Implications of Duncan v. Baddeley
This article first appeared in the summer 1997 issue of the Expert Witness.
The recent decision in Duncan v. Baddeley (Alberta Appeal #9503-0408-AC), provides important direction for both fatal accident and "lost years" claims. In this article, I review a number of the implications of this decision for the assessment of tort damages. The first part of the article deals with fatal accident claims. The remainder discusses "lost years" claims.
Fatal Accident Claims
Justice Kerans ruled that, regardless of whether the deceased had any dependants,
. . . in Alberta a claim for loss of future earnings does survive the death of the victim. And, with two important qualifications, that claim should be assessed as would any claim for loss of future earnings (Duncan, at 2).
The two qualifications to which he referred are that deductions are to be made from the deceased’s projected annual income for (i) income taxes and (ii) the "cost of personal living expenses."
The purpose of this section is to assess the impact of the Duncan decision on the calculation of damages in fatal accident cases. This assessment is conducted in three parts. In the first of these, I review the calculation of the two deductions. In the second, I consider the arguments concerning a "tax gross up" in calculations based on Duncan. Finally, in the third, I identify whether there are any cases in which dependants, who are eligible to sue under the Fatal Accidents Act, might find it advantageous to base their claim on Duncan (that is, on the Survival of Actions Act).
Method of Calculation
Justice Kerans ruled that the income taxes which would have been paid by the deceased must be deducted from gross income when calculating the loss to the estate. Although he appears to believe that the deceased would have paid ". . . taxes in the area of 30 to 40 percent of his income," Statistics Canada data suggest that the average Canadian household pays only 20 percent of its income as income taxes — with a range from about 10 percent to 30 percent.
Second, an amount is to be deducted from after-tax income for the "costs of personal living expenses." After canvassing a number of alternative methods for calculating this deduction, Justice Kerans settled on an approach which he attributed to Constance Taylor, the plaintiff’s counsel. This method, which Justice Kerans refers to as the "available surplus" approach, was first enunciated in the U.K. Court of Appeal in Harris v. Empress Motors (1983) 3 All E.R. 561 and later adopted in one of the first Canadian cases concerning the "lost years deduction," Semenoff v. Kokan (1991) 84 D.L.R. (4th) 76. In the latter case, the court concluded that the "conventional deduction" was 33 percent of income.
Kemp and Kemp on the Quantum of Damages explains how the available surplus approach is to be applied, using an example similar to the following: assume that a deceased male would have married and had two children. Of the family’s after-tax income, approximately 22 percent would have been spent on items which benefitted the deceased alone. In addition, approximately 40 percent of family income would have benefitted all members of the family equally. Thus, if one-fourth of that portion of income, or 10 percent, is allocated to the deceased, the total fraction of family income which would have benefitted the deceased is approximately 32 percent.
Two points need to be made with respect to the available surplus approach. First, it should be noted that if this approach was to be applied to an individual who had no reasonable prospect of being married over the period of her or his loss, the value of the damages which would be calculated would equal those calculated using the "lost savings" approach. That is, as all of a non-married individual’s expenditures are spent on him or herself, once personal expenditures have been deducted from after-tax income it is only savings which will remain. As Justice Kerans was highly critical of the lost savings approach, it appears that the available surplus approach may not stand up to scrutiny. Indeed, although Justice Kerans indicated that it was the plaintiffs who had argued for the available surplus approach in Duncan, a review of their submissions suggests that it is the "conventional approach" which they preferred. (See the discussion of "lost years," below.)
Further, as Scott Beesley argued in "Shortened Life Expectancy: The ‘Lost Years’ Calculation" (Vol. 1(1) of The Expert Witness), it is difficult to argue that wealthy individuals spend as much as 32 percent of their incomes on the "costs of personal living expenses." Rather, as incomes rise, an increasing portion of expenditures is devoted to items which could only be categorized as "luxury". Thus, at least for high income earners, one would assume that the appropriate deduction would be less than 32 percent — and for low income earners it would be greater than 32 percent.
Income Tax "Gross Up"
Whereas an income tax "gross up" is allowed in most fatal accident cases, it is not allowed in personal injury claims for lost earnings. The usual rationale which is offered for this is that the effect of basing (personal injury) damages on gross (before-tax) income is to produce an award which is approximately equal to that which would have been obtained by "grossing up" a lump sum award based on after-tax income.
In Duncan, even though income tax was deducted, as in other fatal accident cases, no allowance was made for a tax gross up. It is my view that no gross up will be allowed in cases brought under a Duncan type of claim. The reason for this is that the tax gross up is only required if the plaintiff is expected to invest her or his award in order to replace a future stream of lost income. In Duncan claims, however, there is no presumption that the estate will invest the award in such a way as to replace the deceased’s income stream on a year-by-year basis. Hence, it appears that no gross up will be necessary.
Distinction Between the "Fatal Accidents Act" and the "Survival of Actions Act"
It appears from Justice Coté’s concurring decision in Duncan that overlap between Fatal Accidents Act and Survival of Actions Act claims will be possible in only extremely exceptional circumstances. Hence, it will be important to determine which of these Acts will yield the higher award to the plaintiffs in those cases in which they are eligible to select between those two causes of action — that is, in cases in which the plaintiffs are also dependants of the deceased.
It appears that in most circumstances dependants would receive a higher award under the Fatal Accidents Act than under the Survival of Actions Act. There are three reasons for this. First, whereas it is only that portion of family income which the deceased spent directly on him or herself which is deducted in a traditional fatal accident claim, in a Duncan type of claim, it is this amount plus the deceased’s share of common family expenses which is to be deducted. Second, no claim for loss of household services can be made in a Duncan claim. Finally, it appears that no tax gross up will be allowed in the latter claim.
There are, however, two factors which might make it advantageous for dependants to file their claim under the Survival of Actions Act. First, if the Alberta courts should decide that it is the cross dependency approach which is to be employed when calculating losses under the Fatal Accidents Act, a deduction will be made for the portion of the survivors’ incomes which was spent on the deceased. No such deduction was contemplated in Duncan. As this deduction can be very substantial — particularly when the survivors earn more than the deceased — high income survivors may be able to make a larger claim under the Survival of Actions Act than under the Fatal Accidents Act. (It should be noted, however, that many experts recommend use of the sole dependency approach. See, for example, my article, "Calculation of the Dependency Rate in Fatal Accident Actions" [Vol. 1(4) of The Expert Witness].)
Second, damages in fatal accident claims are reduced for the possibility that the surviving spouse may remarry. In cases in which this possibility is very high — usually those involving individuals less than 35 years old — the survivor may find it advantageous to claim under the Survival of Actions Act.
Alternatively, it has recently been suggested to me that it may be possible to add together a "standard" claim under the Fatal Accidents Act and some portions of the deceased’s income which cannot be claimed by dependants under the Fatal Accidents Act but which are permissible under the Survival of Actions Act. One such portion might be the "non-necessary" element of the deceased’s expenditures on him or herself. This portion would be deducted in a standard fatal accident claim but might be claimable under the Survival of Actions Act.
"Lost Years" Actions
Duncan also has important implications for the assessment of damages in "lost years" claims; that is, in personal injury claims in which the plaintiff’s life expectancy has been shortened significantly. In these cases, the courts have ruled that a deduction for the cost of necessities is to be made from the income which the plaintiff would have earned during his/her lost years.
Although Justice Kerans appeared to accept the "available surplus" approach to the calculation of this deduction, this approach necessarily becomes identical to the "lost savings" approach when the deceased could have been expected to remain single — and Justice Kerans had explicitly rejected the latter approach. With respect, I suggest that Justice Kerans’ discussion in Duncan is more consistent with the application of what is known as the "conventional deduction" approach than it is with the "available surplus" approach.
First, Justice Kerans expressed his approval of the B.C. Court of Appeal’s reasoning in Semenoff v. Kokan, in which the court appeared to have had in mind the "conventional deduction" approach. Second, the 20–30 percent deduction recommended by Justice Keran in Duncan was consistent with the 33 percent deduction adopted only two months earlier in the Alberta trial division decision: Brown and Fogh v. University of Alberta Hospital. In that decision, Justice Marceau explicitly adopted the "conventional deduction" approach.
Together, it appears that Semenoff, Brown, and Duncan signal a preference for a conventional deduction of approximately 30 percent in both fatal accident and lost years actions.