How present-value damages are calculated in Canada

In a Canadian personal-injury claim, a future loss is worth less than the same dollars today, so it is discounted to a present value. You take each future year's projected amount, reduce it for the chance the payment would not have been made in that year anyway, and divide by a compounding discount rate to reach today's dollars. Sum across all future years and you have the present value.

Those reductions are the contingencies. Mortality is the one that always applies, because nobody collects a payment they are not alive for, but it is not the only one, and the others matter as much on a working-life claim.

The inputs drive the result: dates, income, the discount rate, life expectancy, and whichever contingencies the evidence supports. The arithmetic itself is fixed. What follows is background on the method, not legal or actuarial advice for a specific file.

Present value: why future dollars are discounted

A dollar received ten years from now is worth less than a dollar today, because a dollar today can be invested in the meantime. Everything else in this article is arithmetic built on that one idea. It holds whenever the discount rate is above zero, which is the usual case but not always: Ontario has prescribed zero in several years and -0.5% in 2013, covered in the Rule 53.09 article.

Start with a single future cost

Say the plaintiff will need a $10,000 wheelchair replacement ten years from now. The defendant does not hand over $10,000. They hand over the amount that, invested today, grows to $10,000 by the time the chair is needed.

At a 2.5% discount rate, that amount is $7,812:

$10,000 / (1.025)^10  =  $7,812

Put $7,812 into the fund today, let it earn 2.5% a year, and there is $10,000 waiting when the chair falls due. The plaintiff is made whole and the defendant has not overpaid. That is all present value means, and (1 + r)ⁿ is the whole formula: r is the discount rate, n is the number of years away.

The rate is a real rate, after inflation

The 2.5% is a real rate: the return after inflation, not the headline return.

The $10,000 is in today's dollars, so nobody has to guess what a wheelchair will cost in 2036. Both sides of the calculation are in today's money, and inflation cancels out of it. A net discount rate of 2.5% is not a prediction that the fund will earn 2.5%. It is a prediction that it will earn 2.5% more than inflation.

Distance does most of the work

Discounting compounds, so the further out a cost sits, the less it is worth today. The same $10,000 chair:

A cost forty years out is worth a bit over a third of its face amount. That is why the present value of a young plaintiff's lifetime care is driven so heavily by the early years, and why a small move in the discount rate swings a long-dated total so far.

Most losses are streams, not single costs

Loss of income, and most care items, are not one payment but a payment every year, for years. That repeating series is what gets called a stream, and it is the shape almost every head of damage takes. Each year in it is discounted on its own, and the results are added together.

So $50,000 a year of lost income over 20 years is not $1,000,000. Discounting each year separately at 2.5%, it is roughly $779,000.

That is still before mortality. The plaintiff has to be alive to receive each of those payments, so every year is reduced again for the chance of surviving to it, which is the last section below.

The discount rate

The discount rate is the net, real, after-inflation rate of return the award is assumed to earn. Several provinces prescribe it. In Ontario, Rule 53.09 of the Rules of Civil Procedure sets a lower rate for the first 15 years and a higher rate thereafter, updated periodically.

A lower discount rate produces a higher present value, because future dollars are discounted less. Small movements in the rate move the total a long way, and the longer the claim runs, the more leverage the rate has.

Provinces do not all take the same approach, and some prescribe no rate at all. Where a rate is not prescribed, it is an assumption you set and support for the file.

Past loss vs. future loss

A claim usually separates two periods, and they use different mechanics.

Past loss runs from the incident to the valuation or trial date. It is a historical shortfall, so it is not discounted for survival. Instead, the without-incident income is typically indexed for inflation and the actual earnings over the period are netted off.

Future loss runs from the valuation date forward: to retirement for income, or over the remaining lifetime for care. This is the part that gets discounted to present value and weighted for survival.

Loss of income

Future income loss starts from the income the person would have earned but for the incident, nets off any residual earning capacity, and brings the remaining annual shortfall to present value to the assumed retirement age. The contingencies below then apply to that stream.

Future cost of care

A life-care plan lists future care items: therapies, equipment, attendant care and the rest, each with an amount and a schedule, whether annual, one-time, or for a set number of years. Each item is brought to present value over its own horizon and weighted for survival, then the items are summed. That total is the present value of future care.

Contingencies: the chance a payment never happens

A projection says the plaintiff would have earned $70,000 a year until 65. Real working lives are not like that, and neither are real lifespans. A contingency is any reason a projected payment would not have been made even had the incident never happened, and each one applied reduces the value of the stream.

Mortality, which always applies

Future income and care costs are only incurred while the person is alive, so each future year is weighted by the probability of surviving to it. Those probabilities come from published mortality tables, such as the Statistics Canada life tables. A man of 45 has a 90% chance of reaching 65 and a 47% chance of reaching 85, so the later years of a long claim are worth considerably less than their face amount before any discounting is applied at all.

Life expectancy can also be reduced where the medical evidence supports it, which lowers the present value of long-dated future losses. See Mortality and life expectancy in damages.

The ones that depend on the file

A working life has gaps that have nothing to do with the injury.

Disability. The plaintiff might have left the workforce anyway. A disability incidence table gives, for each age and sex, the chance of that happening in a given year before retirement. One published source is the Chief Actuary of Canada's actuarial report on the Canada Pension Plan, whose rates measure entry onto a long-term disability benefit rather than short absences from work.

Unemployment and job loss. Few careers run twenty years without a gap between jobs. A termination or unemployment allowance, either a flat rate or one that varies by age, reduces each future year for that chance.

Neither is automatic. Each is applied where the evidence and the head of damage support it, and each one lowers the figure. Applying both is not double-counting, because leaving the workforce through disability and losing a job are different risks. Double-counting happens somewhere else.

Where the inputs overlap

A contingency is an adjustment for a risk: the chance the plaintiff would not have been earning in a given year anyway. It can end up reducing the stream for a risk the earnings figure has already allowed for, and that overlap is with the data behind the income, not with another contingency.

Statistics Canada census averages are where that happens, and both sides of the calculation can rest on them. The without-incident income does where a plaintiff has no established earnings history. The residual earning capacity does where a vocational assessment identifies work the plaintiff can still do.

Those averages cover people who earned something that year, and only them. So whether a risk is already inside the figure comes down to one question: were the people it affected still earning?

Only the first is already in the number. An unemployment contingency applied on top of an all-earners or part-year average therefore counts it twice, on whichever side of the calculation that average was used. The full-year full-time basis is the exception, because it covers only people who worked the whole year.

A long-term disability contingency and survival weighting are measuring something no basis counted.

The contingencies only run one way

Every contingency here is a decrement. Survival, disability and unemployment all lower the stream, and there is no contingency that raises it.

What can raise a projection is the income it starts from, which is a different part of the calculation. A career usually pays more at 55 than at 25, and a projection built from a census age-earnings profile carries that rise rather than holding one figure flat for forty years. That is the shape of the earnings data, not an adjustment applied on top of it.

A calculation, not an opinion

DamageIQ is a calculator. It applies the mechanics above to the inputs and assumptions you provide, and every input is traceable in the figure it returns. It is not an expert opinion. The assumptions are yours to set and to verify. A signed actuarial report comes from a retained actuary, and so does the work of defending the actuarial assumptions behind it.

Try it

The free PV Multiplier calculator generates present-value multipliers for any age, gender, supported jurisdiction, and discount rate. The full DamageIQ platform adds loss-of-income and future-cost-of-care files end to end.

By Mike Austin, FCIA, FSA. Fellow of the Canadian Institute of Actuaries and the Society of Actuaries.