Watkins v. Olafson, [1989] 2 S.C.R. 750

Donald Edwin Watkins Appellant

v.

Ian Frank Olafson

and

James Aitkenhead

and

The Government of Manitoba Respondents

indexed as: watkins v. olafson

File No.: 20598.

1989: May 24; 1989: September 28.

Present: Dickson C.J. and Lamer, Wilson, La Forest, L'Heureux‑Dubé, Sopinka, Gonthier, Cory and McLachlin JJ.

on appeal from the court of appeal for manitoba

Torts -- Damages -- Structured settlements -- Lump sum payment or periodic payment -- Grossing up to compensate for effect of taxation on award for future care -- Whether Court of Appeal erred in substituting periodic payments for a lump sum judgment -- Whether allowance should be made for the effect of taxation in calculating the cost of future care -- Whether Court of Appeal erred in reducing the amount allowed by the trial judge for cost of future care -- Whether the Court of Appeal erred in reducing the award for lost earning capacity, past and future.

Appellant, who was a passenger in a van operated by Olafson and owned by Aitkenhead, brought an action in tort against them and the provincial government following an accident that occurred on a stretch of highway that had been under construction. The trial judge awarded a lump sum payment. This payment included damages for loss of earning capacity both to the date of trial and for the future, damages for future care as initial outlay and for ongoing care, and an amount for a financial management fee. The Court of Appeal reduced the damages for pre‑trial and for post‑trial loss of earning capacity. It set aside the lump sum award for future care and ordered in its stead that the provincial government pay the plaintiff a monthly payment adjusted annually for inflation, subject to deductions for on‑going care which the plaintiff might receive from the provincial government. The Court of Appeal disallowed the investment counselling fee and rejected appellant's submission that he was entitled to an "income tax gross‑up", stating that this was unnecessary under the structured judgment. At issue here was (1) whether the Court of Appeal erred in substituting periodic payments for a lump sum judgment; (2) whether allowance should be made for the effect of taxation in calculating the cost of future care; (3) whether the Court of Appeal erred in reducing the amount allowed by the trial judge for cost of future care; and (4) whether the Court of Appeal erred in reducing the award for lost earning capacity, past and future.

Held: The appeal should be allowed in part.

In the absence of enabling legislation or the consent of all parties, a court should not order that a plaintiff forego his traditional right to a lump sum judgment for a series of periodic payments. The principle that a plaintiff is entitled to receive his future care award as a lump sum award has been long‑established at common law. The courts have generally declined to introduce major and far‑reaching changes in the rules hitherto accepted as governing the situation before them. Further, the courts are ill‑equipped to consider fully the complexities associated with introducing the concept of periodic payments. For the same reasons, it would not be appropriate for the court to order the defendant to purchase an annuity for the plaintiff's care during his lifetime.

An allowance should be made for the impact of taxation on the award for cost of future care where the evidence supports it, as it does here. The theory of "grossing‑up" is that an additional sum should be awarded to compensate for the tax that will accrue on the interest portion of the award. Acceptance of the right to an allowance for the impact of taxation on the award for future cost of care does not effect a major change in the established law or deprive either party of an established right, permitting the Court to rule on the matter. A strong case can be made for taking the impact of taxation into account for the award will otherwise prove insufficient to meet the plaintiff's projected needs. Calculating an allowance for taxation is not so inherently speculative or so excessively difficult as to warrant not taking taxation into account.

The Court of Appeal erred in reducing the amount awarded by the trial judge for initial expenditure. Evidence supported the trial judge's finding and, absent demonstrable error, it was not open to the Court of Appeal to disallow the items in question. The Court of Appeal, for similar reasons, should not have substituted its views for those of the trial judge as to what constituted appropriate care and as to what his future earnings would have been, but for the accident, on his return to full‑time work.

The trial judge erred in including an amount for inflation to take into account the fact the dollar value of the award for past earnings at the date of judgment, in terms of comparative purchasing power, was less than the dollar value for the period for which the award was made. At common law, only money lost could be recovered. Interest, which theoretically is comprised of an allowance for inflation, plus an additional percentage for the use of money, was not payable at common law upon money awards for damages in tort. The award for inflation was in effect a partial award of pre‑judgment interest.

The fact that the province took care of the plaintiff between the time of the accident and the time of trial was not a proper ground for reducing the award for pre‑judgment lost income. In calculating loss of future earning capacity in cases where an award for future care is made, a deduction is made from the award for lost earning capacity for living expenses to avoid duplication between the two heads of damage. No award for pre‑trial cost of care was made and, accordingly, the reason for making a deduction on this account did not exist because no duplication between two heads of damage could occur. The Government of Manitoba must abide by its decision not to counter‑claim for the cost of the plaintiff's pre‑trial care.

The rule of post‑trial loss of earning capacity -- that no deduction should be made for tax which the plaintiff would have had to pay on his earnings had he not been injured -- should be applied to pre‑trial loss of earnings where tax has never been deducted. The trial judge's award for post‑trial loss of future earning capacity should be restored; it was supported by the evidence and no error was shown.

A management fee was appropriate given the conclusion that the Court of Appeal's award of periodic payments could not stand.

Cases Cited

Applied: Fournier v. Canadian National Railway Co., 1926 549 (UK JCPC), [1927] A.C. 167; Lewis v. Todd, 1980 20 (SCC), [1980] 2 S.C.R. 694; considered: Andrews v. Grand & Toy Alberta Ltd., 1978 1 (SCC), [1978] 2 S.C.R. 229; referred to: McErlean v. Sarel (1987), 1987 4313 (ON CA), 61 O.R. (2d) 396, leave to appeal refused, [1988] 1 S.C.R. xi; Thornton v. Board of School Trustees of School District No. 57 (Prince George), 1978 12 (SCC), [1978] 2 S.C.R. 267; Arnold v. Teno, 1978 2 (SCC), [1978] 2 S.C.R. 287; Fenn v. City of Peterborough (1979), 1979 77 (ON CA), 25 O.R. (2d) 399; Nielsen v. Kaufmann (1986), 1986 2717 (ON CA), 54 O.R. (2d) 188; Scarff v. Wilson, [1989] 2 S.C.R. 000, rev'g British Columbia Court of Appeal, November 25, 1988, unreported; Reekie v. Messervey, British Columbia Court of Appeal, May 5, 1989, unreported; Ashby v. White (1703), 2 Ld. Raym. 938, 92 E.R. 126; The Queen in right of Ontario v. Jennings, 1966 11 (SCC), [1966] S.C.R. 532; Mandzuk v. Insurance Corporation of British Columbia, 1988 16 (SCC), [1988] 2 S.C.R. 650.

Statutes and Regulations Cited

Ala. Code §§ 6‑5‑486 (1975).

Alaska Stat. §§ 09.55.548 (1983).

Cal. Civ. Proc. Code §§ 667.7 (West 1980).

Courts of Justice Act, 1984, S.O. 1984, c. 11, s. 129.

Del. Code Ann. Title 18, §§ 6864 (Supp. 1984).

Fla. Stat. Ann. §§ 768.51 (West 1986).

Ill. Ann. Stat., c. 110, para. 2‑1701 to 2‑1719 (Smith‑Hurd Supp. 1986).

Income Tax Act, S.C. 1970‑71‑72, c. 63, as amended.

Kan. Stat. Ann. §§ 60‑2609 (1983).

La. Rev. Stat. Ann. §§ 40:1299.39 and 40:1299.43 (West Supp. 1986).

Md. Cts. & Jud. Proc. Code Ann. §§ 3‑2A‑08(b) (1974).

Motor Vehicle (Third Party Insurance) Act 1943‑1972, s. 16 E(5)(a) (W. Aust.)

N.H. Rev. Stat. Ann. §§ 507‑C:7 (1983).

N.M. Stat. Ann. §§ 41‑5‑7 (1978).

N.Y. Civ. Prac. L. & R. §§ 5031 to 5039 (McKinney Supp. 1986).

Or. Rev. Stat. §§ 752.070 (1985).

S. D. Codified Laws Ann. §§ 21‑3A‑5 to 21‑3A‑13 (Supp. 1986).

Utah Code Ann. §§ 78‑14‑9.5 (Supp. 1986).

Wash. Rev. Code Ann. §§ 4.56.240 (Supp. 1983).

Wis. Stat. Ann. §§ 655.015 (West. Supp. 1985).

Authors Cited

Feldthusen, Bruce and Keith McNair. "General Damages in Personal Injury Suits: The Supreme Court's Trilogy" (1978), 28 U.T.L.J. 381.

APPEAL from a judgment of the Manitoba Court of Appeal (1987), 1987 6876 (MB CA), 48 Man. R. (2d) 81, [1987] 5 W.W.R. 193, 40 C.C.L.T. 229, varying a judgment of Wright J. (1986), 1986 4843 (MB QB), 40 Man. R. (2d) 286. Appeal allowed in part.

Robert B. Doyle, Harvey I. Pollock, Q.C., and Martin J. Pollock, for the appellant.

J. D. F. Strange, for the respondent Ian Frank Olafson.

W. G. McFetridge and S. J. Pierce, for the respondent Government of Manitoba.

//McLachlin J.//

The judgment of the Court was delivered by

MCLACHLIN J. -- This appeal raises a number of issues relating to the assessment of damages in personal injury actions. The two main issues are, first, whether the court has the power to order periodic payments on account of future losses instead of a lump sum payment; and second, whether the court should make an allowance for taxation in calculating the amount required for future care. Other issues relate to details of the assessment of cost of future care and lost earning capacity.

The Background

The appellant Watkins was rendered a quadriplegic as a result of an automobile accident in July, 1976. He was a passenger in a van owned by Aitkenhead and operated by Olafson. The accident occurred on a stretch of highway which was under construction under the authority of the provincial government. The issue of liability was tried separately and determined in favour of the appellant. The Manitoba Court of Appeal divided liability as follows: Olafson, for whom Aitkenhead was vicariously liable, 75%; the provincial government, 25%. The sole question before this Court is the amount of damages to be awarded to the appellant.

At trial on the issue of damages, Watkins was awarded a total sum of $2,123,386.56, calculated as follows:

1. Non-pecuniary general damages $180,000.00

2. Special damages to date of judgment 19,308.25

3. Damages for loss of earning capacity

(a) to date of trial 263,000.00

(b) for the future 540,000.00

4. Damages for Future Care

(a) Initial Outlay 46,078.31

(b) Ongoing Care 1,000,000.00

5. Financial Management Fee 75,000.00

Total $2,123,386.56

The Court of Appeal reduced the damages for pre-trial loss of earning capacity to $125,000, and for post-trial loss of earnings to $400,000. It set aside the lump sum award for future care and ordered in its stead that the provincial government pay the plaintiff $3,000 per month, adjusted annually for inflation, subject to deductions for on-going care which the plaintiff might receive from the provincial government. The Court of Appeal disallowed the investment counselling fee and rejected Watkins' submission that he was entitled to an "income tax gross-up", stating that this was unnecessary under the structured judgment.

Issues

1. Did the Court of Appeal err in substituting periodic payments for a lump sum judgment?

2. Should allowance be made for the effect of taxation in calculating the cost of future care?

3. Did the Court of Appeal err in reducing the amount allowed by the trial judge for cost of future care?

4. Did the Court of Appeal err in reducing the award for lost earning capacity, past and future?

Discussion

1. Did the Court of Appeal Err in Substituting Periodic Payments for a Lump Sum Judgment?

The Court of Appeal ordered periodic payments of $3,000 per month for Watkins' future care. The court's concern was that having received a large lump sum award, Watkins might then choose to avail himself of state facilities for all or part of his future care. The result would be a windfall to him, which, in the words of Huband J.A., would be "manifestly unjust". Accordingly, the court ordered that the award for future care should be paid out on a monthly basis, with deductions from the $3,000 monthly payment to offset any benefits Watkins might receive from the government.

The imperfections of a lump sum, once-and-for-all award, as a means of providing for a plaintiff's cost of future care have often been noted. Where the injury is serious and the period of time for which care must be made lengthy, a large number of variables enter into the calculation. Should the plaintiff live longer than projected, or earn less on his capital than expected, he will run out of funds for his care. On the other hand, should chronic illness force him to live in an institution rather than his own home, or should he die earlier than forecast, the funds provided may turn out to be excessive, resulting in a windfall for him or his heirs at the defendant's expense.

Considerations such as these support the conclusion that in cases where care must be provided for a long period in the future, periodic payments are more consistent than the lump sum rule with the fundamental principles upon which the assessment of damages for personal injury are founded -- the basic concepts of restitutio in integrum and full but fair compensation. The whole basis of the claim advanced by the appellant is that in order to provide adequately for his future care he requires a monthly stream of income indexed for inflation for the rest of his life. Periodically paid sums capable of adjustment in the event of changed circumstances best ensure that this need will be met, given the impossibility of predicting the future with any real accuracy. At the same time, it is urged, the result would be fair to defendants, ensuring they pay only what is actually required.

Thus it is not surprising that the periodic payment of damages for cost of future care has emerged as an attractive alternative to the lump sum award. Periodic payment schemes have been introduced in numerous American states. (The following U.S. states have legislation which permits court awarded periodic payment of damages awards in the context of medical malpractice: Alabama, Alaska, California, Delaware, Florida, Illinois, Kansas, Louisiana, Maryland, New Mexico, New York, Oregon, South Dakota, Utah, Washington and Wisconsin. South Dakota and Washington make periodic payment of damages available in all actions for personal injury and totally-disabling personal injury, respectively. See: Ala. Code §§ 6-5-486 (1975); Alaska Stat. §§ 09.55.548 (1983); Cal. Civ. Proc. Code §§ 667.7 (West 1980); Del. Code Ann. Title 18, §§ 6864 (Supp. 1984); Fla. Stat. Ann. §§ 768.51 (West 1986); Ill. Ann. Stat., c. 110, para. 2-1701 to 2-1719 (Smith-Hurd Supp. 1986); Kan. Stat. Ann. §§ 60-2609 (1983); La. Rev. Stat. Ann. §§ 40:1299.39 and 40:1299.43 (West Supp. 1986); Md. Cts. & Jud. Proc. Code Ann. §§ 3-2A-08(b) (1974); N.H. Rev. Stat. Ann. §§ 507-C:7 (1983); N.M. Stat. Ann. §§ 41-5-7 (1978); N.Y. Civ. Prac. L. & R. §§ 5031 to 5039 (McKinney Supp. 1986); Or. Rev. Stat. §§ 752.070 (1985); S. D. Codified Laws Ann. §§ 21-3A-5 to 21-3A-13 (Supp. 1986); Utah Code Ann. §§ 78-14-9.5 (Supp. 1986); Wash. Rev. Code Ann. §§ 4.56.240 (Supp. 1983); Wis. Stat. Ann. §§ 655.015 (West. Supp. 1985). Legislation authorizing courts to award damages on a periodic basis has also been enacted in Western Australia (see: Motor Vehicle (Third Party Insurance) Act 1943-1972, s. 16 E(5)(a) (W. Aust.), which pertains to cases of personal injury or death caused by or arising out of the use of a motor vehicle.) In Ontario, legislation permits periodic awards where the parties agree: Courts of Justice Act, 1984, S.O. 1984, c. 11, s. 129). In addition, structured settlements, where parties agree voluntarily to a scheme of periodic future payments, have become increasingly common throughout Canada.

This case, however, poses a different issue. The issue here is not whether the legislature can impose or authorize periodic damage awards, or whether parties can voluntarily agree to periodically-paid compensation; that is conceded. Nor is the issue whether the ability to award damages by installments would be desirable in some cases; clearly it would. Rather, the issue here is whether, in the absence of enabling legislation or the consent of all parties, a court can or should order that a plaintiff forego his traditional right to a lump-sum judgment for a series of periodic payments.

It is argued that the jurisprudence precludes a court from ordering periodic payments adjusted to future needs. The plaintiff, it is submitted, is entitled to receive his future care award as a lump sum; this fundamental principle of tort law cannot be changed by a court, but only by the legislature. The only case directly on point is that of Fournier v. Canadian National Railway Co., 1926 549 (UK JCPC), [1927] A.C. 167. In that case the jury awarded damages in the form of an annuity. The Privy Council described this as "illegal", stating at p. 169:

The jury . . . most unfortunately shaped the damages they awarded in a form quite improper and illegal. Instead of finding a verdict for a lump sum, they awarded an annuity of $300.00 to be paid annually to each of the children . . . It is much to be regretted that the learned judge . . . did not refuse to accept a verdict so shaped, and did not explain to them the proper principle upon which damages should be awarded.

Subsequent cases have accepted the proposition that it is not open to the courts to order periodic damage awards. In Andrews v. Grand & Toy Alberta Ltd., 1978 1 (SCC), [1978] 2 S.C.R. 229, Dickson J. (as he then was) speaking for the Court stated at p. 236, ". . . our law of damages knows nothing of periodic payment". Similarly, in Lewis v. Todd, 1980 20 (SCC), [1980] 2 S.C.R. 694, this Court considered the form of relief available to dependents upon a fatal accident and stated, at p. 710:

As it is not open to a court, in the absence of enabling legislation, to order periodic payments adjusted to future needs, the dependents receive immediately a capital sum roughly approximating the present value of the income they would have received had the deceased survived.

More recently, in McErlean v. Sarel (1987), 1987 4313 (ON CA), 61 O.R. (2d) 396 (leave to appeal refused, [1988] 1 S.C.R. xi), a judgment delivered three and a half months following the judgment of the Court of Appeal in the case at bar, a five- member panel of the Ontario Court of Appeal considered the issue of entitlement to a lump sum award. The court unanimously concluded, at p. 433, that:

Whether or not a better system of compensation could be devised, and we are aware of various reform proposals in this regard, the respondent is legally entitled to a lump-sum judgment and is not legally obliged to accept periodic payments.

The respondents do not deny that the jurisprudence suggests that the courts cannot award damages on a periodic basis. They argue, however, that the time has come to change the law. The common law, they assert, evolves to meet the realities of contemporary society. Those realities, they submit, cry out for a rule permitting judges to award periodic damages in appropriate cases.

This branch of the case, viewed thus, raises starkly the question of the limits on the power of the judiciary to change the law. Generally speaking, the judiciary is bound to apply the rules of law found in the legislation and in the precedents. Over time, the law in any given area may change; but the process of change is a slow and incremental one, based largely on the mechanism of extending an existing principle to new circumstances. While it may be that some judges are more activist than others, the courts have generally declined to introduce major and far-reaching changes in the rules hitherto accepted as governing the situation before them.

There are sound reasons supporting this judicial reluctance to dramatically recast established rules of law. The court may not be in the best position to assess the deficiencies of the existing law, much less problems which may be associated with the changes it might make. The court has before it a single case; major changes in the law should be predicated on a wider view of how the rule will operate in the broad generality of cases. Moreover, the court may not be in a position to appreciate fully the economic and policy issues underlying the choice it is asked to make. Major changes to the law often involve devising subsidiary rules and procedures relevant to their implementation, a task which is better accomplished through consultation between courts and practitioners than by judicial decree. Finally, and perhaps most importantly, there is the long-established principle that in a constitutional democracy it is the legislature, as the elected branch of government, which should assume the major responsibility for law reform.

Considerations such as these suggest that major revisions of the law are best left to the legislature. Where the matter is one of a small extension of existing rules to meet the exigencies of a new case and the consequences of the change are readily assessable, judges can and should vary existing principles. But where the revision is major and its ramifications complex, the courts must proceed with great caution.

The change in the law which we are asked to endorse in this case would constitute a major revision of the long-standing principles governing the assessment of damages for personal injury -- in particular, the principle that judgment is to be rendered once-and-for-all at the conclusion of a trial, and the correlative entitlement of the plaintiff to immediate execution on the entire award. Permitting courts to award periodic damages for personal injuries does not involve the extension of an existing rule, but the adoption of a new principle. We are not concerned with the right of a court to award the periodic payment of a judgment which has been finally delivered. Rules governing execution in several provinces permit this to be done. We are concerned rather with the proposal that the plaintiff lose his or her right to a final, once-and-for-all-award, to be replaced by a scheme under which the amount he or she receives may depend upon the ruling of the court on applications far in the future. The change is, moreover, fraught with complex ramifications extending beyond the rights and obligations of the parties at bar.

The arguments of the advocates of the award of damages on a periodic basis are powerful. But they leave unanswered the question of whether a court may abrogate the long-standing legal principle of the right to a once-and-for-all lump sum award, and cannot be considered in isolation from the difficulties which might ensue from empowering courts to grant periodic damages in tort. In attempting to remedy the shortcomings of the present system, care must be taken not to create new and greater difficulties.

One such difficulty is the review process presupposed by the Court of Appeal's award of periodic damages. The main purpose of the periodic award is to permit adjustment from time to time so that compensation may be more precisely tailored to need. But how is this tailoring to take place? Presumably further court hearings would be required, with the concomitant expense and worry entailed by documents, discovery, hearings and appeals. The result would be an increased burden on the parties and on the court system. Rules governing the review process would also be required, rules which might be better fashioned by non-judicial bodies.

Another difficulty involves security. In the case at bar security appears not to have been an issue, one of the respondents ordered to pay being a provincial government. Even so, concerns arise; could the plaintiff be certain that the government would not, at some future date, curtail his right to damages? Even with an apparently solvent defendant, it is unfair and unacceptable to place the plaintiff in the uncertain position of not being sure the money he needs to meet his or her needs will be forthcoming in the future. Most of those who have studied periodic payment schemes concur that they are unworkable unless sufficient security is posted. But, assuming security is necessary, how can a judge ensure compliance with an order that a reluctant defendant post security? What adverse consequences could be brought to bear on a defendant who refused or professed to be unable to post the necessary security?

Further complexities arise when one attempts to define precisely when periodic damages should be available. Simply to leave the matter to the discretion of the judge is inadequate; some guidelines would need to be developed, if only to make the law reasonably predictable and promote settlements. Legislation in other jurisdictions suggests a variety of means to define when periodic payment of damages may be ordered. Some statutes limit such awards on the basis of the cause of action, for example, medical malpractice; other schemes predicate availability on the size of award; yet other statutes base the availability of periodic damages on the nature of the injury, limiting it to catastrophic, totally disabling injuries.

Yet another factor meriting examination is the lack of finality of periodic payments and the effect this might have on the lives of plaintiff and defendant. Unlike persons who join voluntarily in marriage or contract -- areas where the law recognizes periodic payments -- the tortfeasor and his or her victim are brought together by a momentary lapse of attention. A scheme of reviewable periodic payments would bind them in an uneasy and unterminated relationship for as long as the plaintiff lives.

I raise these issues not to suggest that schemes for periodic payment should not be attempted, but rather to indicate some of the many complex considerations raised by the implementation of such schemes. A review of legislation in jurisdictions where periodic payments have been adopted reveals many different models premised on different answers to questions such as these. In my opinion, the legislatures are better equipped than the courts to deal with the complexities involved in implementation of the notion of periodic payments into our law of tort.

In summary, I conclude that the well-established limits on judicial law-making powers as well as the complexities associated with introduction of the concept of periodic payments into our law, preclude the court from ordering periodic reviewable payments for future cost of care in the stead of the lump sum judgment to which the plaintiff is entitled under existing legal principles. For the same reasons, it would be inappropriate for the court to order the defendant to purchase an annuity for the plaintiff's care during his lifetime.

2. Should Allowance be Made for the Effect of Taxation in Calculating the Cost of Future Care?

This issue did not arise before the Court of Appeal, given its order for the periodic payment of damages for future care. Under existing tax law, which provides that damages for personal injuries are not taxable income, periodic payments would be tax-free. By contrast, the impact of taxation on a lump sum award for cost of future care is highly significant. The sum is predicated on the assumption that the currently unused portion of the fund will be invested and earn income, for which a discount is made. That income will attract tax under the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. If no allowance is made for this tax, the judgment will prove insufficient to provide the care required for the predicted lifespan of the plaintiff. The theory of "grossing-up" is that there should be an additional sum awarded to compensate for the tax that will accrue on the interest portion of the award.

In contrast to the issue of periodic payment of damages for future care, the jurisprudence on the question of "gross-up" for taxation of the award for cost of care is recent and unsettled. Thus the court does not face the difficulty of effecting a major change in the established law or depriving either party of an established right. The question is simply whether the impact of taxation is one of the factors which the court should consider in determining the amount required to provide for the future care of the plaintiff.

I turn first to the jurisprudence. The question of taxation in calculating damages for cost of future care was considered by this Court in the `trilogy' of Andrews v. Grand & Toy Alberta Ltd., supra; Thornton v. Board of School Trustees School District No. 57 (Prince George), 1978 12 (SCC), [1978] 2 S.C.R. 267; and Arnold v. Teno, 1978 2 (SCC), [1978] 2 S.C.R. 287. The Court made no allowance for taxation in those cases. Dickson J., as he then was, in Andrews v. Grand & Toy Alberta Ltd., after alluding to the difficulty in predicting the actual tax burden and the relief from taxation to be obtained from medical deductions, declined to consider the impact of taxation on the award for future care. At page 260 he stated:

Because of the provision made in the Income Tax Act and because of the position taken in the Alberta Courts, I would make no allowance for that item.

This is far from a categorical statement that taxation can never be considered in calculating damages for the cost of future care. It was predicated largely on factors peculiar to the case, in particular the lack of evidence and absence of findings of the courts below.

The lower courts have taken different views of what Andrews v. Grand & Toy Alberta Ltd. decided on the question of allowing for the impact of tax in calculating the cost of future care. The Court of Appeal in Ontario took the view that the claims for gross-up in the trilogy had failed for want of sufficient proof, and went on to take taxation into account in calculating the cost of future care: Fenn v. City of Peterborough (1979), 1979 77 (ON CA), 25 O.R. (2d) 399, at p. 456; Nielsen v. Kaufmann (1986), 1986 2717 (ON CA), 54 O.R. (2d) 188, at pp. 201-207; McErlean v. Sarel, supra. In British Columbia, the Court of Appeal held in Scarff v. Wilson (November 25, 1988 unreported; reasons in this Court delivered concurrently with the appeal at bar, [1989] 2 S.C.R. 000) that the trilogy ruled out an allowance for taxation. However, another panel of that Court months later took the opposite view as to what the trilogy decided but found that it was bound to follow Scarff v. Wilson nevertheless: Reekie v. Messervey, May 5, 1989, unreported.

I conclude that this Court's views in the trilogy do not forbid taking into account the impact of taxation on the award for cost of future care, provided that the necessary evidentiary foundation is laid.

The case for taking the impact of taxation into account is strong. Academics and judges alike have recognized that unless the impact of taxation is taken into account, the award will prove insufficient to meet the plaintiff's projected needs. Professors Feldthusen and McNair in "General Damages in Personal Injury Suits: The Supreme Court's Trilogy" (1978), 28 U.T.L.J. 381, conclude:

Recognition of the effect of taxes, no matter how difficult to calculate, seems essential if awards are to be fair to the plaintiff.

McEachern C.J.B.C. in Scarff v. Wilson, stated:

. . . I see no reason in principle why the fund awarded for future costs of care should not be protected against the incidence of tax. Without gross-up, such a fund is clearly inadequate for the purpose for which it is intended.

In McErlean v. Sarel, supra, the Ontario Court of Appeal took a similar view:

As a matter of principle, regard has to be paid to the impact of taxation on income from the award for the cost of future care. If this impact is ignored, as the appellant submits it should be, then the award cannot accomplish its prime purpose, which is to assure that the plaintiff should be adequately cared for during the rest of his life.

Those who argue against making an allowance for taxation in calculating the cost of future care do so, not on the ground that the allowance is not required if the plaintiff is to be adequately provided for, but mainly on the basis that the calculation is so speculative that it should not be attempted. I cannot accept that allowance for taxation is so inherently speculative that it should not be taken into account. In the first place, difficulty of calculation is a weak basis for refusing to award a plaintiff damages to which he or she is in principle entitled. The entire exercise of assessing damages for future care over a period of decades is fraught with uncertainty; yet the courts do their best to calculate an appropriate award. Where there is a right, there must also be a remedy: Ashby v. White (1703), 2 Ld. Raym. 938, 92 E.R. 126, at p. 953 and p. 136, per Holt C.J.

In fact, the calculations for taxation in this case and in Scarff v. Wilson, supra, do not present excessive difficulty. In the case at bar an actuary and chartered accountant for the plaintiff and a chartered accountant for the defendants testified as to the impact of taxation on the award for the cost of future care. After reviewing their evidence, the trial judge concluded that $230,000 should be awarded for the impact of taxation on the award for the cost of future care. It is not suggested that this award was not supported by the evidence. In Scarff v. Wilson the opposing experts were able to agree on all relevant factors save for a few variables, and McEachern C.J.B.C. expressed the expectation that the calculation could be reduced to a computer model which would yield an estimate of the gross-up on the basis of the factors relevant to the particular case.

A second reason is advanced for declining to take taxation into account in calculating the award for future care; it is said that to do so would be anomalous since no allowance for tax is made on lost earning capacity: The Queen in right of Ontario v. Jennings, 1966 11 (SCC), [1966] S.C.R. 532, (where the effect would be to reduce the award rather than increase it). But it should not be overlooked that the award for lost earning capacity is also discounted for the earnings on income in the earlier years, and that such earnings are taxable. Thus the plaintiff is in fact paying tax on the award for lost earning capacity.

I conclude that an allowance should be made for the impact of taxation on the award for cost of future care where the evidence supports it, and that the evidence in this case meets that requirement. In my opinion, the trial judge was correct in allowing $230,000 as gross-up for taxation.

3. Did the Court of Appeal Err in Reducing the Amount Allowed by the Trial Judge for Cost of Future Care?

Three issues arise under this head: (1) did the Court of Appeal err in reducing the amount awarded by the trial judge for initial expenditures; (2) did the Court of Appeal err in substituting its view that the cost of future care should be based on living in a government-subsidized apartment, for the trial judge's view that it should be based on costs of living in a detached home; and (3) did the Court of Appeal err in reducing the amount which the trial judge allowed for care and attendants?

I turn first to the question of initial outlay for equipment. The trial judge, relying on the recommendation of the Canadian Paraplegic Association, allowed $46,078.31 for initial outlay costs. The Court of Appeal reduced this sum by $8,429.40, representing $4,683 for the cost of a lift and $3,746.40 for the cost of an electric wheelchair. It felt that the lift was unnecessary because, assuming Watkins had his own home, there would be no need for a basement, and it expressed the view that the government had already provided Watkins with an electric wheelchair. These conclusions were contrary to the evidence, which supported the need for a home with a basement for storage and privacy reasons and indicated that the government loans only a limited number of wheelchairs to disabled persons after evaluation and approval of an assessment committee. There was no evidence Watkins had received such approval. In view of the evidence supporting the trial judge's finding on the need for a lift and for an electric wheelchair, it was not open to the Court of Appeal to disallow those items.

I turn next to the basis of the calculation for cost of future care. The trial judge was of the opinion that the award for future care should be calculated on the basis that Watkins was entitled to be cared for in his own home, despite the availability of less costly government care programs. He considered the home care program administered by the government and concluded that it did not offer "the required security of choice, continuity and standard for the service and equipment needs of Watkins living in a home environment."

The Court of Appeal took a different view of the matter. It concluded that a government-subsidized apartment referred to as a "Fokus Unit" would provide reasonable accommodation for Watkins. A Fokus Unit is a specially constructed and equipped apartment in an ordinary apartment block designed to permit disabled individuals to live on their own. The Court of Appeal concluded that the award for future care should be predicated on the rental of a Fokus Unit. This greatly reduced the sum required for future care. No allowance for land, house construction, or exterior and air-conditioning maintenance would be required, and cost of care would be reduced, in the Court's view, by the government care program made available for residents of the units.

I am satisfied that the Court of Appeal should not have substituted its own views on what constitutes appropriate care for Watkins for the views of the trial judge. The trial judge carefully considered all the evidence, including the evidence relating to the Fokus Units, and concluded that those units would not make possible the care which Watkins needs. No error in that conclusion was demonstrated. On the contrary, the evidence appears to support the contention that the Fokus Units do not provide the care required by Watkins --twenty-four hour care of the sort required is not provided and there was no evidence of the availability of the units.

The trial judge's conclusion on the need for home care was not only supported by the evidence; it is in conformity with the emphasis on full and adequate compensation for seriously injured plaintiffs expressed by this Court in Andrews v. Grand & Toy Alberta Ltd., supra, per Dickson J., at p. 246:

The standard of care expected in our society in physical injury cases is an elusive concept . . . The standard to be applied to Andrews is not merely "provision", but "compensation": i.e. What is the proper compensation for a person who would have been able to care for himself and live in a home environment if he had not been injured? The answer must surely be home care.

In the absence of error and in the face of evidence supporting the trial judge's conclusion, it was not appropriate for the Court of Appeal to substitute its view for that of the trial judge on the issue of whether home care was required.

The third difference between the trial judge and the Court of Appeal on the cost of future care concerns the standard of care to which the plaintiff is entitled. On the basis of the evidence of the Canadian Paraplegic Association the trial judge found that the monthly ongoing cost of care was $3,776.44. The Court of Appeal overturned the finding of the trial judge and concluded that the monthly cost of care was approximately $3,000. In effect, the Court of Appeal rejected the finding of the trial judge that the plaintiff should have one full-time attendant plus homemaker services. The conclusions of the trial judge are in accordance with the principles laid down by this Court in Andrews v. Grand & Toy Alberta Ltd., supra, where the paramountcy of adequate care for those seriously injured through the fault of others was affirmed. In my opinion, no error in the trial judge's method or conclusions is demonstrated, and the Court of Appeal should not have substituted its view of appropriate care for that of the trial judge.

4. Did the Court of Appeal Err in Reducing the Award for Lost Earning Capacity, Past and Future?

(a) Pre-Trial Earnings

Assessment of Watkins' pre-trial earnings loss was complicated by the fact that for two years prior to the accident, following the break-up of his marriage, he had chosen to interrupt his full-time employment. From 1969 to 1974 he had been employed in the design field. In 1974 he ceased full-time employment. At the time of the accident he was engaged in a silkscreen business which he had recently started with another person.

The plaintiff and the defendants presented different opinions as to what Watkins' pre-trial earnings would have been had he not been injured. The plaintiff's opinion was based on earnings of approximately $14,000 in his last full year of salaried employment in 1974. This produced a projected salary at the date of the accident (1976) of $17,475. This was then adjusted for the average wage increase in the industrial sector as well as for inflation for each year between the accident and the trial. The claim totalled $314,013, composed of $243,574 for past earnings and $70,460 for the inflation adjustment.

The defendants took a different approach. They attempted to calculate the position Watkins would have been in had he worked since 1976 to trial, after paying normal living expenses and income tax. This amount plus interest they put at $102,000. This was said to be far greater than the average percentage savings for the population at large.

The trial judge awarded $263,267 for pre-trial wage loss, including $47,754 for inflation. The Court of Appeal reduced the award to $125,000, citing the modest income of Watkins at the date of the accident and past earning history, the inappropriateness of an allowance for inflation, and the fact that his food and shelter had been totally provided by the government between the date of the accident and the trial.

In so far as it relied on the modest income of Watkins at the time of the accident, the Court of Appeal seems to have been substituting its view of what Watkins would have earned for that of the trial judge. There was evidence to support the trial judge's conclusion that but for the accident Watkins would have returned to full-time work at a salary equivalent to what he had earned previously, adjusted for wage increases. No error having been demonstrated, it was not open to the Court of Appeal to substitute its view on this question.

The next question is whether the trial judge erred in including an amount for inflation. The amount was added to offset the fact that the plaintiff would be receiving his award for past earnings in 1985 dollars (the date of judgment), which were worth less than dollars in the years for which the award was made. At common law, interest was not payable upon money awards for damages in tort; all that could be recovered was the money lost. It was to remedy this situation that many provinces passed legislation permitting the courts to award pre-trial interest for monies withheld pending judgment. The award here in issue is not for interest, but for inflation. Theoretically, interest is comprised of an allowance for inflation, plus an additional percentage, referred to as the "real" earnings on money. By making an award for inflation, the trial judge in effect made a partial award of pre-judgment interest to the plaintiff. In my opinion, no legal foundation exists for this award.

The final question is whether the trial judge should have made a deduction for the fact that the plaintiff was cared for by the state between the time of the accident and the time of trial. In calculating loss of future earning capacity in cases where an award for future care is made, a deduction is made from the award for lost earning capacity for living expenses to avoid duplication between the two heads of damage. The Court of Appeal in this case applied similar reasoning to the plaintiff's pre-trial lost income. However, the basis for making a deduction on this account -- duplication between two heads of damage -- was lacking, there being no award for pre-trial cost of care. No case was cited to us in which a deduction for living expenses has been made from damages for pre-trial loss of earning capacity and I see no need to introduce such a practice. If the Government of Manitoba had wished, it could have counterclaimed for the cost of the plaintiff's pre-trial care. Having failed to do so, it must abide by the result.

Nor should any deduction be made for tax which the plaintiff would have had to pay on his earnings had he not been injured. This is the rule for post-trial loss of earning capacity: The Queen in right of Ontario v. Jennings, supra, at p. 546. No authority was cited for application of a different rule to pre-trial earnings, where tax has never been deducted.

I would confirm the trial judge's award for pre-trial loss of earning capacity, subject to a deduction for the allowance for inflation to which the plaintiff is not entitled.

(b) Post-Trial Loss of Earning Capacity

The trial judge assessed Watkins' loss of future earning capacity at $540,000. The Court of Appeal reduced it to $400,000 plus interest, on the basis that Watkins' probable income in 1985 was not $34,773 as found by the trial judge, but $25,000.

There was ample evidence to support the trial judge's finding as to Watkins' probable 1985 income. No error having been demonstrated, the Court of Appeal should not have substituted its own opinion for the conclusion of the trial judge. I would restore the trial judge's award for loss of future earning capacity.

5. Management Award

This Court concluded in Mandzuk v. Insurance Corporation of British Columbia, 1988 16 (SCC), [1988] 2 S.C.R. 650, that a fee for the management of the fund may be awarded where appropriate. The trial judge found that such a fee was appropriate in this case. Given my conclusion that the Court of Appeal's award of periodic payments cannot stand, a management fee remains appropriate.

Conclusion

I would allow the appeal, set aside the order of the Court of Appeal and restore the judgment of the trial judge, subject to a deduction of $47,745 for the factor of inflation included in the award for loss of past earning capacity. The plaintiff is entitled to judgment in the sum of $2,075,632.56, together with costs throughout.

Appeal allowed in part with costs.

Solicitors for the appellant: Pollock & Company, Winnipeg.

Solicitor for the respondents Ian Frank Olafson and James Aitkenhead: S. S. Kapoor, Winnipeg.

Solicitor for the respondent Government of Manitoba: Tanner Elton.