Category: Tax Gross Up

Court Prefers “Probability of Survival” Approach Over “Life Certain” Approach For Purposes Of Calculating Depletion Of Future Cost Of Care Award

In Riding-Brown v. Jenkins, the Plaintiff was seriously injured as a cyclist when struck by a motor vehicle. At trial, he was awarded over $1,000,000 in total damages, including $210,000.00 for the cost of future care.


After the trial, counsel for both parties could not agree on certain issues such as management fees, and the appropriate tax gross up amount. Management fees, although not automatic, are awarded in certain circumstances to assist the Plaintiff in getting professional investment advice if the Court feels they may not be properly able to manage their awards. Tax gross up is an amount awarded to assist a Plaintiff in offsetting any tax that must be paid that is earned on the future cost of care award.


Prior to ascertaining the amounts for management fees and tax gross up, the Court had to determine the proper method at which the plaintiff’s future cost of care award would be depleted.


Counsel for each party called expert evidence in this regard, with counsel for the Plaintiff urging the Court to use the “probability of survival” approach, meaning that the monthly depletion of the cost of care award should take into consideration negative contingencies, such as the probabilities of survival or death. Counsel for the Plaintiff argued that it should not be assumed that the Plaintiff will spend the same amount each month on his care.


ICBC’S lawyer argued that the Court should adopt the “life certain” approach, which presupposes that the Plaintiff’s future care award will be depleted each month by what is necessary for monthly care expenses.


With respect to the correlation between this issue, management fees and tax gross up amounts, the Plaintiff’s desired method would delay depletion of cost of care amounts, which would necessitate increases for management fees and tax gross up methods. The Defendant’s method would lead to earlier depletion of cost of care funds, meaning that the amount of taxes paid on these funds would be less, which would mean a lower amount for tax gross up, and a reduction in management fees, as there would be less of a period of time needed to manage the funds.


The Court considered previous decisions, eventually adopting the “probability of survival” approach.


[19]        The defendant’s proposed method will lead to earlier depletion of the cost of care funds, meaning that less tax will be paid on those funds, likely warranting a lesser amount for tax gross‑up. Earlier depletion of the funds may also justify a reduction in the award for management fees, as the fund will require management for a shorter period of time. Conversely, the plaintiff’s method, which delays depletion of the cost of care funds, may warrant corresponding increases for tax gross‑up and management fees.


[20]        Mr. Justice Grist considered this issue in Whetung v. West Fraser Real Estate Holdings Ltd., 2008 BCSC 182 (CanLII), at paras. 7‑10, as did Madam Justice Boyd in Burdett (Guardian ad litem of) v. Mohamed, 2010 BCSC 311 (CanLII), at paras. 7‑12, Mr. Justice Wilson in Sartori v. Gates, 2011 BCSC 214 (CanLII), at paras. 24‑30, and, most comprehensively, Mr. Justice Brown in Cikojevic v. Timm, 2012 BCSC 1688 (CanLII), at paras. 4‑47. Each concluded that the calculated depletion of cost of care funds should account for negative contingencies in the manner proposed by the plaintiff’s expert economist in this case.


[21]        I see no reason to depart from the rationale expressed in these decisions, and rule that the assumed depletion of Mr. Riding-Brown’s cost of care award should be calculated in accordance with the “probability of survival” approach.

Court Allows Tax Gross Up Fees Of $430,000

In Lines v. Gordon et al. and ICBC, the Plaintiff was injured in a motor vehicle collision, and consequently brought an ICBC claim for damages for pain and suffering, past wage loss, diminished earning capacity, out of pocket expenses, and the cost of future care. At trial, the Plaintiff was awarded over three million dollars for all damages. One of the issues for the Court to decide was if the damages award was to be paid out on a lump sum basis, what amount would be awarded for tax gross up for cost of future care, as well as committee and management fees. The Court heard differing methodologies, namely the “survival probability” model and the “life certain” model adjusted for survivability, from the competing experts, ultimately favoring the latter which was used by the Defendant‘s expert, and awarded tax gross up fees of $430,000.


[44]           I have awarded the plaintiff tax gross-ups for both the award for future care, and for committee and management fees.

[45]           Although the parties agree that an income tax gross-up is appropriate in the case of a lump sum award, they vary wildly in their assessment of the appropriate quantum for such an award.  The plaintiff’s expert, Mr. Carson, estimates the tax gross-up at $489,500.00.  The defendants’ expert, Mr. Gosling, submits that the gross-up and committee fees combined should be $581,288.  This significant deviation can be explained by the fact that the experts’ assumptions varied greatly.

[46]           The experts’ assumptions diverged significantly with regard to the following four items: 

1.         Treatment of disability tax credits;

2.         Period of drawdown;

3.         Inclusion of CPP disability and retirement benefits in first dollar income; and

4.         Methodology

[47]           In general, I prefer the evidence of Mr. Carson regarding the first two issues, and the evidence of Mr. Gosling regarding the latter two items.  Each of these assumptions will be discussed briefly below.


[56]           Finally, the two experts disagreed with respect to the proper methodology to apply.  Mr. Carson favours what he calls a “survival probability” model, while Mr. Gosling prefers a version of the “life certain” model adjusted for survivability.


[58]           Although I do not necessarily agree that Mr. Gosling’s method is more accurate based upon the testimony of both experts, I note that this court has favoured Mr. Gosling’s approach in all three cases where the two have both been considered.  For that reason alone, I am bound by comity to follow the authority laid down in the cases noted above.

$10,025 Awarded To Plaintiff For Tax Gross Up

When a Plaintiff is involved in a motor vehicle accident, and is awarded damages for future care, they will invariably invest the money, and draw from it from time to time. However, when this is done, they will be taxed on the amount taken out. The Courts have recognized this, and award what is known as “tax gross up” damages to help offset negative tax consequences.


In Sartori v Gates, the British Columbia Court of Appeal commented on this area of law. The Plaintiff had asked for $10,000, and the ICBC lawyer had suggested that $3,000 would be more appropriate.


[19]           Accordingly, it is not correct to say that courts are not inclined to give plaintiffs the benefit of these potential investments, nor is it correct to say that it is inappropriate to penalize them by taking into consideration the tax benefits of a tax free savings account.


[20]         In result, I find the tax free savings account benefits to be a lawful consideration in defining the tax gross up amount.  That said, however, Townsend is also authority (among many, many others) for the principle that, “compensation aims at restoring the victim to the position that person would have been in had no loss been incurred”.


[21]         A cost of future care award is founded on the theory that the tortfeasor must provide a fund from which the victim may draw to meet future expenses as they occur.  It is a presumption of law that the fund will be invested and will earn income.  According to the theory, as I understand it, the fund and its income, is a separate stand-alone phenomenon.  It appears to me that Mr. Szekely has treated it as such in his analysis.  Therefore, the tax benefits available to the plaintiff, by virtue of a tax free savings account, are exhausted in this separate stand-alone account.


[31]         Finally, the fund available to meet the plaintiff’s costs of future care is $41,333.33.  I find it is more probable than not that the income to be earned from the investment of this fund will be interest income.  Therefore, I make no allocation for capital gain or dividend income and assess the tax gross up at $10,025.