of decisions. He therefore ordered
deduction of the full yearly amount he had awarded for cost of care. But when
it came to assessing loss of future income, Lander J. rejected that approach.
Addressing the issue that concerned Justice Lander, Saunders J.A. confirmed
that fund management fees and tax gross-ups are questions of fact; other
tax-gross decisions are not binding. She wrote:
[124] In deciding upon the appropriate award to reflect
tax gross-up, the trial judge preferred, for reasons of comity, the survival
approach methodology for discounting the gross amount used by the defendants
expert, Mr. Gosling, to that of Mr. Carson. Applying Mr. Goslings methodology
reduced the award for tax gross-up, which otherwise was based on the report of
Mr. Carson, by $44,830 nearly a 12 percent reduction from the sum generated by
Mr. Carsons approach.
[125] In making the award of committee fees, the trial
judge accepted Mr. Carsons report and said:
As [Mr. Carsons] assumed tax gross-up was reasonably
accurate, I find that this assessment of committee fees is appropriate, and award
that amount for committee fees.
[126] The appellants complain that the reduction made to
the tax gross-up based on Mr. Goslings methodology was not made to the amount
awarded for committee fees. They contend this is an error and the amount
awarded for committee fees should be reduced by a similar percentage.
[127] I do not agree the award for committee fees should
be reduced. Any award of damages, even one based on an experts award, requires
an assessment and is a finding of fact.
[128] The error advanced by
the appellants is not apparent to me in the award or on the evidence adduced.
There was a body of evidence supporting this award, and Mr. Carson was not
asked to comment on the applicability of Mr. Goslings approach to his opinion
on the value of the committee fee. The trial judge accepted Mr. Carsons
opinion, and in my view was entitled to do so. I would not accede to this
ground of appeal.
[35]
Since Lines, at least three cases have followed the approach
adopted by Justice Grist in Whetung: Hodgins v. Street, 2010 BCSC 455 (Hodgins),
Kirk v. Kloosterman, 2011 BCSC 288 (Kirk) and Sartori v.
Gates, 2011 BCSC 214 (Sartori). In Hodgins, Justice
Kelleher said he preferred Mr. Carsons method for substantially the same
reasons as Grist J. (para. 46) In Kirk, Justice Crawford said he
accepted Mr. Carsons approach on this matter, because it seems consistent
with the predominant actuarial opinion and with the reasons given by Grist J.
in Whetung (para. 46).
[36]
I note that in their calculating endorsement of the tax gross-up against
yearly withdrawals discounted for survival, these cases are consistent with the
recommendations of the 1994 Law Reform Commission recommendations.
[37]
The defendant criticizes the plaintiffs reliance on Justice Grists remarks
in Whetung, specifically where Justice Grist concluded that the survival
probability method was preferable (in part) because the plaintiff would likely
economize to ensure the fund lasted long enough to meet her care needs. The
defendant criticizes such comments as speculative and inconsistent with
principles laid down in Townsend , where Deschamps J., writing for the
court, states;
19 First, damages are assessed and not calculated.
Since it is impossible to calculate the exact amount of money that will be
needed in the future, courts have to rely on actuarial evidence: Andrews v.
Grand & Toy Alberta Ltd., [1978] 2 S.C.R. 229, at pp. 236‑37.
Actuarial evidence is itself based on experience and not on individual
circumstances. Future costs and loss of future earnings are amounts that are
estimated because, by definition, they are not yet incurred or earned. Although
this hypothesis may seek to simulate reality, it remains notional. Courts can
only provide the victim with an adequate amount to cover the loss caused by the
defendant. There is no assurance that the amount will cover the actual costs
of care that become incurred nor is the defendant guaranteed that he or she is
not disbursing more than the strict minimum that becomes necessary to cover the
victims loss. In assessing damages, courts do not take into consideration what
victims actually do with the award. The fact that the respondent here had
to wait for almost five years before management fees were assessed creates an
atypical situation, but these exceptional circumstances should not justify a
departure of the usual rules. Notional amounts cannot be mixed with actual
amounts when assessing future damages.
20 Secondly, damages are awarded in a lump sum in
order to respect the principle of finality: Andrews, supra, at p.
236. According to this principle, there has to be a clean break between the
parties. It would be inconsistent with the principle of finality to authorize
repeatedly revisiting the amount assessed as full and fair compensation at
trial whenever new evidence became available. During the prospective period
for which damages are awarded, the hypothesis may prove overly pessimistic for
a period but overstated for another period. The award should not be reassessed
every time reality reveals a discrepancy with the forecast. Therefore,
monitoring the respondents use of the award or adjusting it with her changing circumstances
would create more uncertainty than the present rule, would undermine the
purpose of the statutory discount rate, and would improperly interfere with the
third principle of damages relevant to this case.
21 This final and most important principle is that the
plaintiff has property of the award. The plaintiff is free to do whatever he or
she wants with the sum of money awarded: Andrews, supra, at pp.
246‑47. On this issue, I am in complete agreement with the reasons
delivered by Finch C.J.B.C. in the Court of Appeal. He held that it is not
relevant to inquire into how the plaintiff chooses to spend the amounts recovered
for the assessment of damages for management fees and tax gross-up.
Consequently, management fees and tax gross-up are to be assessed based on the
first assessment of damages and not according to the amount available for
investment as eventually found at some indeterminate future date. In other
words, the appropriate basis for calculation is the one determined at trial,
without considering what happens thereafter. It is improper for a trial judge
to consider what the plaintiff does with awarded damages. As Dickson J., as he
then was, wrote in Andrews, supra, at pp. 246‑47:
It is not for the Court to conjecture upon how a plaintiff
will spend the amount awarded to him. There is always the possibility that the
victim will not invest his award wisely but will dissipate it. That is not
something which ought to be allowed to affect a consideration of the proper
basis of compensation within a fault-based system. The plaintiff is free to do
with that sum of money as he likes.
22 This is the principle which the Court of Appeal
applied in the case at bar (at paras. 58‑59):
In my respectful view, how the
plaintiff may choose to spend the amounts recovered on her claim for damages is
not relevant to the assessment of damages for management fees and tax gross-up.
. . .
. . . How
or when the plaintiff may choose to spend her damages after judgment has been
given has never been a concern the courts would consider in making damage
awards. The awards for management fees and tax gross-up are designed to ensure
that the damages assessed for future losses are adequate. The actual
expenditure of damages after recovery is not relevant to that assessment.
[Emphasis added]
[38]
The defendant therefore submits that absent evidence of what the
plaintiff planned to do with her award, it is wrong to speculate about possible
variations of a plaintiffs cost of care spending based on future choices they
might make. He also points out that to assure the awards sufficiency, I had
already grossed up the plaintiffs award by 10% thus making some provision for
contingencies.
[39]
In Townsend, the court focused on the fact the plaintiff had used
part of her award to buy a house and to pay legal fees. At the defendants
request, the trial judge ordered deduction of these amounts before the gross-up
was calculated.
[40]
It is worth noting here that it is simply in the nature of the two
calculation methods used in the present case that they will on occasion produce
anomalies, such as seeing the fund sinking too fast, as with Mr. Szekelys
fixed withdrawals, or seeing the fund spread over an implausible period, as
with Mr. Carsons. With Mr. Szekelys method, the plaintiff could withdraw more
annually if she chooses to concern herself only with having enough income to
meet her care needs to 83.5. Further, Mr. Szekelys method, which sees the fund
sink to zero six years before the plaintiffs expected age at death largely
reflects a 23% chance she may die before then. Neither method compels a
plaintiff to run their lives according to the experts methods and assumptions.
However, the award I made was based on yearly expenditures discounted for
survivability; and the fact remains that it was the resulting discounted
amount that the plaintiff was awarded.
III.
Conclusion on Tax Gross-Up Calculation Method
[41]
Returning for a few moments to the 1994 LRC report , I was struck by the
fact that eighteen years later, the commissions words at page 19 still have
purchase;
The present lack of a standardized approach to calculating
the gross-up means that courts must continually deal with expert evidence
submitted by each side that does not proceed from the same assumptions. The
adversarial nature of the process leads inevitably to the defendant introducing
an expert report with a lower figure that the one contained in the report
submitted by the plaintiff. The reports may coincide with respect to some
assumptions, but they can be, and frequently are, widely divergent.
In the litigation process, the validity of expert opinion on
an issue is treated as a question of fact. Differing findings on the same
issues reflect badly on the administration of justice, but courts are forced to
act on the basis of the evidence actually submitted in individual cases.
As a non-expert, the trial judge
often has little or no basis on which to make a choice between the conflicting
opinions. Numerous judgments simply indicate a preference for one partys
report over another, without enunciating a rationale for it. Trying to make
findings of fact on such elusive matters as the rate of inflation many years
hence does not enhance the credibility of the courts. The subject-matter of
evidence pertaining to the gross-up is difficult to grasp. To the uninitiated
observer of the courts performance, it carries an air of greater subjectivity
that is actually inherence in the calculations. Splitting the difference
between the experts position, which is sometimes done out of desperation, only
worsens this impression.
[42]
In essence, the purpose of a tax gross-up of the cost of care award is
to protect the award from erosion by way of taxes the plaintiff will have to
pay on income earned from the invested award. The plaintiff emphasized that the
methodology used to calculate the award should not be chosen so the defendant
can save money. But neither should the method used create a windfall or an
additional award. The gross-up should be an amount no more than is necessary to
preserve the plaintiffs award from tax erosion.
[43]
As discussed in these reasons, I can see both methods seem to exhibit
flaws that could incline calculations somewhat in the direction of over or
under compensation. In this regard, the plaintiff was critical of ulterior
motives underlying the defendants methodology, but Mr. Szekelys rationale for
the way he modelled his calculations was not without substance.
[44]
The two highly qualified experts disagreements over even fundamental
questions makes it difficult to discern which of the two approaches would best
preserve the fund from erosion while being fair to the defendant
[45]
Considering all the evidence and able submissions, however, on balance I
conclude the survival probability method and assumptions used by Mr. Carson are
more congruent with the objective of preserving the plaintiffs cost of care of
award from the predations of taxes on the funds income. The fact the LRC
endorsed this method of in its 1994 report fortifies my findings.
[46]
And, as noted, I do find certain aspects of Mr. Szekelys approach
problematic. It is true I found no reason for concern that Mr. Szekely used
different mathematical models to calculate the tax gross-up and the annual cost
of care amounts. Once the plaintiff invests her award, the amount invested
becomes an independent variable for calculating the tax gross-up. But as noted
earlier, Mr. Szekelys method sees the plaintiff withdrawing the full yearly
amount awarded her, but at the same time, reduces the amount of tax payable by
discounting it for mortality. If the plaintiffs withdrawals are treated, in
effect, as a certainty until the funds are exhausted, then likewise, should not
her obligation to pay tax on the fund also be treated as a certainty during her
lifetime?
[47]
I understand the parties prefer the court to see the final set of
calculations that incorporates all my findings, including those on to
plaintiffs claim for the combined costs of a private trustee and external fund
manager, to which I will turn next. Once that question is determined, and given
my findings thus far, the tax-gross up award will be based on Mr. Carsons
method of calculation.
IV.
Should the plaintiff receive an award for the services of both a private
trustee and an external investment manager?
[48]
The plaintiff submits she requires a trustee to oversee the use of her
fund to ensure she does not dissipate her award. She further submits that to
prevent its premature erosion, her trustee, needs to retain an external
investment manager. The defendant opposes the plaintiffs claim for the dual
services of a trustee and investment manager. In the alternative, he asserts
the total amount the plaintiff should recover cannot exceed the maximum fees
charged by the Public Trustee.
[49]
To these ends, the plaintiff seeks an added award of investment
management sums in the range of between $739,000 and $750,000, plus the cost of
setting up the trust, $4,321.32. The defendant submits an award lying in the
range of $300,000 to $400,000 is more fitting.
[50]
The plaintiff framed the main issues this way:
1. Can
the plaintiff trustee achieve the rate of return she requires to preserve her
trust fund from premature erosion without an external professional to manage
her investments?
2. If
the answer is no, what level of investment management is needed to obtain the
requisite rate of return?
[51]
The court heard evidence about the various levels of management services
available, and at what cost. In her closing submissions, however, the plaintiff
stipulated she would agree to an award for tax gross-up based on the combined
rate charged by the Public Trustee to control the funds 0.4%, plus the rate the
Public Trustee pays to an external investment fund manager to invest clients
funds, 0.75%.
[52]
The defendant does not contest the plaintiffs assertion that because of
her inability to manage and spend her money responsibly, she needs the services
of a trustee. But what is contested by the defendant is the plaintiffs claim
that the only realistic way for her trustee to achieve a 3.5% annual return
after inflation on her trust fund is for her trustee to retain the services of
an external discretionary investment manager.
[53]
The defendant first raised an evidentiary objection on these questions.
He urges that I should not allow the plaintiff to adduce evidence of rates of
return paid on interest-bearing instruments as a way of showing her trustee has
to have professional investment advice and management to achieve the 3.5%
discount rate assumed in the award.
A.
The Trust
[54]
An irrevocable trust was established March 4, 2011 with Solus Trust
Company Limited as trustee and the plaintiff as beneficiary. The trust cost
$4,321.32 to establish, which I find is recoverable from the defendant.
[55]
Section 6(a) of the trust agreement states the trustee shall invest the
capital and income of the trust fund. Section 1 of Schedule A, which details
the trustees powers, states the trustee may:
(e) invest the Trust Fund or any part thereof in any
form of property or security in which a prudent investor might invest; and
(f) when holding,
keeping or investing, invest in any investments authorized by the Trustee
Act of British Columbia for the investment of trust funds.
[56]
Section 15.5 of the Trustee Act RSBC 1996 C-464 permits the
trustee to retain the services of an external investment manager.
[57]
Section 7 of Schedule A states the trustees may act upon the opinion or
advice of experts such as lawyers or investment advisors and may pay any fees
incurred out of the trust fund.
B.
Townsend v. Kroppmans and hearing evidence on management fees
[58]
The plaintiff submits that because current rates of return on interest
bearing investment are so low and show no signs of increasing; her trust fund
requires constant professional management to give her a realistic chance of
achieving a 6% rate of return she requires to prevent accelerated erosion of
the funds holding her investments.
[59]
The defendant responds by submitting that following Townsend, the
court cannot hear evidence regarding the differential between 6% rate of return
assumed by the statutory discount rate and the real rate of return achievable
without full portfolio management.
[60]
In Townsend, the appellant defendant had argued that, with
investment counselling, the plaintiff could expect a higher return than the
statutory discount rate upon which her award had been premised. Based on this
expectation, the trial judge allowed a 50% discount of management fees, a
finding the appellant defended on the appeal. At para. 12., DeChamps J. stated:
[12] The second part of the
appellants argument, which seeks to compare the potential rate of return with
the statutory rate, defeats the whole purpose of the deeming provision. The
statutory discount rate is mandatory and renders irrelevant any evidence on
actual or potential rates of return or inflation. In order to entertain the
appellants approach, courts would have to enquire into the potential rates of
return and inflation with the assistance of expert actuarial evidence, compare
it with the statutory rate to determine whether the victim is likely to achieve
a higher rate than the one provided for by the statute, and then apportion any
perceived overpayment between the victim and the defendant. This kind of
inquiry is exactly the one that the legislature allowed the parties to avoid by
adopting a mandatory deeming provision. With the deeming provision, parties no
longer need to adduce evidence on rate of return. Assessment of management fees
should not be an indirect and incidental means of reverting to costly complex
evidence.
[61]
The defendant submits the LRCs remarks at p. 51 of their report suggest
the importance of avoiding evidence and argument on tax gross-up in each case
.
Much court time could
nevertheless be saved if the amount of the fee could readily be linked to the
amount and duration of the award for future loss, without the need for
re-inventing the wheel through evidence and argument in each case.
[62]
If the LRCs objective were to simplify evidence and reduce court costs,
it would be counter-intuitive, the defendant submits, alluding here to the
language of Justice Deschamps in Townsend at para. 14, to allow
the plaintiff to adduce evidence about rates of return achievable without professional
management of her portfolio.
[63]
In brief, the defendant further argues:
§
Given the LRCs stated goal of simplifying evidence and reducing
court costs through imposition of a universal statutory discount rate, it is
counter-intuitive to allow the plaintiff to call evidence that implicitly
challenges the suitability of the statutory discount rate.
§
The legislature made a choice that favoured trial efficiency and
consistent levels of compensation. The court must respect its choice and
refrain from mixing deemed return with potential return. The plaintiffs
position therefore lacks legal foundation and evidentiary basis.
§
The fact that current rates are low gives no reason for greatly
increasing the management fees.
§
Further, there is no evidence a significantly increased
management fee would result in an actual higher rate of return, or would offset
the increased costs of higher management fees.
§
Additionally, given that the Trustee intends to authorize
investment of 50% to 60% of the fund in equities, the rate of return on
interest bearing securities is irrelevant.
[64]
In Li, the plaintiff failed to meet her onus of proving she
required the services of an external fund manager in addition to those provided
by the PGT. The investment manager for the PGT said she intended to employ
outside management of the plaintiffs funds and the plaintiff sought recovery
of the added 0.75% cost. Justice Ehrke, referring to Mandzuk v. I.C.B.C.
[1988] 2 S.C.R. 650 (Mandzuk), saw this as a question of fact,
which at para. 21, he framed this way: Does the evidence establish on a
balance of probabilities that the engagement of an external investment manager
is necessary to achieve the requisite rate of return? Justice Ehrke
answers:
[22] This question cannot be answered simply by looking
at the rates of return achieved by the pooled funds available through the B.C.
Investment Management Corporation for the past two years, since there is no way
of knowing whether those rates of return will be achieved in the future: Townsend
v. Kroppmanns, 2004 SCC 10 (CanLII), [2004] 1 S.C.R. 315.
[23] Rather, the question is whether this plaintiff, by
virtue of her particular circumstances, requires the services of an external
investment manager. In my view, the evidence falls short of establishing that
she does. If there were no committeeship order, she would undoubtedly be
incapable of managing her investments without professional assistance. But in
this case, she already has the assistance of the Public Guardian and Trustee.
The Supreme Court of Canadas decision in Mandzuk clearly contemplates
that not all plaintiffs in serious personal injury cases will receive an award
for investment management fees; it depends on whether they require it, based on
their individual circumstances. In the present case the evidence does not
establish that the plaintiff, with the assistance she will receive from the
Public Guardian and Trustee, cannot achieve the requisite rate of return
without the assistance of an external investment manager. The fact that the
Public Guardian and Trustee has decided to hire such a manager does not
demonstrate that doing so is necessary to produce the requisite rate of
return. Rather, the Public Guardian and Trustee may envision that with the
help of an external money manager, the plaintiff can achieve a return in excess
of the requisite rate and that the additional expense of 0.75 % is therefore
worthwhile. But while the decision to hire an external manager may therefore be
prudent and in the plaintiffs best interests, this does not mean that it is
necessary to produce the requisite rate as described by Sopinka J. in Mandzuk.
[Emphasis
added]
[65]
The defendant points out that the plaintiff has the support of Solus
Trust to invest her award. But the plaintiff points to evidence before the
court that an external investment manager is necessary to produce the requisite
rate; and to the trustees refusal to act as trustee without an external
investment manager.
[66]
In Yeung (Guardian ad Litem of) v Au, 2007 BCSC 175 (Yeung),
the mother, who was the plaintiffs committee, sought management fees of
$739,400 to pay the cost of full discretionary investment manager. The mother
testified that she had chosen Genus Capital Management because it had a record
of obtaining a good rate of return and she considered its fees to be
reasonable.
[67]
The manager of investments for the PGT also testified in Yeung.
She explained the use of external investment managers had been common in the
past, but not these days. The decision whether to use one depended on the
circumstances of the case. Hiring of an investment manager would be limited to
situations where the estate was valued at $500,000 or more and the patient
needed high cash flow. In such cases, the PGT charged the patient both its own
fees and those of an external investment manager.
[68]
At para. 55 of Yeung, Justice Tysoe rejected Ms. Yeungs claim
for a discretionary investment manager, concluding such a service would be
warranted only in an unusual situation.
[55] It seems to me that counsel for
Ms. Yeung is inviting me to do the very thing which the Supreme Court of Canada
said should not be done. Counsel is inviting me to determine whether the use of
an investment manager will produce a net rate of return higher than the 3.5%
discount rate and to only reduce the claimed management fee if there will be a
so-called profit. That is the same type of inquiry which was advocated by the
appellants in Townsend v. Kroppmanns and which the Supreme Court of
Canada rejected because it was an indirect and incidental means of reverting to
costly complex evidence.,
[56]
If a committee is appointed, the plaintiffs financial
affairs will presumably be properly managed, and full investment management
services will only be warranted in the unusual situation where the
committee is not capable, with (sic) the assistance of investment management
advice or investment counselling, of achieving a real rate of return equal to
the 3.5% discount rate used to calculate the present value of the future loss.
[Emphasis
added]
[69]
At para. 57 Justice Tysoe noted Ms. Yeung was an intelligent and
well-educated person, a trained accountant; not a sophisticated investor at
the present time but [certainly possessing] the ability to become one. Justice
Tysoe also accepted evidence that if Ms. Yeung were aided by an external fund
investment manager she should be able to achieve a real rate of return in the
range between the 3.5% discount rate and the 7.1% real rate of return achieved
by Canadian pension plans over the 25 year period from 1981 to 2005. Seeing
this likelihood, he commented, it appears to have been a prudent decision for
[the committee mother] to have engaged the services of Genus, but the defendant
should not be required to pay for the full amount of the management fees
charged by Genus.
[70]
Noting Justice Tysoes comments, the defendant in the present case
submits that if the plaintiff desires a Cadillac investment strategy that
includes two tiers of fund management it does not follow the defendant has to
pay for this.
[71]
In Bystedt, Justice Hall concluded that Townsend requires
the court to address whether a plaintiff will be in a position to have the
funds for the future invested in such a way that the required investment return
can be obtained for them. Hall J. also noted that Townsend was
distinguishable because in it the evidence showed the plaintiffs
forecast real rate of return would likely exceed the rate needed to
preserve the fund, thus making unnecessary an elaborate discussion about
whether an adjustment in the amount of the management fee should be made. In
the present case, the opposite fact pattern is evident.
[72]
The plaintiff maintains that the reasoning in Bystedt is
applicable in this case. She argues the court can consider the negative effects
of the extraordinary economic environment on a non-professionals investors
chances of achieving a 3.5% real rate of return. The defendant answers the
point by arguing that the applicability of the statutory discount rate has
never turned on whether current interest rates are low or high. That is true,
but when the 3.5% discount rate last was set, achieving that return with safe
interest bearing instruments was relatively easy. Should the court when
deciding the issue cover its eyes against the reality of volatile economic
conditions and a challenging investment climate, one that requires the
plaintiff to look well outside the range of safe interest bearing investments
that used to be available to achieve a 6% rate of rate? The current investment
environment casts into significant doubt the ability of even a trustee more
knowledgeable than the average investor to achieve a real rate of return of
3.5%.
[73]
The defendant criticized the plaintiffs reliance on Bystedt (Guardian
Ad Litem of) v. Hay, 2007 BCCA 84 (Bystedt). While Justice Hall
did state that the primary objective of an award of management fees is that a
fund awarded for future needs of the plaintiff must be protected from
depreciation and dissipation; the defendant argues that Townsend addressed
risks of the fund exhausting due to the inability of the victims to manage
their affairs, not due to external circumstances such as low interest rates.
[74]
In Bystedt, Justice Hall also noted the comments of Justice
Lambert in Lee, where Justice Lambert had noted a number of cases
Justice Wong had considered at trial, which I will not recount here.
Considering those cases in conjunction with Townsend, Justice Lambert
concludes,
[38] I consider that the reconciliation of all those
authorities in both this Court and the Supreme Court of British Columbia lies
not in requiring management fees to be set as part of a damage award in any
particular way but in understanding that a management fee award must depend
on the evidence in each particular case.
[39] If a calculation is made, not simply of the cost of
future care or the loss of income earning capacity, but of the management fee
itself as an item of expenditure to be made in the future, then the discount
rate set under the Law and Equity Act for calculating the present value
of future damages must be used. But that calculation should never end the
matter of assessment of a management fee. The assessment process will
require consideration of the investment capability of the plaintiff, it will
require evidence of the range of appropriate mixes of investments over
projected future periods, and it will require evidence of the skills required
in managing investments within the range chosen, and over every time in that
period. The process upheld in Cherry v. Borsman need not end the
assessment process. The process upheld in West v. Cotton need not end
the assessment process. In accordance with Lewis v. Todd the process
ends with the exercise of informed judgment by the trier of fact applied to the
evidence in the particular case, including, but not limited to, the
calculations made by expert economists or actuaries.
[Emphasis
added]
[75]
Against this view, the defendant contends the plaintiff cannot point to
a case that sees a court award costs for both the PGT and an external investment
manager. He argues the only reason the plaintiff can give the court for
allowing an external investment manager is that current interest rates are low,
a contention he submits, that Townsend does not permit the court to
consider.
C.
Discussion of Requirement of External Fund Manager
1.
Foundational requirements to be eligible for award of a management fee
[76]
The plaintiff acknowledges the burden and onus of proof rests with her.
[77]
Mandzuk, sets out the basic guiding principles for the awarding
of management fees. In that case, a mentally unimpaired quadriplegic was
found nonetheless to lack the education and ability to invest their future loss
award in a way that would allow them to achieve the requisite income required
for their lifetime care. At para. 2 Justice Sopinka says,
[2] The only principle
that appears to be applicable is that the defendant must take the plaintiff as
he finds him, including his state of intelligence. Whether this is low by
reason of the injuries complained of or its natural state, a management fee or
investment counselling fee should be awarded if the plaintiff s level of
intelligence is such that he is either unable to manage his affairs or lacks
the acumen to invest funds awarded for future care so as to produce a requisite
rate of return.
[78]
Pursuing this basic principle, Justice Sopinka states three criteria to
justify awards of either a management fee or an investment counselling fee:
i.
evidence that management assistance is in fact necessary;
ii.
evidence that investment advice is in fact necessary in the
circumstances;
iii.
evidence as of the cost of such services.
[79]
As noted in the LRCs report at page 44-45,
The Committee also recognizes, however, that virtually all
plaintiffs who are awarded damages for future loss extending over long periods
will have to pay custodial fees to the trust company. Most will need investment
advice at the outset at least, as well as some accounting assistance. This
raises the question whether there should be a minimum management fee.
…
As it is not logical to award damages
on the basis of a self-liquidating fund unless the fund can be preserved for
the necessary length of time, it is appropriate to allow a management fee where
the plaintiff would otherwise be unable to invest the fund properly in order to
achieve this result. Much court time could nevertheless be saved if the amount
of the fee could be readily linked to the amount and duration of the award for
future loss, without the need for reinventing the wheel to evidence and
argument in each case.
[80]
Following those observations, the LRC also noted at 45 that the most
logical way to standardize the appropriate range for a management fees is to
set different levels of fees, depending on the degree of assistance the
plaintiff requires. The commission proposed a four level classification:
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.
[81]
The LRC proposed the four levels of service as an aid to analysis, not
rigid categories into which each plaintiff must neatly fall, although most
plaintiffs likely could. I find the LRCs classification system is a useful
analytical tool, but judges are not bound by them.
[82]
In Townsend, Justice DeChamp referred approvingly to the four
level classification system recommended by the LRC (para. 11). Some judges have
used it in their analysis of the plaintiffs needs.
D.
Does the plaintiffs trustee require the services of an external fund
manager?
[83]
The defendant referring to level 4 of the LRC report, pointed to Mr.
Blackmers qualifications and financial experience and says he is obviously not
the incapacitated person described at level 4. The language used by the LRC, incapacitated
or otherwise incapable of managing their personal financial affairs, is
similar to the language contained in the provisions in the Patients Property
Act, R.S.B.C. 1996, c. 349 for the appointment of a committee.
[84]
The plaintiff stresses that Andrews v. Grand and Toy Ltd., [1978]
2 S.C.R. 229, with its reinforcement of the pre-eminence of the full
compensation principle (Andrews), supports her claim to an award for
an investment manager external to Solus to protect her trust from dissipation
by rash decisions, or from erosion through poor investment returns.
[85]
The plaintiff submits the chief question is – what is it going to take
to ensure the amounts related to future needs are not exhausted prematurely? Townsend,
para. 6.
[86]
The plaintiff points out the LRC recommended a review in May of each
year of the statutory discount rate, which has not occurred. She submits the
statutory discount rate no longer reflects the economic and investment
realities confronting plaintiffs having to invest their award. She reminded the
court that investment management fees are not a bonus, but an independent head
of damages intended to make the injured person whole; Lines at para.
108. She submits, therefore, her request for an award for an external fund
investment manager must be viewed in light of economic realities that have
placed the plaintiffs award at risk. In effect, if the statutory discount rate
is an immovable factor, she submits, the court is obliged to consider other
means to prevent premature sinking of her trust fund.
[87]
In sum then, the plaintiff submits she needs not only the services of a
trustee, to compensate for the plaintiffs inability to manage her spending
and resources, responsibly, but also an investment manager, to compensate for
the unrealistic discount rate on which was based assessment of her cost of care
and loss of earning capacity awards.
E.
The effects of Townsend on the plaintiffs position
[88]
Before the plaintiff can advance her position, she must first overcome
the defence challenge that Townsend prohibits leading evidence about
real rates of return achievable versus those assumed by the statutory discount.
[89]
The plaintiff submits Townsend is distinguishable. She says Townsend
did not deal with the threshold question of entitlement, that is, what
investment management services does the plaintiff need to give her a rate of
return equal to the statutory discount rate? Instead, the question in Townsend
was whether, based on evidence the manager was likely to achieve a return
higher than the 3.5% discount rate, the court should discount the award to
reflect that likelihood.
[90]
I agree with the plaintiffs submission that a careful reading of Townsend
suggests the court had not concerned itself with basic entitlement questions.
[91]
As noted earlier, decisions such as Li, Yeung, Lines and Whetung,
decided after Townsend, were considering defence applications for
reductions in management fees based on assertions the plaintiffs real
rates of return would exceed 3.5%. Following Townsend, judges in such
cases refused to make commensurate reductions in their management fee awards. Bystedt
was actually the only decision following Townsend to make such a
reduction, an anomaly likely explained by the fact the plaintiff had agreed to
a reduction and was contending only for a lesser one than what the defendant
was seeking.
[92]
More noteworthy, however, is the fact that judges in the cases I
mentioned did consider some evidence of real rates of return the plaintiff
likely would achieve. As noted earlier, in Li, the court considered
rates of return within the context of deciding if the plaintiff could
achieve a 3.5% real rate of return without using an external investment manager.
In Lines, the court distinguished Townsend by characterizing
the question in Townsend as one of addressing whether shrewd investing
would achieve a return greater than the statutory rate; whereas in Lines,
the question was whether a structured settlement could produce the annual level
of payments at the sums the trial judge had awarded (para. 93). At para
95, the court in Lines added,
Now the periodic payment
available on purchase of an annuity is less than that available when investment
rates of return or greater. The damages award is based on an historical view of
rates of return. In contrast, the rate available for a periodic payment when an
annuity is purchase, even while based on long-term rates, reflects the
investment return available at one point in time and can deny to a plaintiff
some of the advantage of the longer view upon which the damages awards
calculated.
[93]
In Yeung, Justice Tysoe cites Townsend for the proposition
that if the plaintiff cannot achieve the real rate of return assumed by the
statutory discount rate, then, the plaintiff should be awarded the amount of
money needed to pay the fees of professional managers or advisors who can
assist the plaintiff to achieve that rate of return (para. 45).
[94]
I agree with the plaintiff that Townsend decided the point that
once a trial judge has found a person is entitled to a certain level of
management, the parties can call no further evidence upon which to base a claim
for a reduction in the management fee. But Townsend does not stand
against the adducing of evidence where the objective is to determine the
entitlement question of whether the plaintiff will be able to achieve the rate
of return without the aid of an investment manager. In the present case,
however, the question of ability implicitly shifts the focus away from the
plaintiffs ability to the trustees ability.
[95]
To facilitate a fair determination of the threshold question of
entitlement, I find it is necessary to consider evidence of actual rates of
return, especially those for interest bearing instruments, achievable currently
or in the foreseeable future without the aid of an investment manager.
F.
Evidence on real rates of return achievable
[96]
The 3.5% discount rate is predicated on rates of return
achievable on interest bearing instruments such as government bonds, as noted
by Justice Taylor at para. 30 of West v. Cotton (1995) 10 B.C.L.R. (3d)
73 (BCCA), and quoted by Justice Hall in Bystedt at para. 8,
[D]iscount rates adopted by
regulation under the Law and Equity Act, R.S.B.C. 1979 c. 224, s.51, are
predicated on the investment of awards for future care and loss of future
earning capacity in interest-bearing government bonds, or similar secure bank
or trust company investment certificates, and do not contemplate the need for
dividends or capital gain in order to achieve the required annual payments from
the assumed self-liquidating fund.
[97]
When the LRC made its recommendations, a reasonably intelligent
plaintiff still could achieve the statutory discount rate through safe
investment vehicles such as government bonds or other investment certificates.
The table following, compiled by the plaintiff, compares rates up to and
including 2011:
Investment | Year and interest rate | |||
| 1994 | 1995 | 2010 | 2011 |
Bank rate | 5.77% | 7.30% | 2.45% | 2.07% |
Benchmark Bond yields, five years | 7.94% | 7.70% | 2.45% | 2.07% |
Benchmark | 8.43% | 8.08% | 3.20% | 2.57% |
[98]
The plaintiff submits that, as interest-bearing instruments contemplated
in 1994 would today barely protect the plaintiff against the corrosive
consequences of inflation, let alone achieve the real rates of return expected
by the award for cost of care, she must turn to riskier forms of investment.
[99]
The plaintiff also points out both experts agreed that to achieve a rate
of return of 6.0875%, she must reinvest any income over her needs in the first
eighteen years in the trust. Further, to sustain the fund for the plaintiffs
lifetime, it must benefit from the effects of compounding.
G.
Witnesses
[100] The
plaintiff called Mr. R. Blackmer, CEO of Solus Trust Company and trustee of the
plaintiffs estate and A. Harkness, manager of investments for the officer of
the Public Guardian and Trustee (PGT). The plaintiff also filed an experts
report written by J. Guise, chief investment officer with CC&K Private
Capital.
1.
Mr. R. Blackmer, Solus Trust
[101] Before
establishing Solus Trust Company Limited, Mr. Blackmer worked for 20 years in
various positions in the wealth management industry. After graduating from
Queens University in 1980, he entered the joint law school and MBA program
offered through Osgood Hall Law School and Schulich Business School at York
University. In 1984, he earned his LLB with concentration in tax, trust and
estate law. His MBA focused on accounting and finance. He then practiced law in
large law firms in Calgary and Toronto, where he specialized in tax, trust and
estate planning. Mr. Blackmer is also a member of the Law Society of British
Columbia.
[102] He
practiced law as in-house counsel for Royal Trust in Toronto. His curriculum
vitae summarizes extensive experience in the trust industry, which included
assisting in launch of fiduciary operations for large banks both in Canada and
outside of Canada. He has held executive positions in the industry. The last
paragraph in Mr. Blackmers curriculum vitae states,
In addition to his trust company
experience, Mr. Blackmer has worked in investment related positions (with world
trust in Amsterdam and with Real Assets Investment Management Inc. in
Vancouver.) He has also been employed in the philanthropic sector where he
worked with Vancouver Foundation, one of Canadas largest charitable
organizations.
[103] Mr.
Blackmer confirmed that to ensure the fund would meet the plaintiffs long-term
needs, it would have to achieve a real rate of return of 6%. He explained that
during the plaintiffs younger years, he assumed her needs would be less. This
circumstance would allow capital to accrue and be available to use in later
years, when the plaintiffs expenses are expected to increase. It would also
give a longer period to allow reinvestment and compounding of interest.
[104] Mr.
Blackmer explained the practice of hiring external managers is now common among
private trustees. Bank trusts, on the other hand, use their own subsidiaries to
manage the funds. In the past, however, when interest rates were high, trustees
saw no need to retain an external fund manager, as it was easy to produce a
real rate of return of 6% with low risk investments. Mr. Blackmer testified he
is not qualified to give the plaintiff the investment advice she needs. He is
not registered with BC Securities Commission, certification he requires to
enable him to invest in the full range of investments necessary. Solus would,
however, continue to monitor the plaintiffs investments. Soluss board members
do monitor market conditions and clients estates regularly. Mr. Blackmer
educates and keeps himself current by attending seminars on market performance.
One of Soluss board members has more qualifications and expertise on
investment matters than he does, and can assist him in evaluating the
constitution and performance of client portfolios on a periodic basis.
[105] Despite
his investment experience, Mr. Blakmer explains the plaintiffs financial
needs, the size of the award, and the investment risks engendered by todays
volatile economic climate render his level of experience inadequate to ensure
the plaintiff achieves the real returns she needs. Thus, were he unable to
externalize investment management of the fund, he would not act for the
plaintiff, irrespective of whether the plaintiff receives an award for the external
investment fees.
[106] Mr.
Blakmer said to protect the plaintiffs fund from erosion the plaintiff needs
the services of an external fund manager. They can be closely attuned to her
portfolio and able daily to monitor risks and market fluctuations. They must be
positioned to respond quickly and buy and sell in timely fashion if necessary.
Only in this way, he believes, will the plaintiff have a realistic chance of
achieving the 6% returns she needs to meet her lifetime needs. Besides, as
noted, Mr. Blakmer lacks the necessary credentials and licensing to engage in
the level and type of investment the plaintiff needs.
[107] Mr.
Blackmer explained the office of the PGT most often serves a different client
and is usually a trustee of last resort. PGT clients usually have smaller
funds and are often severely incapacitated. Because they serve so many clients,
the PGT cannot provide the level of personalized level of service Solus does.
[108] Mr.
Blakmer gave the plaintiff and her father the names of Conner, Clark and Lunn,
(CC&L) and three other similar companies that offer a similar range of
services, all said to be reputable and well qualified. The plaintiff and her
father preferred CC&L, although final approval rested with Mr. Blakmer. As
mentioned earlier, Mr. Blackmer will continue to monitor the investments if
necessary. He could fire the external fund manager, whose performance he would
monitor by comparing the funds investment returns with those achieved by the
Toronto Stock Exchange and other similar benchmarks of investment performance.
[109] Approval
of the overall structure and balance of the plaintiffs portfolio rests finally
with Solus. It will continue to review the portfolios performance. Solus has
final say on the nature and percentage balancing of the various types of
investment choices.
[110] Given the
plaintiffs youth, needs and low returns currently available in fixed
investments, Mr. Blakmer foresees equity investments occupying in the range of
up to 50-60% of the plaintiffs portfolio. Such a portfolio balance demands a
much greater degree of investment monitoring and management than Solus can
provide the plaintiff. But, as the plaintiff ages, the portfolio will shift
more to instruments with fixed returns and see more draws on capital to meet
the plaintiffs needs.
[111] In sum.
Given the plaintiffs age, her needs, the volatile economic climate, the need
for constant monitoring to achieve returns assumed by the award while
protecting capital, Mr. Blakmer says he lacks the credentials, the skills,
experience and the time necessary to meet the plaintiffs investment needs. He
could not meet the standard of prudence a trustee must meet. And he would
expose himself to being found in breach of his fiduciary duty to the plaintiff.
Even a certified knowledgeable and experienced professional investor, he says,
will likely find it difficult to achieve the rate of return needed. Therefore,
he says, prudent investment in such circumstances calls for discretionary
management by an external fund manager able to select from a wide range of
investments that match closely the plaintiffs age, personal circumstances,
needs, risk factors and longer-term objectives while achieving the required
minimal return of 6%.
a)
Soluss charges
[112] Mr.
Blakmer explained the fees charged by Solus, permitted by s. 88 of the Trustee
Act, RSBC 1996 C- 464.
[113]
Soluss total annual fees are considerably less in total than the 5%
allowed by the Act, and in some respects, lower than those charged by
the PGT. Soluss fees are,
§
A onetime acceptance set-up fee equal to 1% of the market.
§
An annual trustee fee paid quarterly equal to 3% of the market
value of the Trust assets, including cash on hand, calculated at the end of
each quarter.
§
On each distribution of any capital of the trust, a distribution
fee equal to 2% of the value of the assets distributed from the Trust.
§
HST or its successor tax on all fees where applicable.
§ The fees are
exclusive of out-of-pocket expenses
including asset management fees and
preparation of income tax returns
paid by the trustee for which it will be
reimbursed by the trust.
[114] Solus also
charges 5% of income earned on the Trust. But since investment of the
Trust funds will be externally managed, Solus would not be charging for that
service.
2.
Report of Jeff Guise
[115] The
September 6, 2011 report of Mr. Jeff Guise, Chief Investment Officer of Conner,
Clark & Lunn Private Capital, is brief enough to reproduce it in full.
I, Jeff Guise, Chief Investment Officer of
Connor, Clark & Lunn Private Capital Ltd., am qualified to provide the
information requested.
You have advised me that approximately $1.4
million was awarded to Ms. Cikojevic for future loss of earning capacity as
part of a personal injury. You have asked me to assume the following:
1.
The $1.4 million awarded was made on a
"present value" basis – meaning that the awards were reduced by the
Court based on the assumption that Ms. Cikojevic would earn interest over a
long time period.
2.
In order for Ms. Cikojevic to achieve the award
intended by the Court she must earn a 6.0875% return on her investment per
year, after fund management fees.
3.
Ms. Cikojevic has no training or experience in
finance or investment and has sustained a brain injury.
4.
You have asked me to provide an opinion
regarding the need for Ms. Cikojevic to hire a profession investment manager
for these funds in order to meet the assumed rate of return.
I am aware that pursuant to Rule 11-2(1). I
have a duty to assist the Court and to not be an advocate for any party. I have
prepared this information in accordance with my duty to the course as
articulated in Rule 11-2(1). If I am called upon to give oral or written
testimony in relation to this matter, I will give that testimony in conformity
with my duty to the court as articulated in Rule 11-2(1).
As an officer of Connor, Clark & Lunn
Private Capital Ltd., I am responsible for the opinions expressed in this
report.
Firm Profile
Connor. Clark & Lunn Financial Group is
the second largest independently owned asset manager in Canada. At December 31,
2010, the firm collectively managed over $39 billion in assets on behalf of
individual and institutional investors. Connor, Clark & Lunn Private
Capital Ltd. is an affiliate within the CC&L Financial Group. CC&L
Private Capital provides discretionary private wealth management services to
individuals, endowments, foundations and First Nations.
Experience
I am a Partner of Connor, Clark & Lunn
Private Capital Ltd. and since 2006 have held the position of Chief Investment
Officer. I have been employed by the firm since 1995.I am also the Chair of the
Portfolio Strategy Team, where I am ultimately responsible for investment
strategy within the Private Client Group and oversee both strategic and
tactical changes in asset allocation. I am also responsible for product
development for private clients and I direct the $2 billion of capital
investments for the firm I received a BA from the University of British
Columbia in 1995 and I hold the Chartered Financial Analyst designation (CFA).
I am committed to adhere to the Code of
Ethics and Standards for Professional Conduct of the CFA Institute.
Opinion
While it is possible that Ms Cikojevic could
choose an investment vehicle without professional assistance that could provide
the required late of return, in my opinion and that of Connor Clark & Lunn Private
Capital Ltd , it is unlikely to achieve a return of 6.0875% per year will
require the advice and guidance of a financial professional.
The prevailing environment of low interest
rates greatly reduces the likelihood that Ms Cikojevic could earn the required
rate of return and therefore increases the need for professional investment
management services For example, at the time of writing the yield to maturity
on a 10-year Canadian Government bond is 2 45% and the yield to maturity on a
30-year Canadian Government bond is 3 06% In my opinion, these low yields
necessitate the use of various strategies including, active fixed income
management equity investments or alternative investments to earn the required
return of 6 0875% – all of which require the advice and guidance of a financial
professional.
Deleveraging has followed almost every major
financial crisis, accompanied by sub-par economic growth With private sector
deleveraging alongside high levels of government indebtedness we expect
economic growth prospects to be muted and accordingly have lower expected
returns on traditional asset classes over the next 5-7 years making the
deliverance of investment returns m the range implied by the award difficult.
It is my opinion that an actively managed
investment portfolio balanced between fixed income, equity, and alternative
strategies would be required for Ms. Cikojevic to meet her return objective of
6.0875% net of fees over her lifetime. In my opinion, the advice and guidance
of a financial professional is required to increase the probability that Ms Cikojevic
will earn the requisite return of 6.0875%.
I trust that this information
will be of assistance.
[116] What is
most telling from Mr. Guises opinion is 1) his prediction of five to seven
years of lower returns on traditional asset classes, making the deliverance of
investment returns in the range implied by the award difficult and 2) the
necessity of using a variety of strategies or alternative investments to
achieve the required rate of return.
[117] The plaintiff
submits Mr. Guises cautionary note that even with active management and use of
alternative investment strategies, it will be difficult to achieve the rate of
return assumed by the 3.5% discount rate is a sobering one; more so, given the
plaintiff must reinvest excess income during the earlier investment years so
she can retain and compound enough capital.
3.
Evidence of Ms. A Harkness
[118] The
affidavit of Ms. A. Harkness, who manages investment services for the PGT, sets
out recent rates of returns on GICs, 91 day Government of Canada treasury
bills and 2010 rates of return achieved by the B.C. Investment Management
Corporation (2011 rates of return were not available for B.C.I.M.C.). It
manages pooled investments for government pensions and various government
agencies, including the PGT when required. Evidence of these various rates of
returns strengthen the view that if the plaintiff is to have a decent chance of
achieving a 6% rate of return, her trustee will have to retain for a period at
least, an external investment manager to invest in and manage equities and
other alternative instruments.
[119] The
plaintiff submits investment in the stock market, particularly given the
effects of the economic crisis and anticipated growth in coming years is not a
safe enough place to invest for someone in the plaintiffs circumstances
without the assistance of an external investment manager.
[120] The
plaintiff tried to example some of the dangers and volatility investors
confront at the moment through means of the investor advice contained in a 2012
Outlook Report published by CC&L. Plaintiffs counsel attached it to the
written outline of her oral submissions. Of course, this report does not
constitute an experts report under Supreme Court Civil Rules, Rule
11-6, and cannot be received as such. It can be viewed only as a demonstrative
aide-memoire to example the plaintiffs point regarding the kind of market
related anxieties shot through media, the internet and daily newspapers. I view
it as such. Among investment worries raised in CCLs 2012 report are: concerns
about equity markets once again declining; growing worries the US economy will
stall; fear of the re-emergence of European sovereign debt issues; problems in
Asia coming back on the radar screen; geopolitical risks emanating out of the
Middle East; sovereign concerns related to Greece, Spain and Italy; potential
conflict between Iran and Israel; the pending so-called 2013 financial cliff in
the United States, referring here to the looming imposition of a series of
financial restraint measures, comprised of automatic spending cuts, tax
increases and the expiration of unemployment benefits. Some positive signs in
the housing market and other areas the economy are sprinkled through the
report, as well as other negative concerns giving cause for concern which I
have not included.
[121] The report
is emblematic of the investment climate faced by a prudent investor now having
to stray from the safety of interest bearing instruments. In my view, I should
take judicial notice of the fact of wide spread concerns regarding current and
future economic conditions and the challenges they pose for investors
[122] Of course,
as noted during the hearing, markets fluctuate. The market has always exposed
investors to a full range and mix of anxieties and optimism, all at the same
time. However, relying on strategies such as taking the longer view and
expecting the market eventually to run to the positive side does not address
the plaintiffs specific needs now.
[123] Her
investments must pay for her care needs as well as produce income for support.
The plaintiff needs a chance to re-invest and accrue earned income in excess of
her youthful needs and see some benefit from compounding, else her Trust fund
will sink too soon.
[124] I conceive
my primary duty is to ensure the plaintiffs award is protected from
dissipation and erosion to the extent the evidence requires, and I have the
means at hand to do so. Given the evidence heard, I agree the 3.5% discount
rate appears to be unrealistic. But as it is fixed at 3.5% at the moment, this
leaves the logical choices either of authorizing Mr. Blakmer to retain the
services of an external investment manager for the period of time necessary to
meet the plaintiffs needs, or of exposing her to the vagaries, the latter of
which the law does not permit.
[125] In
different economic circumstances, such as those experienced in most years since
1994, one could readily accept the defendants point that Mr. Blakmer has the
ability and experience needed to invest an award like the plaintiffs through a
combination of prudent instruments, and achieve a 6% return relatively easily.
In my opinion, however, Mr. Blakmers statement that he would not act as
trustee for the plaintiff without the ability to retain an external investment
manager is a reasonable position and deserves considerable weight.
[126] The
plaintiffs circumstances are unlike those seen in cases discussed earlier,
such as Li and Yeung, where the courts expectations were that if
the plaintiff had the services of an external investment manager; they would
see returns in excess of those assumed by the statutory discount. But in the
present case, the evidence points to reasonable expectation that even with the
assistance of an professional investment manager, especially in the earlier
years of investing, the plaintiff chances of achieving the statutory rate of
return are guarded.
[127] I note
Justice Lamberts comments in Lee that these decisions, as with the
present one, are decided on their individual facts and circumstances.
V.
Management Fees – Conclusion
[128] Considering
all the evidence, I confirm the plaintiff is not capable of managing her
financial affairs. I find she requires the assistance of a trustee to protect
her award from dissipation and financial mismanagement and that it was
reasonable for her to retain the services of Solus.
[129] I also
find, considering all the evidence, that to prevent erosion of her award, the
plaintiffs trustee requires the assistance of an external investment manager
for a certain period. Funding for the plaintiffs trustee is set at the rate
typically charged by the Public Guardian and Trustee rate: 0.4% of the gross
value of the plaintiffs assets under administration and 5% of the yearly
income earned by the assets and for external financial management, at .75% of
the annual value of the fund.
[130] However, I
also have to address the further question of the length of time the trustee
will require the services of an external investment manager.
[131] The only
empirical evidence of what the economy holds for future investors is
contained in Mr. Guises statement. He foresees lower expected returns on
traditional asset classes over the next 5-7 years. That is one consideration.
[132] Another
consideration is that an 18-year period of front-end investing is critical to
ensuring the plaintiff receives the full benefit of her award. As mentioned, a
3.5% rate of return is essential to allow the plaintiff to accumulate capital
in the form of reinvestment of income earned in excess of her needs when she is
young. This will also give her time to see the trust fund benefit from the
compounding necessary to ensure the trust fund does not sink prematurely.
[133] Another
consideration is that when the plaintiff is older, the balance of her portfolio
will shift more towards interest bearing instruments and include more passive
investment strategies and use of interest bearing securities.
[134] To address
all the above concerns and considerations, I find an award of fees for external
management of the plaintiffs investment portfolio for a period of 15 years is
reasonable.
[135] However,
this fails to address two concerns. First, if Solus assumes responsibility for
overseeing investment of the plaintiffs investments after 15 years, the
plaintiff would be subject to a fee of 5% of income earned on the trust fund,
which, assuming, for example, that the plaintiffs income from the trust fund 16
years later is $50,000 in current dollars, she would have to pay the trustee
the equivalent of an additional $2,500 yearly.
[136] After 15
years, I find the plaintiff will also require periodic investment reviews
throughout the duration of the award. This level of management is encompassed
by level 2 of management fees, as set out in the LRC report. In my view, the
external discretionary fund manager would be positioned to set up an initial
transitional plan to facilitate the plaintiffs move toward a less active management
strategy. I anticipate Solus would continue to monitor the plaintiffs
portfolio, which by then should have transitioned from a strategy that involves
short term buying and selling. Although periodic investment reviews may be
necessary that involves retaining of professional investment advice, I assume
the plaintiffs trustee by then would be charging 5% of income earned on the
plaintiffs trust fund to reflect the fact the trustees more active
involvement in managing the plaintiffs portfolio. If that is not the case, the
plaintiff could use the equivalent amount to pay the costs of obtaining
periodic investment advice. In either case, commencing one year after the
external management of the plaintiff trust fund ends, she becomes is entitled
to an award of 5% of income-earned yearly by her trust fund.
[137] I leave it
to counsel and their advisors to make the necessary calculations, based on the
findings in these reasons. If they cannot agree, or require any clarification,
they may appear or seek direction in writing through the Supreme Court trial
coordinator in New Westminster.
VI.
HST Changeover
[138] Although
the changeover from a combined GST to an enhanced PST is incomplete, I take
judicial notice that, as before, the rate will as before, 7% provincial sales tax
and 5% GST, equal to the 12% HST. Calculations are to be made accordingly.
VII.
Final Clarifications
[139]
If I have made any arithmetic or similar errors the parties wish me to
address, they may forward their request in writing to the Supreme Court Trial
Scheduling New Westminster. The parties may likewise deal with costs.
N. Brown J.