Present Value Factors
A table of present value factors for future costs of care (medical equipment expenses, in-home caregivers, modifications to housing, extra transportation costs, etc.) allows for the calculation of the present value of any known cost of care. Where specific costs have been identified by a medical/rehabilitation professional, with some costs possibly occurring at intervals over the life of the individual, Discovery Economic Consulting can provide the present value of such costs.
Tax Gross-Up on Cost of Care Awards
Interest earned on a lump sum award for future costs of care will attract income taxes. This reduces the value of the cost of care award. All such awards should be reviewed to see if an additional claim should be made. The following has to be taken into account:
- the amount of the award and whether it is invested at interest or in equities;
- other income of the award recipient;
- future inflation rates; and
- eligibility for the medical expense tax credit of specific medical care costs.
If the individual has no other source of income, the tax gross-up on a small fund may be negligible. However, if the award is in addition to other income (such as employment earnings, long term disability benefits, Canada Pension Plan, or income from an award for loss of earnings) then the impact of taxes on even a small fund may be significant. And while many costs may be eligible for the medical expense tax credit, with typical inflation rates some tax gross-up may be required even if all costs are eligible for the credit. If an allowance for the cost of professional fund management is to be made, then it may be desrable to carry our these calculations at the same time as the tax gross-up calculations, since fund management fees will have an impact on taxes. Because of the information needed and the complexity of tax gross-up calculations, it is often more economical to wait until after the award amount has been determined to calculate the gross-up required.
In the future, tax impact calculations may also be needed for loss of earnings reports. In a Court of Appeal decision (Cooper vs. Miller, V01259, etc.: December 19, 1991) Madam Justice Southin suggests that the present practice of ignoring the impact of income taxes on loss of earnings awards should be changed, and that instead an award for net of tax losses, grossed up for taxes on the earnings of the funds awarded, should be made. If implemented by legislation or by a reversal of the Supreme Court of Canada decision, such a change will require tax calculations on loss of earnings awards.
The basic information required to develop an estimate of the present value of future care costs is as follows:
- date of birth of the client;
- date of the trial or valuation (perhaps a mediation or arbitration date);
- values related to specific costs of care including any applicable taxes; and
- frequency of the occurrence of the future costs (i.e., every year, 5 years, etc.).