Février 2013 — “…we have been witness to an emerging contradictory tendency in case law, as several trial level judges granted an indemnity on the basis of net earnings, after deducting income tax.”
The Supreme Court has been clear since 1966. Income replacement indemnities granted to compensate the loss of earning capacity are calculated on the basis of a victim’s gross earnings before income tax.
Since several years now, we have been witness to an emerging contradictory tendency in case law, as several trial level judges granted an indemnity on the basis of net earnings, after deducting income tax.
In two judgments rendered in January 2013, the Court of Appeal tempered this tendency and recalled that the courts are bound by the decisions of the highest court in the country.
THE THEORY OF GROSS EARNINGS: THE RULE ESTABLISHED BY THE SUPREME COURT
In 1966, when dealing with a case of civil liability undertaken following an automobile accident, the Supreme Court of Canada ruled in a case from Ontario, R v. Jennings and others1, that the loss of future income must be assessed on the basis of gross earnings. Justice Judson, writing for the highest court in Canada, dismissed the principle of English law upheld in British Transport Commission v. Gourley2 to the effect that an indemnity must be calculated on the basis of net earnings. Over the years, this rule in the Jennings case has been reiterated several times by the Supreme Court 3 and recently by the Court of Appeal.4 In spite of that, the trial level courts in Quebec have infringed this principle.5
To put an end to this controversy, the Court of Appeal dealt with this issue in detail in Montreal (Ville de) v. Wilson Davies6 and Clement v. Painter7 which we will be discussing below.
THE WILSON DAVIES CASE
In the beginning, this was a suit in civil liability against the City of Montreal following a bicycle accident. Ms. Wilson Davies had sustained serious injuries which left her paraplegic. Justice Mandeville S.C.J. ruled that the city was liable and she awarded her an indemnity for the loss of past income, taking income tax into consideration.
The City appealed this judgment on the issue of liability. Ms. Wilson Davies brought a cross-appeal, seeking modifications to the trial level judgment, submitting that the indemnity for loss of income must rather be calculated on the basis of gross earnings. We will not discuss the dismissal of the appeal made by the City of Montreal, but rather the claimant’s cross-appeal.
Theory of Net Earnings
Persons advocating the theory of net earnings base their argument on the opinion of Professor Daniel Gardner8, who proposes to discard the principle in the Jennings decision. According to him, granting an indemnity without taking into consideration the tax consequences that the victim would have gone through had it not been for the accident, conflicts with the rule of total compensation provided under article 1611 of the Civil Code of Quebec. According to this principle, which is also called restitutio in integrum, a victim must be indemnified for the prejudice actually sustained and nothing more. The author Gardner affirmed that the gains of which the victim actually is deprived is the loss of his net income. Doing otherwise means that the person committing the prejudice would be required to pay excess damages, leading to a situation of over compensation.
At trial level, Justice Mandeville dismissed the argument to the effect that the legislator deliberately gave a tax break for income replacement indemnities. According to her, it is up to the court to determine fair compensation to comply with the objective of complete reparation. Because no clear evidence showed that the legislator obviously intended to give a victim an advantage, she used and applied the theory of net earnings. The Court of Appeal dismissed this argument, and described the loss resulting from an incapacity to work as a “capital loss” and not merely a loss of employment income, and this according to it, warrants a tax break.
Supporters of the theory of net earnings try to make a distinction with the Jennings decision and with other judgments9 rendered by the highest court in Canada, on the basis of the fact that these judgments come from Common Law provinces rather than from a civil law jurisdiction. The Court of Appeal dismissed this proposed distinction after having reviewed the judgments and their basis and recalled that the principle of total reparation is basically the same in civil law as in Common Law.
In addition, the author Gardner claimed that the rule in Jennings concerned future losses of income, for which tax liabilities are undetermined. The Court of Appeal dismissed the proposed distinction and recalled that the issue was already resolved in Watkins v. Olafson10 in which the Supreme Court reached the conclusion that there were no grounds which would warrant applying a different rule depending on whether the losses claimed were sustained before or following the trial. It did not omit to recall that treating past and future income differently would give results which were quite incongruous.
Although Justices Rochon, Dutil and Bouchard considered that this theory of net earnings was enticing, they dismissed this position once and for all, recalling that we are bound by the judgments of the Supreme Court of Canada “except to the extent that it is possible to make distinctions of fact or of law with those which were considered or discussed by the Supreme Court itself”11.
THE PAINTER JUDGMENT
The Court of Appeal rendered a second judgment on this point on January 23, 2013 in Clement v. Painter.12 The trial level decision had also been rendered by Justice Mandeville.
In a suit in civil liability, the victim Clement claimed damages sustained after falling in the staircase of Painter’s building. The trial level decision awarded him an indemnity on the basis of net earnings.
Dismissal of the Theory of Net Earnings
In its analysis, the Court of Appeal approved the reasons given in Wilson Davies, even clearly affirming that the Jennings judgment had its place in Quebec. In addition, the Court of Appeal once again recalled that all trial level courts are bound by the judgments of the Supreme Court.
Justices Rochette, Pelletier and Belanger reaffirmed that the loss resulting from an incapacity to work is a loss said to be capital, the prejudice of which is more than the income actually lost and that indemnification on the basis of gross earnings is the appropriate reparation. According to the Court of Appeal, the legislator deliberately gave victims receiving income replacement indemnities a tax break and this is not contrary to the principle of total reparation.
The Court ruled:
an indemnity is based on gross earnings.
Basically, with the judgment in Jennings, the Supreme Court ruled that in non-contractual matters, the income replacement indemnity must be calculated on the basis of the claimant’s gross earnings. In a context in which this rule seemed to be increasingly discarded by trial level courts, the Court of Appeal reiterated the principle in its two judgments rendered in 2013. It called the trial level courts to order, affirming that they are bound by these rulings.
The judgments in Wilson Davies and Painter are significant in that they underline two fundamental points. The first one is that only important distinctions with the judgments of the Supreme Court will allow courts to discard the theory of gross earnings. The second is that only the legislator or the Supreme Court itself is entitled to rule that net earnings are to be used as a basis for calculation. On the basis of what has been explained, there is no doubt that the trial level courts will have to comply with the Supreme Court of Canada’s rule from now on.
Another case dealing with this issue is now pending before the Court of Appeal.13 It seems to be obvious that the Court will be ruling the same way it did in the judgments analyzed, unless of course it is “except to the extent that it is possible to make distinctions of fact or of law with those which were considered or discussed by the Supreme Court itself!”14
- R. v. Jennings and others  S.C.R. 532
- British Transport Commission v. Gourley,  A.C. 185
- Andrews v. Grand and Toy Alberta Ltd.,  2 S.C.R. 229, 251; Guy v. Trizec Equities Ltd. and others.,  2 SCR 756; Watkins v. Olafson,  2 S.C.R. 750; Cunningham v. Wheeler,  1 S.C.R. 359
- Rosenstein v. Kanavaros, 2012 QCCA 128 (C.A.)
- Mailloux v. Angeli, 2010 QCCS 1967; Vaillancourt v. Cie d’assurances Missisquoi,  R.R.A. 374 (S.C.); Quintal v. Bernier, B.E. 2004BE-862 (S.C.); Chamard v. Desrochers, B.E. 2005 BE-73 (S.C.); Tremblay v. Loisirs St-Rodrigue, B.E. 2005BE-1058 (C.Q. Ménard c. Archambault, 2010 QCCS264; Dubois v. Dubois, 2007 QCCQ 4265; Boissonneault v. Vachon, 2000 R.R.A. 1034(S.C..) and Clément v. Painter, 2010 QCCS 4631
- Montreal (City of) v. Wilson Davies, 2013 QCCA 99 (C.A.)
- Clement v. Painter, 2013 QCCA 34 (C.A.)
- Daniel GARDNER, Le préjudice corporel, [Bodily Prejudice] 3rd ed., Cowansville, Editions Yvon Blais, 2009, p. 736
- Supra., notes 2 and 3
- Watkins v. Olafson,  2 S.C.R. 750
- Supra., note 6, para. 82
- Supra., note 7
- Hudon v. Cloutier, 2010 QCCS 4612
- Supra., note 6, para. 82
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