Saturday, December 11, 2010

BC Court of Appeal Rules on Net Past Wage Loss Calculations in Motor Vehicle Cases

Historically in Canada past and future income loss awards in personal injury cases were not subject to a reduction for taxes.  The rationale seemed to be that it was up to the legislature to impose a tax on personal injury awards, not the Courts.  The Courts would simply award gross past and future wage loss amounts based on the evidence in a case without any consideration of the taxes that would have been been paid if the accident had not happened and the plaintiff had actually earned the income awarded in the case.  This significantly assisted plaintiffs attempt to achieve full compensation for their injuries in personal injury cases.

However, this changed in British Columbia on June 17, 1997 after ICBC successfully lobbied for changes to the Insurance (Motor Vehicle) Act.  The changes ICBC was able to implement to the Act limited plaintiffs to recover only net past wage loss rather than gross past wage loss in injury cases arising from car accidents.  One can take cold comfort from the the fact that the changes to the Act only apply to wage loss claims arising from car accidents and only to past wage loss awards, not future awards.  Future wage loss or future capacity awards remain gross and past wage loss claims in injury cases that do not arise from car accidents also remain gross in BC. 

Following the changes to the Act in 1997 there have been a number of decisions from the BC Supreme Court and Court of Appeal considering how net past wage loss deductions should be calculated.  This issue is important because the method by which the deductions are calculated can have a significant impact on the amount a plaintiff is awarded.

Some of the key issues concerning the method of calculation that have been considered by our Courts are: (1) whether past income should be calculated as though it was earned in each of the years before the accident in which it is claimed, or, as though it was earned on a lump sum basis in one year; and (2) if the plaintiff has residual earning capacity and actually earned some income in any of the years for which past income loss is claimed, should the lost income be added to the actual income earned, or, be considered on its own when the Court decides which marginal tax rate to apply to the past income loss.

In Laxdal v. Robbins the BC Court of Appeal clarified how net past wage loss is to be calculated in motor vehicle accident injury cases.  The Court held that, (1) if there is evidence to establish that the past income loss is attributable to a particular year the loss should be calculated on a yearly basis rather than as a lump sum for all years as though it was earned in one year.  This benefits Plaintiffs because a higher marginal tax rate would apply if past wage loss stretching over a number of years were considered as though it was earned in one year.  The Court also held that (2) when a Judge is considering what the appropriate marginal tax rate is in each year the income was lost, the lost wages should be added to the actual income earned by the plaintiff in that year.  This bad for Plaintiffs as it means that a higher marginal tax rate will apply to a plaintiff's past loss if the plaintiff is not totally disabled in the years leading up to trial and earns income in any of the years.

The Court stated as follows on these issues in Laxdal v. Robbins, 2010 BCCA 565:

[17]         The respondent argued that a plain reading of the reference in s. 95 of the Insurance (Vehicle) Act to only “the gross income that the person lost in that period less the amount that would have been payable on that gross income” compels one to the conclusion that the past income loss award is to be taxed without reference to taxes otherwise payable during the same taxation year. In my view, such a reading of s. 95 is not harmonious with s. 98 of the Act, as amended, which seeks to award “damages for the income loss suffered after the accident and before the first day of trial of any action brought in relation to it, [of] not more than the net income loss that the person suffered in that period as a result of the accident”.
[18]         I have concluded that the trial judge was incorrect in interpreting ss. 95 and 98 of the Insurance (Vehicle) Act as not requiring a reduction in her award for past loss of income to reflect the tax consequences when that loss is combined with earned income during the same period. The words of those sections must be read in their grammatical and ordinary sense.
[19]         Having found that the losses all occurred in 2006, the trial judge ought to have combined the respondent’s 2006 income with the past income loss award for the purpose of determining the income she would have earned for income tax purposes “as if she had continued working” (as per Tysoe J.A. at para. 185 of Lines). To achieve this result, the appellant proposed the use of what has been referred to as the “stacking approach”.
[20]         I am satisfied that, where an income loss can be attributed to a particular tax year or years, the language of ss. 95 and 98 of the Insurance (Vehicle) Act requires a resort to the stacking approach. Although Tysoe J.A. explained in the examples he referred to in Lines that “it was the intention of the Legislature to give a discretion to the judge to determine what period or periods are appropriate for the determination of net income loss in all of the circumstances”, once that determination is made, the legislation requires a deduction from the gross income loss to take into account the provisions of the Income Tax Act of British Columbia, the Income Tax Act of Canada and the Employment Insurance Act of Canada for the relevant year or years.
[21]         In England, where only net earnings after income tax are recoverable in tort, the stacking approach has been used to determine net income loss. In Lynndale Fashion Manufacturers v. Rich, [1973] 1 W.L.R. 73; 1 All E.R. 33, the Court of Appeal approved of the stacking approach stating at paras. 79-80:
... whether having arrived at a net taxable income it is proper to divide the total tax bill rateably between the loss of capacity and the other income or whether the loss of capacity falls to be treated at the top part of the income and thus attracting to itself the higher rates of tax applicable in the assumed assessment.
In my judgment, the question which on the authorities has to be posed, namely, how much larger would the tax have been if the (loss of capacity) had been received as additional (income) admits of only one answer. For, if a comparison is to be made between a given income and that income with something added, the addition must be treated as the top part of the income. To treat it otherwise would not produce the true amount of the additional tax since it is the increase in income which attracts the higher rates of tax.
This approach was subsequently adopted by the House of Lords in Hodgson v. Trapp, [1989] A.C. 807.
[22]         As Tysoe J.A. observed in Lines at para. 180:
... It does seem somewhat odd for the income loss allocated to a particular year to be reduced according to one set of tax rules (i.e., the tax rules for the preceding year), while the plaintiff's actual earnings for that year are taxed according to a different set of tax rules (i.e., the tax rules for the year in which the income was earned).
[23]         The application of the stacking approach in accordance with the legislation will result in the combination of the award for past income loss with the other income earned for the same year, but the application of the enumerated legislation from the preceding year to only that portion of the total income for that year represented by the award. While the result is a cumbersome calculation, I see no need to resort to any exceptional construction of the legislation, as discussed by Lamer J., as he then was, in R. v. Paul, [1982] 1 S.C.R. 621 at 662, in order to achieve the legislative intent of ss. 95 and 98 of the Insurance (Vehicle) Act. Section 95(a) of the Insurance (Vehicle) Act refers in each of its subsections to taxes or premiums as the enumerated Acts “read on December 31 of the calendar year before the calendar year in respect of which the net income loss is to be determined”. In my view, this wording accommodates awards for either single or multiple years of income loss by permitting a judge to allocate the loss as discussed at para. 184 of Lines, and to then subject the award for that year or years to the effect of the specified legislation based on their provisions for the preceding year.
[24]         A feature of the present legislation that does not arise in this case is the inability of a person injured in a motor vehicle collision to take advantage of any tax planning, such as a contribution to a Registered Retirement Savings Plan. In Lines Tysoe J.A. concluded at paras. 190-194 that such a notional contribution could not be allowed when calculating net income loss under ss. 95 and 98. While the inability to take advantage of such tax planning will not place the injured person in the same position that he or she would have been in, but for the accident, the application of the stacking approach will come as close to so doing as possible, while at the same time giving effect to the intent of the Legislature.
[25]         In this case, the respondent’s total reported income for the year 2006 was $40,175.00. The respondent paid $6,024.05 for federal and provincial income tax that year, which represented an overpayment of $202.26.
[26]         I conclude that the appropriate means by which to arrive at the respondent’s net past income loss is:
a)       to determine her income from other sources during 2006 ($40,175.00);
b)       add that figure to her income loss after taking into account the sick benefits she received ($3,306.24);
c)       determine the tax that would be payable on $43,481.24, based upon the 2005 income tax rules and regulations by computing the amount in accordance with the provisions of the Income Tax Act of British Columbia, the Income Tax Act of Canada and the Employment Insurance Act of Canada applicable to the calendar year ending December 31, 2005 and on $40,175.00 based upon the 2006 income tax rules and regulations by computing the amount in accordance with the provisions of the Income Tax Act of British Columbia, the Income Tax Act of Canada and the Employment Insurance Act of Canada;
d)       subtract the difference between the two tax figures determined in c, above;
e)       then deduct d from the income loss award, net of sick benefits that she received.

posted by Collette Parsons at


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