Knowledge

The Capital Asset Approach To Calculating Damages

Rehana MoosaBy Rehana Moosa

Published in the May 2, 2014 edition of The Lawyers Weekly (co-author)

Canadian courts have typically adopted one of two categories in quantifying financial losses due to bodily injury. One is the “lost earnings” approach, which attempts to directly measure the decrease in the plaintiff’s future earnings level by projecting what they would have earned absent the accident and comparing it to what they will likely earn.

A second approach is commonly known as the “capital asset” approach, which originated with the Supreme Court’s ruling in Andrews v. Grand & Toy Alberta Ltd. [1978] S.C.J. No. 6. It measures the plaintiff’s damages by the reduction in the value of their person as a generator of economic value. While the plaintiff’s historic or projected earnings level may form a basis for valuing this “capital asset” – valuation theory holds that the value of an asset is equal to the present value its projected earnings – often this data will not pain a full picture of the plaintiff’s loss.

Plaintiffs who are self-employed may have the option to hire other individuals to replace their own impaired labour. If the replacement worker is an arm’s length party, the Supreme Court has accepted the replacement wage as an appropriate measure of damages (Engel v. Salyn [1993] S.C.J. No. 4).

Even in cases in which the replacement worker is a family member who is not paid a market wage, courts have still held that the notional cost of the replacement worker can be used to measure the plaintiff’s loss. For example, in Madge v. Meyer [1999] A.J. No. 1566, the plaintiff’s son assumed management of the family farm following his father’s accident. The court invoked the “capital asset” approach and ruled that the appropriate measure of damage was the notional cost to hire an experienced farm manager.

However, sometimes the full cost of hiring a replacement worker cannot be attributed solely to the incident. In Rezaei v. Leland [2013] B.C.J. No. 1972, the plaintiff hired another full-time mechanic to work at his auto repair business. The court correctly noted that the extra worker allowed the plaintiff to generate additional billings and grow his business, and that “there is a lack of evidence of the true net cost of adding… an extra employee.”

Accounting experts can help by quantifying the cost of the replacement labour based on the plaintiff’s accounting records (if a third party worker has been hired) or statistical data (if the replacement worker is a family member), or in explaining why the replacement labour may have been due to other factors (such as increased sales volumes, or other changes in the labour force).

The plaintiff’s income following the accident may remain constant or even go up, in spite of injuries. It is important to analyze why. For example, in Ibbitson v. Cooper [2012] B.C.J. No. 1365, the plaintiff’s annual tax returns showed no discernible decrease in income following the incident. However, on further analysis, it was shown that while prior to the accident he had worked a maximum of 6.5 hours per day, earning $455 to $545 per day, he earned only $32.20 per hour following the accident and worked significantly longer shifts. The court noted that had the plaintiff “worked the same amount of hours post-injury as he had pre-injury, he surely would have been found to have suffered a compensable loss of earning capacity. His entitlement to such damages does not disappear due to his industrious efforts to maintain his level of income.”

Courts have consistently ruled that in assessing loss, it is not what the plaintiff theoretically could have earned that is relevant, but rather what they would have earned. In Meehan v. Holt [2010] A.J. No. 603, the plaintiff worked as an employee at a chiropractic clinic for a number of years following the incident before opening her own practice. With the assistance of expert accounting analysis, the court found that the plaintiff’s new chiropractic practice did not generate enough clients to make any of her physical limitations relevant, and did not award anything for loss of earnings; the court did not accept the suggestion that the plaintiff’s labour should be valued based on the average employment income of chiropractors. Nonetheless, it awarded her $50,000 for loss of capacity, on the grounds that her injuries might prevent her taking on certain types of employment in the future.

This brings up to our final category. In some cases the injuries may not have translated into a reduction in income levels by the trial date for the simple reason that the plaintiff, though clearly impaired physically, has persevered in working through their injuries in the short term.

In such cases, the court is left to speculate as to whether, and to what extent, there will eventually be a loss. In Brown v. Golaiy [1985] B.C.J. No. 31, the court awarded the plaintiff the equivalent of one year’s income as a “rough and ready estimate.” In Kobzey v. Paziuk [2009] A.J. No. 1314, the court rejected outright the proposition that claims for loss of earnings capacity “should be empirically calculated, and if such calculation is not possible, then the claim has likely not been made out.”

Nonetheless, while it is true that it is sometimes necessary to make a “rough and ready” estimate to arrive at a damages amount using the “capital asset” approach, this does not mean that there can be no “wrong” answer. In Jurczak v. Mauro [2013] B.C.J. No. 783, the trial court awarded a past loss of income of $110,000 on the basis that the plaintiff was capable of working only 15 hours per week instead of her intended 23 hours; yet when it came to assessing the future loss of earning capacity, the court awarded – with no explanation – an amount that was out of proportion to the award for past loss of earnings. The Court of Appeal varied the award ([2013] B.C.J. No. 2635).

Historical earnings do not always form a proper basis for calculating personal injury damages. While awards under the “capital asset” method may sometimes involve less explicit quantitative reasoning, expert accounting analysis can be helpful in suggesting alternate methodologies to arrive at a defensible award.

Contact us to learn more.   647-426-0146  |  rehana@rmforensics.ca

Communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. For permission to republish this content, please contact Rehana Moosa Forensic Accounting Professional Corporation.

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