Pestano v. Wong

2017 BCSC 1666 Pestano v. Wong

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Pestano v. Wong 2017 BCSC 1666 Date: 20170920 Docket: S111428 Registry: Vancouver Between: Matthew Pestano, by his litigation guardian, Kevin Pestano Plaintiff And Mildred Wong, Vancouver Coastal Health Authority, John Doe #1, John Doe #2 Defendants Before: The Honourable Mr. Justice Branch Reasons for Judgment Counsel for the Plaintiff: B. Webster-Evans A. York, A./S Counsel for the Defendant, Mildred Wong: G.P. Brown, Q.C. J.A. Morris Counsel for the Defendant, Vancouver Coastal Health Authority: D. Hwang Place and Dates of Trial: Vancouver, B.C. August 21-25, 2017 August 28-31, 2017 Place and Date of Judgment: Vancouver, B.C. September 20, 2017 I. INTRODUCTION [1] This medical malpractice case has largely been resolved by way of a settlement. However, the parties require determination of several issues in relation to management fee and tax gross-up awards and calculations. II. BACKGROUND [2] Helpfully, the parties were able to provide an Agreed Statement of Facts: 1. The infant plaintiff Matthew Pestano was born March 15, 2009.

2. The infant plaintiff suffered a brain injury at three days of age secondary to a severe hypoglycemic episode, causing oxygen deprivation and cortical damage.

3. As a result of the infant plaintiff's injuries his litigation guardian commenced a legal action against the defendants in this matter. The first trial date was set for April 7, 2015.

4. The infant plaintiff has cerebral palsy, epilepsy, autism spectrum disorder, and global developmental delay.

5. As a result of his injuries the infant plaintiff has a reduced life expectancy of 56.0 additional years (from December 29, 2014) to age 61.8 years. The infant plaintiff's life expectancy is based on the expert report of Dr. David Strauss dated December 29, 2014, and filed by agreement.

6. As a result of his injuries the infant plaintiff will not be competitively employable.

7. As a result of his injuries the infant plaintiff will need lifelong care.

8. As a result of his injuries the infant plaintiff will be unable to manage his estate or his person.

9. As a result of his injuries the infant plaintiff will be unable to personally manage or invest his settlement fund.

10. In the event Solus Trust is retained to act as a trustee, Solus Trust would charge the following for trustee services: a) One-time activation fee of 2% (maximum $10,000.00). b) Annual trustee fees of 0.375% payable quarterly based on the market value of the trust assets. c) Distribution fee of 0.5% on the market value of the assets distributed from the trust. d) Reimbursement for out of pocket expenses.

11. In the event ScotiaTrust is retained to act as a trustee and investment manager, ScotiaTrust would charge the following for trustee services and investment management: a) Annual care and management fee of 1% of the average value of the trust in that year, plus GST. b) Capital distribution fee of 1% of the capital assets distributed, plus GST. c) Tax return fees equal to those in its fee schedule in effect from time to time. d) Reimbursement for out of pocket expenses.

12. In the event Investors Group is retained to act as an investment manager, Investors Group would charge the following for investment management based on its Conservative Pool with Money Market option: a) No capital commission. b) 0.54% annual Program Advisory fee plus GST. c) If the total assets drop below $1M, the Program Advisory fee increases by 0.20%. d) 0.57% annual Management Expense Ratio. [3] To these formally agreed facts, I would add the following. The claim was settled in part prior to the last scheduled trial date, subject to court approval. Court approval was obtained on June 23, 2015. [4] The parties agreed that the settlement for the plaintiff was for $5,850,000, with any applicable gross-up amounts left to be determined. The parties agree that this figure includes the following allocations: a) $4,000,000 for cost of care; b) $1,200,000 for future income loss. [5] There were obviously other allocations making up the final $650,000 of the settlement amount, but no evidence of those additional allocations was put before the court. [6] Although the defendant Vancouver Coastal Health Authority was separately represented at trial and did participate, they joined in the submissions of the defendant Wong. As such, for sake of simplicity, I will refer to the defendant parties jointly below as "the defendant". III. ISSUES [7] The parties require direction on a number

of issues, specifically: a) What is the appropriate inflation rate to employ? b) Is it appropriate to account for the prospect of receiving a disability tax credit as well as the attendant care benefit? c) What is the appropriate level of investment advice required? d) What is the appropriate assumption for the cost of the investment advice? e) Should there be a separate committee of the person fee award? f) Should there be a gross-up of the fee to account for the risk that the Public Guardian and Trustee ("PGT") may need to take over management of the settlement funds at some stage? g) What is the appropriate actuarial methodology to apply to the calculation of the tax and management fee gross-up? IV. DISCUSSION AND ANALYSIS Assumptions Regarding the Settlement [8] There is a preliminary issue regarding competing underlying assumptions used by various experts. As noted above, the parties only offered evidence of the settlement having incorporated future costs of care of $4,000,000, and future income loss of $1,200,000. As noted above, there were clearly other sums incorporated into the final global settlement figure, but these were not in evidence before me. [9] This creates a difficulty, in that the plaintiff's expert economist Mr. Robert Carson assumed and incorporated certain additional amounts in his calculations. Specifically, he incorporated $125,000 for home renovations

(which he includes in his cost of care figure), and $25,000 for loss of interdependency (which he includes in his future income loss figure). However, given that these amounts were not validated through evidence before me, this negates my ability to rely on the precise final numbers reached in Mr. Carson's calculations, even were his methodology accepted in all other respects. There was some evidence that these errors would reduce Mr. Carson's calculations by about 3%. However, given that I have not otherwise accepted all of Mr. Carson's assumptions, I conclude that the most appropriate order is for the parties to re-run their calculations based on the directions provided in this judgment, in order to facilitate a more accurate assessment. Appropriate Inflation Rate [10] Mr. Carson's first report used an inflation rate assumption of 2.5%. Mr. Douglas Hildebrand, the defendant's economist, critiqued this assumption, noting that inflation has been running below that percentage in Canada for many years, and that the Bank of Canada has established 2% as its target rate. The defendant's accounting expert Ms. Theresa Reichert provided similar evidence, and also opined that 2.5% was excessive. In reply, Mr. Carson prepared reports that ran his approach using a reduced 2% inflation rate for all or parts of the relevant period. In his testimony, Mr. Carson was not particularly

aggressive in defending the 2.5% rate, and accepted that there was a valid controversy about the issue, although he did note that in this case any assumption must cover a very long period of time. [11] I am prepared to direct that a 2% inflation rate be used in any calculation, as it is more reflective of recent historical rates and the Bank of Canada's stated future intention. Appropriateness of Incorporating the Disability Tax Credit and Attendant Care Tax Credit [12] In his initial report, Mr. Carson incorporated an assumption that adjusted the first dollar income tax calculation on the basis that the plaintiff had the ability to claim the disability tax credit, while then also claiming attendant care as a medical expense on the second dollar income. Mr. Hildebrand and Ms. Reichert critiqued that approach, noting that in most cases an individual can claim the attendant care tax credit, or the disability tax credit, but not both. In his response report, Mr. Carson did run his approach without the disability tax credit, and his defence of his initial approach was lukewarm at best. He acknowledged that his theory might be viewed as "a bridge too far". There was some suggestion that a changed living arrangement in the future could result in the ability to claim both tax benefits, but I find this suggestion speculative. I agree that not including the potential effect of both

deductions was the appropriate approach on the evidence before me. Appropriate Level of Investment Management Advice [13] The Supreme Court of Canada's decision in Mandzuk v. I.C.B.C., [1988] 2 S.C.R. 650, sets out the guiding principles for awarding management fees. In that case, a mentally unimpaired quadriplegic was found to lack the education and ability to invest his future loss award in a way that would allow him to achieve the requisite rate of return. The court stated: [2] The only principle that appears to be applicable is that the defendant must take the plaintiff as he finds him, including his state of intelligence. Whether this is low by reason of the injuries complained of or its natural state, a management fee or an investment counselling fee should be awarded if the plaintiff's level of intelligence is such that he is either unable to manage his affairs or lacks the acumen to invest funds awarded for future care so as to produce the requisite rate of return. [14] The court provided three criteria to justify awards of either a management fee or an investment counselling fee (at para. 5): i. evidence that management assistance is in fact necessary; ii. evidence that investment advice is in fact necessary in the circumstances; iii. evidence as to the cost of such services. [15] In terms of facilitating this evaluation, both parties referenced the Law Reform

Commission's report on the potential levels of investment management assistance that may be required: Law Reform Commission of British Columbia, Report on Standardized Assumptions for Calculating Income Tax Gross-up and Management Fees in Assessing Damages (Vancouver: Ministry of Attorney General, 1994) (the "LRC Report"). The LRC Report provides a useful summary of the underlying purpose of such an award [at p. 43]: The reason why courts occasionally award management fees is that if the plaintiff is forced to pay for investment assistance from the awards for cost of care and loss of future earnings, those funds will be exhausted prematurely. The projected cost of the management assistance is therefore added to the damages so that the fund will subsist for the required length of time. [16] The LRC Report recommended a four-level classification of the need for investment management advice or services: C. Levels of Management Fees It appears to us that the most logical way to standardize the appropriate range for a management fee is to set different levels of fees, depending on the degree of assistance the plaintiff requires. We propose a four-level classification, as follows: Level 1 - The plaintiff requires only a single session of investment advice and the preparation of an investment plan at the beginning of the period the award is to cover. Level 2 - The plaintiff will

require an initial investment plan and a review of the investment plan approximately every five years throughout the duration of the award. Level 3 - The plaintiff will need management services in relation to custody of the fund and accounting for investments on a continuous basis. Level 4 - The plaintiff will require full investment management services on a continuous basis, including custody of the fund, accounting, and discretionary responsibility for making and carrying out investment decisions. Such a plaintiff is likely to be mentally incapacitated or otherwise incapable of managing personal financial affairs. Classification of fee levels in this manner allows distinct ranges of fees to be developed. [at pp.45-46] [17] The defendant acknowledges that neither the plaintiff nor his parents are in a position to manage the settlement funds themselves. This was a reasonable concession. The plaintiff's mother is clearly overwhelmed by the tremendous challenges she faces caring for a child who awakens with seizures several times a night. The father is currently the primary caregiver for the family's other two children, while maintaining a full-time job. There was no evidence that either have the expertise or experience to manage a sum of this size. [18] Hence the real question is not whether the plaintiff needs paid investment management assistance, rather, it is what level of

assistance is required. [19] The defendant suggests Level 2, while the plaintiff proposes assistance at Level 4. [20] The plaintiff suggests that assistance in the form of a retainer of the independent trust company Solus Trust, in conjunction with active and ongoing investment assistance from the investment management firm Investors Group would be a reasonable level of assistance. [21] The defendant does not dispute the reasonableness of retaining a trust company such as Solus Trust to hold the funds. The dispute is over whether additional support from an investment manager is necessary. [22] Notably, the defendant's economist Mr. Hildebrand assumed that the funds would be invested in a mixed portfolio in his calculations (as did Mr. Carson). He also testified that if long term bonds were purchased, there would be a risk of losses if the bonds had to be sold before maturity. As such, he agreed that any manager would need to be "opportunistic" to guard against this outcome. He agreed that a professional investment manager would be required to look at what care needs are projected, and what might need to happen with the investments over the necessary timelines. [23] It is difficult to see how Level 2 assistance would be consistent with this assumed need for more active management. Indeed, the defendant agreed that it would be reasonable for Solus Trust to hire an outside

investment manager, but submitted that the defendant should not be required to pay for this assistance. However, as a basic starting point, neither the plaintiff nor any custodial trustee would have had any need to hire an investment manager to perform the work contemplated by Mr. Hildebrand absent the assumed negligence of the defendant: Yeung (Guardian ad Litem of) v. Au, 2007 BCSC 175 at para. 45. [24] In advancing their submission for Level 4 assistance, the plaintiff placed particular emphasis on Solus Trust's Chief Executive Officer John Blackmer's statement that Solus Trust was not in a position, nor willing, to provide investment advice on its own. This was supported by the Solus Trust material introduced into evidence which states that "as Solus Trust provides only trust and estate services, we always look to the external organization recommended by our clients to provide the financial and professional services required by their trust or estate". Solus Trust is not licensed to act as an investment advisor. It is not a deposit-taking institution. Mr. Blackmer testified that Solus Trust's "prudent investor" rules require it to obtain outside assistance in this situation. Furthermore, Solus Trust's proposed fees were based on acting solely as trustee, without providing any investment management services. This evidence is supportive of the need to hire an external

investment manager in order to achieve the requisite rate of return. [25] The court addressed a similar debate in Cikojevic v. Timm, 2012 BCSC 1688. As described by the court in that case at para. 65: [65] The defendant points out that the plaintiff has the support of Solus Trust to invest her award. But the plaintiff points to evidence before the court that an external investment manager is necessary to produce the requisite rate; and to the trustees refusal to act as trustee without an external investment manager. [26] The court held that: [72] Should the court when deciding the issue cover its eyes against the reality of volatile economic conditions and a challenging investment climate, one that requires the plaintiff to look well outside the range of safe interest bearing investments that used to be available to achieve a 6% rate of rate? The current investment environment casts into significant doubt the ability of even a trustee more knowledgeable than the average investor to achieve a real rate of return of 3.5%. [122] Of course, as noted during the hearing, markets fluctuate. The market has always exposed investors to a full range and mix of anxieties and optimism, all at the same time. However, relying on strategies such as taking the longer view and expecting the market eventually to run to the positive side does not address the plaintiff's specific needs now. [123]

Her investments must pay for her care needs as well as produce income for support. The plaintiff needs a chance to re-invest and accrue earned income in excess of her youthful needs and see some benefit from compounding, else her Trust fund will sink too soon. [124] I conceive my primary duty is to ensure the plaintiff's award is protected from dissipation and erosion to the extent the evidence requires, and I have the means at hand to do so. Given the evidence heard, I agree the 3.5% discount rate appears to be unrealistic. But as it is fixed at 3.5% at the moment, this leaves the logical choices either of authorizing Mr. Blakmer to retain the services of an external investment manager for the period of time necessary to meet the plaintiff's needs, or of exposing her to the vagaries, the latter of which the law does not permit. [125] In different economic circumstances, such as those experienced in most years since 1994, one could readily accept the defendant's point that Mr. Blakmer has the ability and experience needed to invest an award like the plaintiff's through a combination of prudent instruments, and achieve a 6% return relatively easily. In my opinion, however, Mr. Blakmer's statement that he would not act as trustee for the plaintiff without the ability to retain an external investment manager is a reasonable position and deserves considerable weight. [126] The

plaintiff's circumstances are unlike those seen in cases discussed earlier, such as Li and Yeung, where the court's expectations were that if the plaintiff had the services of an external investment manager; they would see returns in excess of those assumed by the statutory discount. But in the present case, the evidence points to reasonable expectation that even with the assistance of an professional investment manager, especially in the earlier years of investing, the plaintiff' chances of achieving the statutory rate of return are guarded. [127] I note Justice Lambert's comments in Lee that these decisions, as with the present one, are decided on their individual facts and circumstances. [128] Considering all the evidence, I confirm the plaintiff is not capable of managing her financial affairs. I find she requires the assistance of a trustee to protect her award from dissipation and financial mismanagement and that it was reasonable for her to retain the services of Solus. [129] I also find, considering all the evidence, that to prevent erosion of her award, the plaintiff's trustee requires the assistance of an external investment manager for a certain period. Funding for the plaintiff's trustee is set at the rate typically charged by the Public Guardian and Trustee rate: 0.4% of the gross value of the plaintiff's assets under administration and 5% of the yearly income

earned by the assets and for external financial management, at .75% of the annual value of the fund. [27] The court in Cikojevic did conclude that investment management assistance would only be necessary for 15 years. This was based on evidence presented in that case that (1) lower than expected returns on traditional asset classes were projected for the next 5-7 years, (2) the portfolio would shift to more passive investment strategies when the plaintiff was older; and (3) the first 18 years were the critical period to ensure appropriate compounding. [28] In Wiens v. Serene Lea Farms Ltd, 2000 BCSC 1306, the plaintiff suffered a severe brain injury which left him unemployable. The court held at paras. 39-40 that the injuries suffered by the plaintiff were catastrophic, and that a management fee at Level 4 was appropriate. [29] In Li v. Sandhu, 2006 BCSC 949, the court observed that the need for a management fee is a question of fact based on evidence. In that case, the court concluded the plaintiff had not proved the necessity of external money management over and above the services that were going to be provided by the PGT, and declined to award an additional amount for a management fee. However, in Li, the PGT had already been appointed as the committee of the plaintiff, and was going to charge its statutory schedule of fees in any event. In contrast, the plaintiff in this

case is proposing assistance at a fee level that is less than the PGT would otherwise charge. [30] In Bystedt v. Hay, 2007 BCCA 84 , the court confirmed that in order to receive an award for the cost of management services the plaintiff must adduce evidence of the management services required to provide a rate of return equal to the discounted rate. [31] In Yeung, the mother, who was the plaintiff's committee, sought management fees of $739,400 to pay the cost of a full discretionary investment manager. The manager of investments for the PGT conceded in Yeung that the use of external investment managers had been common in the past, but not "these days." The decision whether to use one depended on the circumstances of the case. Hiring of an investment manager was said to be limited to situations where the estate was valued at $500,000 or more, and the patient needed high cash flow. [32] Mr. Justice Tysoe, as he then was, rejected Ms. Yeung's claim for a discretionary investment manager: [55] It seems to me that counsel for Ms. Yeung is inviting me to do the very thing which the Supreme Court of Canada said should not be done. Counsel is inviting me to determine whether the use of an investment manager will produce a net rate of return higher than the 3.5% discount rate and to only reduce the claimed management fee if there will be a so-called profit. That is the same type of

inquiry which was advocated by the appellants in Townsend v. Kroppmanns and which the Supreme Court of Canada rejected because it was an indirect and incidental means of reverting to costly complex evidence. [56] If a committee is appointed, the plaintiff's financial affairs will presumably be properly managed, and full investment management services will only be warranted in the unusual situation where the committee is not capable, with [sic] the assistance of investment management advice or investment counselling, of achieving a real rate of return equal to the 3.5% discount rate used to calculate the present value of the future loss. [33] At para. 57, Justice Tysoe noted Ms. Yeung was a trained accountant and though she was not a sophisticated investor at the time, she certainly possessed the ability to become one. Justice Tysoe also accepted evidence that if Ms. Yeung were aided by an external fund investment manager she "should be able to achieve a real rate of return in the range between the 3.5% discount rate and the 7.1% real rate of return achieved by Canadian pension plans over the 25 year period from 1981 to 2005." In light of this evidence, he concluded that "it appears to have been a prudent decision for Mrs. Yeung to have engaged the services of Genus, but the Defendants should not be required to pay for the full amount of the management fees charged by Genus." In

the result, the plaintiff was awarded an amount limited to the fees that would have been charged by the PGT. As noted above, the approach proposed by the plaintiff in this case yields fees less than those that would have been charged by the PGT - the level that was approved in Yeung. [34] In Whetung v. West Fraser Real Estate Holdings, 2008 BCSC 182, the injured adult plaintiff suffered from dystonia, a neurological disorder characterized by involuntary contractions and was required to undergo Botox injections in three month cycles due to injury. The court held that through most of a cycle, she would be able to feed and clothe herself, and also go on walks. At paras. 15-16, the court held that the plaintiff was neither trained, nor had the capacity to become able to manage the total funds awarded as damages ($4,006,204). The court awarded management fees of $655,200 within that figure. [35] In Lines v. W & D Logging Co. Ltd, 2009 BCCA 106, the court stated: [108] A management fee is intended to compensate for the cost to the plaintiff of management and investment of the lump sum damage awards for future care and loss of future earnings. It is a sum that may be given to ensure those awards fully compensate the plaintiff as was intended by the court, without erosion by expenditures for professional management. [109] A party seeking to recover a management fee must provide

evidence of the necessity for the service: Mandzuk v. Insurance Corporation of British Columbia, 1988 CanLII 16 (SCC), [1988] 2 S.C.R. 650, 53 D.L.R. (4th) 606. [36] In Lines, the parties disputed whether the court could award combined management and committee fees that would exceed the maximum fee charged by the PGT. The court held that the fees should not exceed that amount. However, the court left open the question of whether combined management and committee fees could ever exceed the PGT's maximum fee. Again, this particular issue is not engaged here since the plaintiff's proposed scenario yields fees below the PGT's fee schedule. [37] More recently in Riding-Brown v. Jenkins, 2015 BCSC 1751 and Best v. Thomas, 2014 BCSC 2487 the courts approved very limited investment management awards of $10,000 and $25,000 on underlying damage awards of approximately $1.2 million and $2.6 million, respectively. However, a) In Riding-Brown, the evidence was that the plaintiff was capable of performing full-time work in a sedentary position (2014 BCSC 382 at para. 13), that he was a person of intelligence, talent and ability, and that he was capable of making rational decisions about his financial future with the occasional guidance of a qualified financial advisor. Furthermore, the cost of care component was only $210,000; b) In Best, the evidence was that the plaintiff was a mature

adult, capable of making rational decisions about his financial future. He also intended only to invest the funds in safe vehicles, such as bonds, which required less skill to manage. The management fees were, accordingly, awarded only to cover financial advice over the next five years, during which the bond market was projected to be uncertain. [38] In this case, the defendant conceded that the plaintiff could not achieve the required returns on his own. The plaintiff proffered evidence from the parents which satisfied me that they could not achieve the statutory discount rate either. As noted above, there was also evidence from the plaintiff's proposed custodian that if they were retained as the trustee of a sum this large, they would require independent management assistance in order to pursue any investment returns. Mr. Blackmer's evidence was that hiring a professional at Level 2 to review the necessary investments every five years would not be prudent. I find the defendant's suggestion that it should only be required to fund Solus Trust to do the work on its own was inconsistent with this evidence. Even if Solus Trust were prepared or able to do the investment management work on its own, which it is not, its fees would clearly have been higher. [39] The defendant offered some evidence on historical levels of return in order to support its submission that outside

investment assistance beyond Solus Trust was unnecessary to obtain the required rates of return. However, as any investor knows, "past performance is no indication of future results". Furthermore, Mr. Hildebrand's review of investment returns fails to appropriately acknowledge that: 1. over the most recent decade, S&P/TSX returns have been below long term historical averages; 2. there have been wild swings year over year within that time horizon; 3. historical S&P/TSX returns would likely have been achieved, at least in part, with the assistance of professional investment managers, whom the defendant suggests are unnecessary here; and 4. Government of Canada 10 year bond yields are presently below the discount rate and have been since 2010, meaning that there is a legitimate concern that a simple passive and conservative investment strategy will not get the plaintiff the required rate of return over the important early years. [40] In this case, I find that investment assistance in line with the LRC Report's Level 4 would be the most reasonable, for the following reasons: 1. The plaintiff has put forward sufficient evidence that neither he, nor his parents, nor the proposed custodial trustee, can achieve the required rate of return assumed by the statutory discount rate on their own.

2. Even the defendant's expert assumed the need for portfolio management in excess of Level 2.

3. This is an extremely large award, in excess of $5 million. As such, even small errors or gaps in the required investment results could yield significant shortfalls for the plaintiff in absolute terms.

4. This award must last an extremely long period of time, with the plaintiff having a life expectancy of 56 years from trial. As such, even slight dips below the necessary level of return for short periods of time could yield outcomes that fall far short of the settlement's intended results, given the unfortunate power of negative compounding. This is particularly so at the front end of the investment horizon.

5. If Solus Trust is accepted as a reasonable custodian of the settlement funds, the evidence before me is that it would require active outside investment management assistance. It is only with such assistance that the plaintiff could be expected to achieve the discount rate of return, given that Solus Trust will not make investment decisions on its own. [41] It is difficult to imagine a fact pattern that would require Level 4 assistance if this case does not. The plaintiff is a catastrophically injured infant who will never be able to make his own decisions, and is presently cared for by parents without material investment expertise. Adopting the LRC Report's guidance, the plaintiff is very clearly "mentally incapacitated or otherwise incapable of managing personal financial affairs". The defendant's submissions on this issue came perilously close to a suggestion that with the reduction in the discount rate to 2%, no one will ever require Level 4 assistance. In my view, such an approach would not be appropriate, and would not be supported by the evidence in this case in any event. I find that Level 4 assistance is required here to achieve the rate of return contemplated by the discount rate. [42] As to duration, I see no basis to cut off this assumed level of investment management assistance at a specific point in time. There is sufficient evidence to assume Level 4 is

required, and there is not sufficient evidence before me, unlike in Cikojevic, that there will be a specific point at which the investments will be able to enter a more passive pattern, or that the current market uncertainty supporting active management can be expected to cease as of a particular date. Appropriate Assumption for the Cost of the Investment Management Advice [43] After using the PGT fee schedule in its initial reports, at trial the plaintiff advanced the investment management fees based on the assumption that the independent trust company Solus Trust would be retained in combination with the external advisor Investors Group. [44] In my opinion, the plaintiff's fee proposal is reasonable, both practically and economically. The plaintiff's father noted that this will need to be a very long term relationship, and he will likely be the primary point of contact with these organizations. He has met with each of the companies, and has developed a good rapport and comfort level with them. From an economic standpoint, the reasonableness of this proposal is also supported by the following factors: a) the fees are quite low when compared with the PGT's schedule; b) Solus Trust is proposing to charge fees below its typical fees; c) Investors Group's fees are below those typically charged by investment managers, which often range from 1-2.5% annually; and d) one of the other

alternatives illustrated by the defendant (the retainer of ScotiaTrust to provide both custodial and investment assistance), does not yield fees materially different than the plaintiff's proposal, after other methodological differences are taken into account. [45] The defendant's suggestion that Solus Trust's fees alone be used is not appropriate, given that these fees were provided based on the assumption that Solus Trust would only be providing custodial services. Given my finding that Level 4 investment management assistance is required, the appropriate fee schedule must incorporate costs for investment advice. [46] The defendant raised the concern that with Investors Group's assistance, the plaintiff may be in a surplus position if, for example, a real rate of return of 5% were achieved. I do not find this to be a relevant concern. Once the court concludes that investment management services are necessary to achieve the discount rate, the fact that it may be possible to earn surplus returns should not change the outcome. [47] I note that this aspect of the decision should not be treated as pre-judging the application that will need to be made to appoint Solus Trust as trustee. That issue is not before me. Rather, what the parties need at this stage is direction as to the fee assumptions that should be used in the gross-up calculations. I direct that the fees charged by

Solus Trust in conjunction with Investors Group should be used in this respect. Committee of the Person Fee [48] The plaintiff suggests that on top of the Solus Trust fee and the investment management fee, there should also be an additional committee of the person fee. This fee was meant to represent the work that would have to continue to be done by the parents after their usual parental responsibilities came to an end at the age of majority. [49] The plaintiff conceded that this request was unprecedented, and offered no case law support for it. However, the plaintiff suggested that such a fee could be derived from first principles, since the parents were clearly going to have to do additional work that was caused by the assumed negligence of the defendants. [50] The defendant argued that beyond such a fee being unprecedented, it was inappropriate given that (1) there is generally no compensation awarded to a committee of the person, (2) where there is a private trust there is no requirement to have a committee appointed, and (3) any award for the parents arising from their obligation to care for the plaintiff could and should have been advanced as an "in trust" claim within the underlying damages claim. [51] I agree with the defendant. No award should be made to account for future committee of the person responsibilities. Contingency for Risk that the PGT May Need to Assume

Management [52] The plaintiff notes that it has proposed a fee structure that is well below what the PGT would charge were they acting as trustee and investment advisor. However, the plaintiff raises a concern that the PGT may need to assume these roles in the future if the proposed group made up of the parents, Solus Trust, and Investors Group are no longer able to work together in the future. They suggest that a positive contingency be added to any award to account for this risk. [53] I am not prepared to make such an award. I was not presented with sufficient evidence to support the suggestion that there is a "real and substantial possibility" that the proposed arrangements will collapse in the future: Lines, para.

18. Furthermore, as the defendant noted, the more likely scenario on any breakdown in the relationships would be the retainer of a different trustee or manager, rather than the more expensive PGT option. The testimony from Ms. Manaloudis of the PGT supports this finding, in that cases where a private trustee has come to the PGT asking for the PGT to assume control are extremely rare. Appropriate Methodology for Gross-up Calculation [54] The B.C. case law on this issue has long been bedeviled by a debate about whether the appropriate approach was the "life certain" or "probability of survival" method. Indeed, the opposing experts in this case were often the standard bearers for these opposing methodologies. After several barrels of ink were spilled, a general judicial consensus eventually developed, beginning in 2008, under which the "probability of survival" method won out. [55] What was presented to the court in this case appears to be a 2nd generation of the debate. While both economists now accept that the mortality tables must be expressly factored into the gross-up calculations (rather than simply applying a pure "life certain" approach), the debate is now about how and when within the order of operations that should occur. [56] Mr. Carson and the plaintiff's expert actuary Mr. Banville suggest that the best approach for this case is to run 97 scenarios covering the entire

potential range of life expectancies, using the projected cost of care stream of payments. This yields an expected amount of future care dollars that would be required under each of those possible life expectancies. Some of the scenarios in later years would require more than the available funds. However, Mr. Carson and Mr. Banville both note that this interim outcome is simply a step along the calculation path. The next step is to adjust the amounts by incorporating the probability of death in each of those scenarios, assuming for actuarial purposes that only a small portion of the person dies in every year based on the odds reflected in the mortality tables. This eventually yields a cumulative net present value sum which essentially matches the total awards provided for the cost of future care and income loss. Mr. Carson and Mr. Banville suggest that this approach is preferable to that proposed by the defendant as: 1. It more closely aligns with the approach that was taken in developing the lump sum present values of the cost of care and income loss in the first place, which is the necessary base of the gross-up calculation; 2. It is consistent with the so-called "Method 3" approach recommended in a 2001 paper entitled Grossing-Up for Income Tax authored by Brian Burnell, an actuary who was Chair of the Actuarial Evidence Committee of the Canadian Society of Actuaries. This

paper is provided on the Canadian Society of Actuaries website as one of the only resources devoted to the topic of gross-up calculation methodologies. It suggests that Method 3 (or as Mr. Banville calls it, the "Probability of Death" method), is preferable to the Method 1's "Life Certain" method, or Method 2's "Probability of Survival" method. [57] I will refer to Mr. Carson's method as the "Probability of Death method" for the balance of these reasons. [58] Mr. Banville concedes that even the Probability of Death method has a problem, in that when management fees are regressive (in other words, when the percentage of fees go up if you are only investing smaller amounts), the method does not yield a perfect mathematical outcome if the calculation is deemed to occur after an award has been determined. The proposed fees here do have a regressive element. However, Mr. Banville clarified during his testimony that the global net effect of this problem is limited. While the regressive fees can cause the amounts to be undervalued, this is offset in whole or in part by the fact that the progressive nature of our tax system can cause the amounts to be overvalued. The problem is also negated if the gross-up calculation is deemed to take place at the same time as the award is determined. [59] As such, Mr. Banville's testimony was that the Probability of Death method is the most

appropriate when compared to the other two approaches, which suffer from more fundamental difficulties. Method 1, the method closest to Mr. Hildebrand's approach, can create projections that will often not take the plaintiff the entire way through to his projected life expectancy. That specific problem revealed itself here, as we will see further below. According to Mr. Banville and Mr. Burnell's paper, Method 2 has its own difficulties, particularly when first dollar income and tax credits are incorporated in the calculation. Neither party advanced Method 2 as the appropriate method in this case. [60] Mr. Hildebrand adopted an approach which he concedes is outside of any of the three methods proposed by Mr. Burnell. His approach starts with a fixed fund representing the actual amount awarded, and he then draws down that fund until exhaustion, whenever that occurs, even if the fund runs out before the projected life expectancy. He then applies the mortality tables to that stream to reduce the amounts further. This approach is said to better reflect reality, since it starts with the actual amounts available and never illustrates scenarios that are impossible to achieve with the fixed amount of money available under the settlement. In terms of the problem created by illustrating a stream that runs out, in this case, about five years before the projected life expectancy, Mr.

Hildebrand says that this is simply what the math requires once you assume that "a lump sum is a lump sum is a lump sum". He says that this outcome is likely to occur when withdrawals are "front-end loaded". He did illustrate an alternate method that extended through to the projected life expectancy, but he had to reduce the projected withdrawals from the fund to do so, and he sees no reason why that alternate approach makes any theoretical sense. [61] Mr. Banville's critique of Mr. Hildebrand's approach is that: 1. It yields outcomes that are even lower than those that would be provided by the generally rejected "life certain" approach, by effectively using the "life certain" method to begin, and then applying the mortality risk to reduce the amounts further. Mr. Hildebrand did not dispute this.

2. It yields outcomes that would have the funds expiring earlier than the average expected life expectancy, even after factoring in the relevant discount rate. Mr. Hildebrand described that result as "regrettable", but said it was required by the mathematical formula.

3. It essentially discounts for the mortality risk twice. The withdrawals and their duration are made with certainty in a situation where the potential duration of those withdrawals has already been limited by the mortality assumptions used in the cost of care calculations, but then Mr. Hildebrand's method provides net amounts of taxes and fees that are again reduced for the risk of death. Or, as Mr. Carson puts it: "The problem with Mr. Hildebrand's method is that if withdrawals are made with certainty, the implicit assumption is that the risk of death in each year is zero until the life expectancy age is reached, and that it is then 100% when the life expectancy age is reached. If the risk of death is 100% at the predicted age of death, then it is incorrect to apply mortality risks in the years prior to the expected age of death. This double counts death." As noted above, Mr. Banville responds to the fundamental concern about the illustration of so-called unrealistic scenarios in Mr. Carson's method by noting that this is simply an intermediate step in the calculation. The final outcome is designed to yield amounts which match the agreed amounts. [62] I note that the defendant's expert actuary Stephen Cheng did not provide actuarial support for Mr. Hildebrand's approach. Rather, he was simply retained to critique Mr. Carson's method. In this respect Mr. Cheng did state that

in his view, "all three methods summarized by Mr. Banville in his report doing gross-up are fundamentally correct". Mr. Cheng did testify that he was unaware of other actuaries using the Probability of Death approach in these circumstances. However, he conceded that there were no formal actuarial standards directing actuaries to use one method or another. In cross-examination Mr. Cheng indicated that his preferred methodology in this case would be Mr. Burnell's Model 1 approach, or the pure "life certain" approach. This approach would yield outcomes in the range of 8% higher than Mr. Hildebrand's approach. However, as noted herein, even this higher pure "life certain" approach has fallen into disfavour in British Columbia. Mr. Cheng based his stated preference for Method 1 on his own reading of the Supreme Court of Canada's decision in Townsend v. Kroppmanns, 2004 SCC 10. As discussed further below, I do not believe that the Townsend decision directs the court in the manner suggested by Mr. Cheng. [63] Nor did Ms. Reichert provide accounting support for Mr. Hildebrand's approach. Ms. Reichert raised a concern that the calculation of expenses in Mr. Carson's supporting charts are not smooth and sometimes show negative values. However, Mr. Carson explained this on the basis that certain identified outlier values were simply balancing entries created by the necessity for mid-year

calculations. Others were the product of certain planned spikes in care expenditures. Finally, in the very last years, there is a spike driven by the fact that the last number of years of potential life expectancy were compiled into a single year for sake of convenience. Mr. Carson provided a reply to Ms. Reichert which shows a more logical fully compiled stream of projected expenses. [64] Does the case law provide any assistance that would guide this debate? [65] In Cikojevic, the court noted the challenging position in which the court is placed in resolving these actuarial debates: [41] Returning for a few moments to the 1994 LRC report , I was struck by the fact that eighteen years later, the commission's words at page 19 still have purchase; The present lack of a standardized approach to calculating the gross-up means that courts must continually deal with expert evidence submitted by each side that does not proceed from the same assumptions. The adversarial nature of the process leads inevitably to the defendant introducing an expert report with a lower figure that the one contained in the report submitted by the plaintiff. The reports may coincide with respect to some assumptions, but they can be, and frequently are, widely divergent. In the litigation process, the validity of expert opinion on an issue is treated as a question of fact. Differing findings on the same

issues reflect badly on the administration of justice, but courts are forced to act on the basis of the evidence actually submitted in individual cases. As a non-expert, the trial judge often has little or no basis on which to make a choice between the conflicting opinions. Numerous judgments simply indicate a preference for one party's report over another, without enunciating a rationale for it. Trying to make findings of "fact" on such elusive matters as the rate of inflation many years hence does not enhance the credibility of the courts. The subject-matter of evidence pertaining to the gross-up is difficult to grasp. To the uninitiated observer of the court's performance, it carries an air of greater subjectivity that is actually inherence in the calculations. "Splitting the difference" between the experts' position, which is sometimes done out of desperation, only worsens this impression. [66] Nonetheless, the court in Cikojevic did provide some helpful guidance on the appropriate judicial approach, stating: [42] In essence, the purpose of a tax gross-up of the cost of care award is to protect the award from erosion by way of taxes the plaintiff will have to pay on income earned from the invested award. The plaintiff emphasized that the methodology used to calculate the award should not be chosen so the defendant can save money. But neither should the method used create a

windfall or an additional award. The gross-up should be an amount no more than is necessary to preserve the plaintiff's award from tax erosion. [67] In the result, the court concluded: [45] Considering all the evidence and able submissions, however, on balance I conclude the survival probability method and assumptions used by Mr. Carson are more congruent with the objective of preserving the plaintiff's cost of care of award from the predations of taxes on the funds income. The fact the LRC endorsed this method of in its 1994 report fortifies my findings. [46] And, as noted, I do find certain aspects of Mr. Szekely's approach problematic. It is true I found no reason for concern that Mr. Szekely used different mathematical models to calculate the tax gross-up and the annual cost of care amounts. Once the plaintiff invests her award, the amount invested becomes an independent variable for calculating the tax gross-up. But as noted earlier, Mr. Szekely's method sees the plaintiff withdrawing the full yearly amount awarded her, but at the same time, reduces the amount of tax payable by discounting it for mortality. If the plaintiff's withdrawals are treated, in effect, as a certainty until the funds are exhausted, then likewise, should not her obligation to pay tax on the fund also be treated as a certainty during her lifetime? [68] Similarly, in Whetung, the court held as

follows: [7] The two actuarial models proposed by counsel to account for depletion of the cost of care differ in that the approach employed by the plaintiff's expert, Mr. Struthers, suggests the cost of care funds would be accounted for as being depleted by the sum judged necessary to cover the monthly expenditures, less a probability factor needed to discount for negative contingencies, notably survivability. The method employed by the defendant's expert, Mr. Szekely, would deplete the fund by the full cost of care required each month, with no application of this probability factor. [8] The probability accounting method matches the method employed to assess costs of future care and depletion of the fund on the probability basis, at least notionally, makes the fund available through the plaintiff's lifespan. [9] The accounting on the basis of a full reduction each month for the cost of care judged appropriate, will result in a depletion of funds at a considerably earlier point in time. The additional effect of this full deduction model is a shorter period of time during which funds are available for investment, and a reduced requirement for a tax gross-up. [10] In my view, there should be a consistent basis employed for the calculation of damages and in accounting for the depletion of funds. Theoretical symmetry is not the only question. I think it is likely that a person

suffering a disability, knowing that the cost of care needs to be sustained will make economies, accepting a lower standard month-to-month, so that the funds applied each month will be sustained as far into the future as can be reasonably managed, or will use other resources to help defray costs. In either case this form of management is better and more equitably described by the method proposed by the plaintiff. [Emphasis added.] [69] In Burdett (Guardian Ad Litem) v. Mohamed, 2010 BCSC 311, the court was also presented with dueling actuarial methodologies, and concluded as follows: [11] It must also be noted that if one accepts Mr. Szekely's front end approach, the fund is effectively exhausted by the time the plaintiff reaches the age of 73, well before the conclusion of her actual life expectancy. Adopting Mr. Car[s]on's approach, the fund will be able to meet those costs throughout her lifetime. [70] Most recently, similar competing methodologies were presented to the court in Hans v. Volvo Trucks North America Inc., 2017 BCSC 555. In Hans, Mr. Justice Davies stated: [32] The debate between Mr. Carson and others like him who have applied probability methods and Mr. Szekely and those economists who have applied life certain approaches has been ongoing amongst economists in this Province since at least 1998 and has resulted in the spilling of much judicial ink. [33] Although

early decisions favored the life certain methodology, later decisions have shown a marked movement in favor of probability approaches. [34] I have concluded that the probability approach employed by Mr. Carson in his calculations best meets the objectives of LRC 133 and Mr. Hans' entitlement to a management fee and a tax gross-up award arising from the damages suffered by Mr. Hans as a consequence of the defendants' negligence. [71] The defendant suggests that the Supreme Court of Canada's decision in Townsend is determinative of this debate, and directs acceptance of Mr. Hildebrand's approach. With respect, I do not believe that this Supreme Court of Canada decision purports to analyze or determine this highly technical actuarial debate. I note that none of the post-Townsend cases discussed above treated the case as resolving the methodological issues. The case primarily dealt with the question as to whether legal fees and a housing expenditure that had been incurred since the award should be deducted before the calculation of management fees. The court held that they should not. Further, the court held that there should not be a deduction from management fees for the prospect that returns higher than the discount rate might be achieved. I do not see that this case determined whether the Probability of Death method should be adopted over Mr. Hildebrand's downward-adjusted

"Life Certain" method. However, the case does set down important general principles: [5] Compensation aims at restoring the victim to the position that person would have been in had no loss been incurred. Compensation is awarded in the form of a lump sum payment. The dollar amount received for future costs is actually lower than projected costs because it is assumed that the amount paid will be invested and will earn income before being used for future needs. The same reasoning applies for loss of future income. The victim is awarded a lower amount for income than that person would have actually earned at a future date. In other words, the amounts are discounted to reflect the present value of the expenses incurred or the income earned at a future date, taking inflation adjustments into consideration. The purpose of the discount rate is thus to insure that victims will be fully compensated but that defendants will not be called on to overpay. [6] The same underlying rationale guides the attribution of management fees and tax gross-up. The law aims at ensuring that the value of the amounts awarded to victims is maintained over time. In tort law, victims of personal injuries are awarded management fees when their ability to manage the amount they receive is impaired as a result of the tortious conduct. The purpose of this segment of the award is to ensure that amounts related to

future needs are not exhausted prematurely due to the inability of the victims to manage their affairs. [18] In fixing the award of damages in a tort action, courts rely on many principles. Three of them are of particular relevance to this case. First, there is the principle that damages are assessed and not calculated. The second principle is finality, according to which courts award a one-time lump sum of damages. Finally, the third principle is that the plaintiff has property over the award. [21] [M]anagement fees and tax gross-up are to be assessed based on the first assessment of damages and not according to the amount available for investment as eventually found at some indeterminate future date. In other words, the appropriate basis for calculation is the one determined at trial, without considering what happens thereafter. It is improper for a trial judge to consider what the plaintiff does with the awarded damages. [Emphasis added.] [72] The defendant relies on the principle of finality in suggesting that Mr. Hildebrand's approach more accurately achieves this outcome by using the actual agreed amounts, and spending those amounts in accordance with a fixed schedule on the basis that the plaintiff will draw down those funds until the amount is exhausted. However, I do not find that the Probability of Death method violates the principal of finality, since it is also

ultimately derived in a way that respects the final fixed amount awarded. Furthermore, the Supreme Court of Canada acknowledged the following actuarial reality: [19] Since it is impossible to calculate the exact amount of money that will be needed in the future, courts have to rely on actuarial evidence Actuarial evidence is itself based on experience and not on individual circumstances. Future costs and loss of future earnings are amounts that are estimated because, by definition, they are not yet incurred or earned. Although this hypothesis may seek to simulate reality, it remains notional. [73] In relation to the concern about finality, this issue arose in Townsend because the defendant was seeking to incorporate facts into the calculation that had developed since the judgment. The court held that this was not appropriate, stating: [20] It would be inconsistent with the principle of finality to authorize repeatedly revisiting the amount assessed as full and fair compensation at trial whenever new evidence became available. [74] The Probability of Death method does not violate this direction. It does not seek to incorporate any new facts that have occurred since the amounts were fixed by the settlement. [75] The defendant raises the concern that some of the scenarios incorporated into the Carson approach are unrealistic. However, the court in Townsend acknowledged the reality

of any actuarial exercise: [20] During the prospective period for which damages are awarded, the hypothesis may prove overly pessimistic for a period but overstated for another period. [76] Having reviewed the authorities, I derive the following general principles: 1. the gross-up methodology should, to the extent possible, provide funds at a level that will be able to meet the projected expenses throughout the plaintiff's lifetime, and not end prematurely; and 2. the methodology should, to the extent possible, be consistent with the methodology used for the underlying awards upon which the gross-up is based. [77] I find that these principles favour Mr. Carson's Probability of Death method, in that this method is more closely aligned to the probabilistic approach used to derive the cost of care and future income lost. By way of contrast, Mr. Hildebrand admits that his approach "decouples" the gross-up calculations from the underlying calculations. Furthermore, the Probability of Death method is more likely to yield a stream that matches the plaintiff's average expected life expectancy. Finally, Mr. Hildebrand accepted that the Burnell paper, from which the Probability of Death method was derived, is a recommended resource for actuaries. This was affirmed by Mr. Banville. Mr. Cheng agreed that there was very little else out there other than Mr. Burnell's paper. Conversely, there

was no evidence of any actuary approving of Mr. Hildebrand's approach. [78] In terms of the defendant's critiques of the Probability of Death method, the concern about certain illustrated scenarios being unrealistic is overstated, since they were simply a step along the road of a longer mathematical calculation that eventually adjusts in such a way that the final expected outcome matches the award. Furthermore, this complaint overlooks that the interim scenarios in the early years vastly underutilize the agreed amount. This only highlights the need to assess the approach in its totality, not on the basis of what is illustrated half-way through the order of mathematical operations. It is somewhat akin to critiquing a student for showing that (2X2)-1=4 part way through a student's calculations, without turning over the page to see that the student subsequently subtracted 1 to reach 3. [79] I conclude that the calculations guiding the court's assessment in this case should be performed using Mr. Carson's Probability of Death method. V. CONCLUSION [80] In sum, I conclude that: a) the base for any gross-up calculation shall be $4,000,000 for cost of care and $1,200,000 for future loss of income; b) the interest rate in any calculation shall be 2%; c) the disability tax credit shall not be incorporated into any calculation alongside the attendant care tax credit; d) the appropriate

level of investment assistance for this case is at Level 4; e) the appropriate level of management fees shall be the combination of the Solus Trust and Investors Group schedules; f) no amount shall be awarded for committee of the person services provided by the parents; g) there shall be no contingency for the prospect that the PGT may need to take over management of the estate in the future; and h) the "Probability of Death" methodology used by Mr. Carson shall be applied to the calculation. [81] The process of establishing tax gross-up and management fees has been described as an assessment rather than a calculation: Tucker (Public Trustee Office) v. Asleson (1991), 62 B.C.L.R. (2d) 78 (C.A.) at pp. 87-88. However, given the magnitude of the amounts in issue, I conclude that it would be appropriate here for further calculations to be performed consistent with these reasons before finalizing any assessment. This is particularly so given that none of the scenarios presented to me fit precisely with the directions now provided. [82] It may be that with these directions the parties can arrive at an agreement on the precise figures. As such, I direct that the parties may have up to 60 days to both run further calculations and determine whether agreement is possible. Failing agreement, the parties may come back before me for a more precise assessment. Similarly, failing agreement, the parties may attend at that time to address the issue of costs. "Branch J." ________ The Honourable Mr. Justice Branch