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Loss of Earning Capacity

October 22, 2021

British Columbia

,

Canada

Issue

How to courts calculate loss of earning capacity for a self-employed individual operating an unsuccessful business?

Conclusion

It is correct to say that an award of damages for loss of earning capacity is a result of the careful weighing of all the evidence and the application of considered judgment to that evidence. It is not a calculation. Because the court is required to take into account all substantial possibilities it is necessary to use careful judgment in weighing those possibilities. In order to ensure that all reasonable substantial possibilities are taken into account, however, the conventional approach dictates that there are two major components to an assessment of loss of future earning capacity. One is the general level of earning thought by the trial judge to be realistically achievable by plaintiff but for the accident, taking into account the plaintiff’s intentions and factors that weigh both in favor of and against that achievement, and the other is the projection of that earning level to the plaintiff’s working life, taking into account the positive and negative vagaries of life. From these two major components must be applied an analysis that produces a present value of the loss, adjusted for all appropriate contingencies.The standard of proof to be applied when evaluating hypothetical events such as loss of future earnings, is simple probability rather than the balance of probabilitie. (Meghji v. British Columbia (Ministry of Transportation and Highways))

The most basic of those principles is that a plaintiff is entitled to be put into the position he would have been in but for the accident so far as money can do that. An award for loss of earning capacity is based on the recognition that a plaintiff’s capacity to earn income is an asset which has been taken away. Where a plaintiff’s permanent injury limits him in his capacity to perform certain activities and consequently impairs his income earning capacity, he is entitled to compensation. What is being compensated is not lost projected future earnings but the loss or impairment of earning capacity as a capital asset. In some cases, projections from past earnings may be a useful factor to consider in valuing the loss but past earnings are not the only factor to consider. (Rosvold v. Dunlop)

There is a discrete, two-step process that is required with respect to these past and future loss of earning capacity claims:

1. the court must first determine whether, as a result of the injuries sustained in the accident(s), the plaintiff's past or future earning capacity has been or will likely be impaired, such that there has been an actual loss of income in the past and/or a real and substantial possibility of a loss of income in the future; and

2. if so, then the court must then determine the amount of past loss that has been incurred to the date of trial and, on a present value basis, assess the amount to be awarded for any possible future financial loss. (Kallstrom v. Yip)

Most cases are not simple to asess. Young persons who have not settled into a career, those with an irregular or no history of employment income, self-employed entrepreneurs, and those involved in unconventional income-earning enterprises are all examples where any past or future loss of earning capacity can be very difficult to both establish and measure. So too where an injured plaintiff has returned to work (usually with a sympathetic employer), but whose future remains uncertain. In these difficult cases, step one in the analysis, entitlement, is often informed by the following factors:

1. The plaintiff has been rendered less capable overall from earning income from all types of employment;

2. The plaintiff is less marketable or attractive as an employee to potential employers;

3. The plaintiff has lost the ability to take advantage of all job opportunities which might otherwise have been open to him, had he not been injured; and

4. The plaintiff is less valuable to himself as a person capable of earning income in a competitive labour market,

bearing in mind that mere inability to perform an occupation that is not a realistic alternative occupation is not proof of a future loss. (Kallstrom v. Yip)

The following reasoning process is adopted by the court in assessing the loss of future earning capacity:

• the findings of fact in the case should be expressly related to the actual assessment of damages;

• the court should undertake a "clear analysis of whether [the plaintiff] proved a substantial possibility of future income loss derived from [his/her] diminished marketability [or other components of any loss of earning capacity]";

• "[m]athematical, statistical or economic evidence, where available, may be of assistance in assessing damages";

• the court should provide an "explicit analysis of the general level of earnings [the plaintiff] would have realistically achieved, but for the accident, taking into account [his/her] intentions and the probabilities of achieving them";

• this should be followed by a "projection of [the plaintiff's] likely future earnings taking into account [the] injuries and other relevant contingencies";

• as part of this last step, if the court concludes that the plaintiff may have to accept less than full-time work in the future as a result of her his or her injuries, the court must assess the probability of that occurring and the extent to which the plaintiff will be restricted to such part-time work; and

• if parties provided the court with expert evidence from economists to assist in the valuation of lost capacity, the court should explain its relevance and what use, if any, the court ultimately makes of it.

The onus is on the plaintiff to establish that she is entitled to an award for loss of earning capacity. The plaintiff must first establish that there is a real and substantial possibility that her injuries will result in a future loss of earnings. If the plaintiff satisfies the first step in the analysis, then the plaintiff must quantify the loss. (Allen v Figueira)

In Nokleby v Fiddick, the plaintiff was injured when the car he was a passenger in was rear-ended by the defendant. At the time of the accident, the plaintiff resided with his wife and son in the Lower Nicola area where they lived on a three-acre farm, which the plaintiff and his wife had purchased. The plaintiff, who was 61 at the time of trial, claimed past and future loss of capacity to earn an income relating to his farming income. However, income tax evidence showed that the farm operated at a loss and was never profitable. As a result, the Court concluded that there could be no award for loss of earning capacity related to the farm.

In Joyce v. Dorvault, the plaintiff was injured in a motor vehicle accident. He and a partner had previously operated a business that sold helicopter parts. The business had been popular, however, two years before the accident his partner had left. At trial, the plaintiff contended his income, had he been able to continue to operate his business, would have been upwards of $300,000 a year. He sought an award of $550,000 for his past loss of income from 2003 to 2007. He was awarded $200,000. This award was made having regard for four negative factors the judge said were “considerable”: 1) the plaintiff was relatively new to the business and very new to the transaction side, although he was earning a good reputation; 2) the business had benefited from windfall income prior to the partner’s leaving which was not likely to be repeated; 3) experience indicated a person could earn $60,000 or more early on and $100,000 or more after a few years; and 4) the nature of the business has changed, particularly with the advent of the internet and it has become more competitive and less profitable. The Court of Appeal affirmed the trial judge's finding.

In Sunner v. Rana, the trial judge included a significant negative contingency in the calculation of the plaintiff's loss of earning capacity since the trial judge believed that the gas station business that the plaintiff operated was likely to fail. However, the Court of Appeal ruled that the trial judge's reasoning was in error and that his award was infected with his concern that the business would fail and with his failure to consider the positive contingencies of full‑time employment, consistent with the expert evidence, and the possible success of the business based on its financial records.

Law

In Meghji v. British Columbia (Ministry of Transportation and Highways), 2014 BCCA 105 (CanLII), the Court summarized the approach to assessing loss of future earning capacity, emphasizing that it was based on a careful weighing of all the evidence and the application of considered judgment to that evidence:

[81] It is correct to say that an award of damages under this head is a result of the careful weighing of all the evidence and the application of considered judgment to that evidence. It is not a calculation: Mulholland v. Riley Estate (1995), 1995 CanLII 1971 (BC CA), 12 B.C.L.R. (3d) 248 at para. 43, [1995] B.C.J. No. 1823 (C.A.). Because the court is required to take into account all substantial possibilities it is necessary to use careful judgment in weighing those possibilities. In order to ensure that all reasonable substantial possibilities are taken into account, however, the conventional approach is that described in Lines. In that case, at para. 57, Saunders J.A. held:

There are two major components to an assessment of loss of future earning capacity. One is the general level of earning thought by the trial judge to be realistically achievable by plaintiff but for the accident, taking into account the plaintiff’s intentions and factors that weigh both in favor of and against that achievement, and the other is the projection of that earning level to the plaintiff’s working life, taking into account the positive and negative vagaries of life. From these two major components must be applied an analysis that produces a present value of the loss, adjusted for all appropriate contingencies.

[82] The standard of proof to be applied when evaluating hypothetical events such as loss of future earnings, is simple probability rather than the balance of probabilities: Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458, [1996] S.C.J. No. 102.

In Kallstrom v. Yip, 2016 BCSC 829 (CanLII), Justice Kent set out a two-stage process for the calculation of past and future loss of earning capacity:

[393] There is a discrete, two-step process that is required with respect to these past and future loss of earning capacity claims:

1. the court must first determine whether, as a result of the injuries sustained in the accident(s), the plaintiff's past or future earning capacity has been or will likely be impaired, such that there has been an actual loss of income in the past and/or a real and substantial possibility of a loss of income in the future; and

2. if so, then the court must then determine the amount of past loss that has been incurred to the date of trial and, on a present value basis, assess the amount to be awarded for any possible future financial loss.

Justice Kent identified scenarios where the loss of earning capacity is difficult to quantify, including self-employed entrepreneurs and others involved in unconventional income-earning enterprises. Justice Kent endorsed five factors that should be considered in such cases:

[396] Most cases are not as simple as the scenario described above. Young persons who have not settled into a career, those with an irregular or no history of employment income, self-employed entrepreneurs, and those involved in unconventional income-earning enterprises are all examples where any past or future loss of earning capacity can be very difficult to both establish and measure. So too where an injured plaintiff has returned to work (usually with a sympathetic employer), but whose future remains uncertain.

[397] In these difficult cases, step one in the analysis, entitlement, is often informed by the factors listed in Brown v. Golaiy (1985), 1985 CanLII 149 (BC SC), [1997] 26 B.C.L.R. (3d) 353 (S.C.) at para. 8, namely whether,

1. The plaintiff has been rendered less capable overall from earning income from all types of employment;

2. The plaintiff is less marketable or attractive as an employee to potential employers;

3. The plaintiff has lost the ability to take advantage of all job opportunities which might otherwise have been open to him, had he not been injured; and

4. The plaintiff is less valuable to himself as a person capable of earning income in a competitive labour market,

bearing in mind that mere inability to perform an occupation that is not a realistic alternative occupation is not proof of a future loss: Perren v. Lalari, 2010 BCCA 140.

In Allen v Figueira, 2020 BCSC 1864 (CanLII), the Court explained that the onus is on the plaintiff to establish that she is entitled to an award for loss of earning capacity:

[134] The onus is on the plaintiff to establish that she is entitled to an award for loss of earning capacity. The plaintiff must first establish that there is a real and substantial possibility that her injuries will result in a future loss of earnings. If the plaintiff satisfies the first step in the analysis, then the plaintiff must quantify the loss. In Perren v. Lalari, 2010 BCCA 140, Madam Justice Garson described the plaintiff's onus at para. 32 as follows:

[32] A plaintiff must always prove, as was noted by Donald J.A. in Steward, by Bauman J. in Chang, and by Tysoe J.A. in Romanchych, that there is a real and substantial possibility of a future event leading to an income loss. If the plaintiff discharges that burden of proof, then depending upon the facts of the case, the plaintiff may prove the quantification of that loss of earning capacity, either on an earnings approach, as in Steenblok, or a capital asset approach, as in Brown. The former approach will be more useful when the loss is more easily measurable, as it was in Steenblok. The latter approach will be more useful when the loss is not as easily measurable, as in Pallos and Romanchych. A plaintiff may indeed be able to prove that there is a substantial possibility of a future loss of income despite having returned to his or her usual employment. That was the case in both Pallos and Parypa. But, as Donald J.A. said in Steward, an inability to perform an occupation that is not a realistic alternative occupation is not proof of a future loss.

[Emphasis in original.]

The Court outlined a reasoning process adopted by the court in assessing the loss of future earning capacity:

[135] In Dzumhur v. Davoody, 2015 BCSC 2316, Mr. Justice Kent, citing Schenker v. Scott, 2014 BCCA 203, outlined the reasoning process adopted by the court in assessing the loss of future earning capacity at para. 212:

• the findings of fact in the case should be expressly related to the actual assessment of damages;

• the court should undertake a "clear analysis of whether [the plaintiff] proved a substantial possibility of future income loss derived from [his/her] diminished marketability [or other components of any loss of earning capacity]";

• "[m]athematical, statistical or economic evidence, where available, may be of assistance in assessing damages";

• the court should provide an "explicit analysis of the general level of earnings [the plaintiff] would have realistically achieved, but for the accident, taking into account [his/her] intentions and the probabilities of achieving them";

• this should be followed by a "projection of [the plaintiff's] likely future earnings taking into account [the] injuries and other relevant contingencies";

• as part of this last step, if the court concludes that the plaintiff may have to accept less than full-time work in the future as a result of her his or her injuries, the court must assess the probability of that occurring and the extent to which the plaintiff will be restricted to such part-time work; and

• if parties provided the court with expert evidence from economists to assist in the valuation of lost capacity, the court should explain its relevance and what use, if any, the court ultimately makes of it.

In Rosvold v. Dunlop, 2001 BCCA 1 (CanLII), Mr. Rosvold was a roofer. At his trial there was no dispute that he could not return to his previous employment as a roofer earning about $37,000 per annum. After the accident he tried unsuccessfully to retrain in a few positions. His unproven business plan by the time of trial was to operate a home-based business, building pet toys and garden ornaments. He projected that his annual earnings from this endeavour would be $25,000. The judge awarded Mr. Rosvold the capitalized value of the differential between roofing and the new venture. Huddart J.A., writing for the Court, criticized the judge’s approach as “excessively mathematical”:

[7] The award for loss of earning capacity cannot be so easily resolved, as the appellant’s counsel recognized in an alternative submission. In view of the excessively mathematical approach the trial judge took to the assessment of this loss, encouraged it seems by both counsel, it is important to recall the principles that guide the assessment of damages for personal injury.

[8] The most basic of those principles is that a plaintiff is entitled to be put into the position he would have been in but for the accident so far as money can do that. An award for loss of earning capacity is based on the recognition that a plaintiff’s capacity to earn income is an asset which has been taken away: Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229; Parypa v. Wickware (1999), 1999 BCCA 88 (CanLII), 65 B.C.L.R. (3d) 155 (C.A.). Where a plaintiff’s permanent injury limits him in his capacity to perform certain activities and consequently impairs his income earning capacity, he is entitled to compensation. What is being compensated is not lost projected future earnings but the loss or impairment of earning capacity as a capital asset. In some cases, projections from past earnings may be a useful factor to consider in valuing the loss but past earnings are not the only factor to consider.

[9] Because damage awards are made as lump sums, an award for loss of future earning capacity must deal to some extent with the unknowable. The standard of proof to be applied when evaluating hypothetical events that may affect an award is simple probability, not the balance of probabilities: Athey v. Leonati, 1996 CanLII 183 (SCC), [1996] 3 S.C.R. 458. Possibilities and probabilities, chances, opportunities, and risks must all be considered, so long as they are a real and substantial possibility and not mere speculation. These possibilities are to be given weight according to the percentage chance they would have happened or will happen.

Huddart J.A. explained how trial judges might incorporate a pecuniary type of assessment into the overall analysis:

[11] The task of the court is to assess damages, not to calculate them according to some mathematical formula: Mulholland (Guardian ad litem of) v. Riley Estate (1995), 1995 CanLII 1971 (BC CA), 12 B.C.L.R. (3d) 248 (C.A.). Once impairment of a plaintiff’s earning capacity as a capital asset has been established, that impairment must be valued. The valuation may involve a comparison of the likely future of the plaintiff if the accident had not happened with the plaintiff’s likely future after the accident has happened. As a starting point, a trial judge may determine the present value of the difference between the amounts earned under those two scenarios. But if this is done, it is not to be the end of the inquiry: Ryder (Guardian ad litem of) v. Jubbal, [1995] B.C.J. No. 644 (C.A.) (Q.L.); Parypa v. Wickware, supra. The overall fairness and reasonableness of the award must be considered taking into account all the evidence.

Applying these principles to the assessment of Mr. Rosvold’s loss of earning capacity she made the following ruling:

[16] In my view, the trial judge’s failure to factor into his analysis the possibilities that Mr. Rosvold’s proposed business might fail, that it might produce less income than he anticipated, and that he might not find any alternate source of income led to an inordinately low award.

[17] In sum, the accident rendered Mr. Rosvold less capable of earning income from all types of employment, less attractive as a business partner, unable to take advantage of business opportunities that might otherwise have been available to him, and thus less valuable to himself as a person capable of earning income in a competitive labour market. He is entitled to compensation for that loss of earning capacity viewed as a capital asset.

[18] The assessment of damages is a matter of judgment, not calculation. Only Mr. Rosvold’s optimism and willingness to embark on a new and untried line of endeavour distinguish him from the 47-year old longshoreman who in otherwise very similar circumstances was awarded $695,000.00 based on the loss of an annual earning capacity of $49,000.00: Mazzuca, supra. When account is taken of all the evidence and the corrected pre-trial annual earning capacity, while having due regard for the trial judge’s confidence in Mr. Rosvold’s ability to start a successful business, I consider an appropriate award for loss of future earning capacity would be $300,000.00. I would vary the award for future loss accordingly and the award for past loss to $125,000.00.

In Nokleby v Fiddick, 2012 BCSC 1463 (CanLII), the plaintiff was injured when the car he was a passenger in was rear-ended by the defendant. At the time of the accident, the plaintiff resided with his wife and son in the Lower Nicola area where they lived on a three-acre farm, which the plaintiff and his wife had purchased. The plaintiff, who was 61 at the time of trial, claimed past and future loss of capacity to earn an income relating to this farming operation. However, income tax evidence showed that the farm operated at a loss. As a result, the Court concluded that there could be no award for loss of earning capacity related to the farm:

[67] As I have said, the above figures are without a capital cost allowance which is probably mainly the plaintiff’s truck which he uses for the farm to transport feed, take the animals to market, and deliver produce to his egg and lamb customers.

[68] This farm is a hobby which the plaintiff and his wife have pursued for over twenty years. The farm’s ability to earn income is limited as to the size of the farm and the number of animals that it can carry. It is truly a hobby farm.

[69] The plaintiff and his wife intend on pursuing their farming activities as long as they can. I can conclude that, as a result of the injuries suffered in the motor vehicle accident, the plaintiff may not be able pursue his farming activities with quite the vigor he has in the past.

[70] However, Dr. Laidlow concluded that the plaintiff could do any activities that he had done previously, although some may be performed with discomfort.

[71] There cannot be an award for a loss of earning capacity related to the farm as it operates at a loss. It is obvious that the plaintiff and his wife’s lives centred around the farm, their animals, and the breeding of animals. It is a hobby which took up most of their spare time. When considering an award for non-pecuniary damages, this activity will be taken into consideration.

In Sunner v. Rana, 2015 BCCA 406 (CanLII), the trial judge included a negative contingency in his calculation of the plaintiff's loss of earning capacity on the grounds that he believed that the plaintiff's gas station business was likely to fail. The Court of Appeal ruled that the judge's finding was not supported by the evidence:

[36] Although the judge did not award the respondent an amount calculated to compensate him for the full difference between his pre- and post-accident average incomes or for the loss of his janitorial income, he does not appear to have considered the potential for the respondent to continue full-time employment in the gas station business or in a management position.

[37] The respondent acknowledged that he and his brothers anticipated that he would have a salary of $45,000 from the gas station business. The respondent questioned this possibility because he was not working full-time in the business. The expert evidence was that he was capable of working full-time.

[38] The judge’s focus was on his perception that there was a serious risk that the gas station business would fail. As noted, in my view, the evidence did not support that perception, but even if the business did fail that would not obviate the potential of the respondent to work full time in a management capacity.

[39] The judge was entitled to reject the appellants’ position that the respondent was entitled to only a modest amount for loss of earning capacity and to award a significant sum for that loss. In my view, the judge erred in not considering the evidence that the respondent could work full time and in not considering that the gas station business would succeed and provide the respondent with an income at least comparable with his pre‑accident income.

[40] The judge stated that the gas station business “can certainly not afford to pay the [respondent] a larger salary in its present financial state”. While it may have been prudent not to do so, the financial records of the business do not support the proposition that the business could not do so.

[41] The judge was influenced by the negative contingency in awarding the appellant $250,000 for loss of earning capacity and did not consider the positive potential for the respondent to work full-time in the gas station business or in a management capacity despite his inability to work as a janitor or taxi driver. In my view, he erred on both counts.

[...]

[56] There is no evidence to support the $100,000 awarded by the judge for the negative contingency that there is a high risk the business would fail. That aspect of the judge’s reasoning is in error and the extra $100,000 cannot stand. The basic $250,000 assessed by the judge as the present loss of future income, is infected with his concern that the business would fail and with his failure to consider the positive contingencies of full‑time employment, consistent with the expert evidence, and possible success of the business based on its financial records. Considering the views of the judge as to the loss of the respondent’s capital asset, the adjustment required is not nearly of the magnitude advocated by the appellants. Based on the record and the judge’s reasons, in my view, a reduction of $50,000 is appropriate.

In Joyce v. Dorvault, 2008 BCCA 151 (CanLII), the plaintiff was injured in a motor vehicle accident. The plaintiff, with a partner, had operated a company that sold helicopter parts. However, two years before his accident his partner had left and in the time leading up to the accident, and in the month after, the business showed a loss. The trial judge made the following award:

[6] At trial, the plaintiff contended his income, had he been able to continue to operate his business, would have been upwards of $300,000 a year. He sought an award of $550,000 for his past loss of income from 2003 to 2007. He was awarded $200,000. This award was made having regard for four negative factors the judge said were “considerable”: 1) the plaintiff was relatively new to the business and very new to the transaction side, although he was earning a good reputation; 2) the business had benefited from windfall income prior to the partner’s leaving which was not likely to be repeated; 3) experience indicated a person could earn $60,000 or more early on and $100,000 or more after a few years; and 4) the nature of the business has changed, particularly with the advent of the internet and it has become more competitive and less profitable.

The Court of Appeal affirmed the trial judge's finding regarding the negative contingencies:

[14] I do not disagree with what the plaintiff says the “real possibility” approach entails. The difficulty in this case is much of what the judge considered to be negative factors seriously undermines accepting the financial performance of the business prior to the plaintiff’s falling out with his partner as indicative of the success to be expected. The projected income stream is based on what had been achieved with the benefit of the partner’s experience, particularly on the transaction side, and on substantial windfall gain that was unlikely to be repeated. The basis of the projected income was then not sound. The plaintiff points to evidence that might be said to yield a more positive picture in terms of the potential success of the business but, while I can see arguments going both ways, I see no error in this regard.

[15] It is recognized contingencies are “so bound up with an appreciation of the evidence that the trial judge’s view must be given deference”, and should not be interfered with, barring an “obvious error”: Morris v. Rose Estate (1996), 1996 CanLII 2906 (BC CA), 23 B.C.L.R. (3d) 256 (C.A.) at para. 33. The lack of an explicit balancing between positive and negative contingencies does not mean the positive contingencies the plaintiff raises were ignored by the trial judge.

[16] The plaintiff says his personal commitment to the business, his experience in selling cars and motorcycles which would have permitted him to do well on the transaction side of the business after his partner left, and the increased demand for helicopters attributable to the growth of the petroleum industry are positive contingencies the judge did not take into account. But the extent to which any of these factors could be said to counterbalance what the judge saw as the negative factors is, on the evidence, open to argument. The plaintiff may well have been committed to the business but I doubt his previous experience could be said to be strong evidence he would necessarily have done well in buying and selling helicopter components, and the extent to which his business may have benefited from the growth of the petroleum industry must be highly speculative. It may be arguable there was support for the plaintiff’s case in these considerations but the judge evidently did not consider there was and I see no error on his part.

[17] The plaintiff says his partner’s leaving was actually a positive consideration because he would have been able to improve the reputation of his business. He says this factor was not considered. But (at para. 10) the judge expressly recognized the evidence that reputation is most important in the helicopter parts business and, as I have stated, he actually saw the fact the plaintiff was earning a good reputation as mitigating the first of the negative factors he identified.

[18] While the plaintiff argues the negative contingencies were not as negative as the judge appears to have considered, it cannot, in my view, be said the judge was not entitled to take the view of them he did, nor that his doing so led him into “obvious error” in the assessment he made. The negative contingencies were assessed in light of evidence relating to the history, the current status, and future direction of the industry in which the business operated. I see no reason the judge was not entitled to assess the contingencies as he did.

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