All questions

Quantification of financial loss

i Introduction

The quantification of financial loss is a factual exercise. Ultimately, the court must assess damages based on what is fair and reasonable in the circumstances. If calculated properly, the plaintiff will be 'made whole' by the award but will not receive a 'windfall'.

ii Evidence

Once liability is established, the onus rests on the plaintiff to prove its damages 'on a reasonable preponderance of credible evidence'.5 The general rule is that damages that are uncertain, contingent and speculative in their nature cannot be made a basis of recovery. However, if damages claimed are proven on a balance of probabilities, the court is then obligated to do its best to assess the quantum based on the available evidence, even if mathematical exactitude is difficult or impossible. The inherent difficulty in assessing damages cannot relieve a wrongdoer from liability. The above principles are summarised by the Ontario Court of Appeal in TMS Lighting Ltd v. KJS Transport Inc:

(I)t is a well established principle that where damages in a particular case are by their inherent nature difficult to assess, the court must do the best it can in the circumstances. That is not to say however, that a litigant is relieved of his or her duty to prove the facts upon which the damages are estimated. The distinction drawn in the various authorities, as I see it, is that where the assessment is difficult because of the nature of the damage proved, the difficulty of assessment is no ground for refusing substantial damages even to the point of resorting to guess work. However, where the absence of evidence makes it impossible to assess damages, the litigant is entitled to nominal damages at best.6
iii Date of assessment

Selecting the date of assessment upon which to calculate compensatory damages is a context-specific exercise driven by what is fair in the circumstances. The presumptive rule in Canadian law is that, absent cases where specific performance is made out, damages are generally assessed as at the date of the wrongdoing.7

The 'breach date rule' rests on the assumption that, were a plaintiff given the value of the goods or property lost on the date of the wrongdoing, the plaintiff could instantly mitigate its losses by purchasing substitute goods or property. Early crystallisation of the plaintiff's loss is seen to promote efficient behaviour and avoids the plaintiff speculating 'at the defendant's expense by reaping the benefits of an increase in the value of the goods in question without bearing any risk of loss'.8

The court may depart from the breach date rule in circumstances where assessment as at the date of the wrong would 'give rise to an injustice'.9 These special circumstances include where the plaintiff would not have been able to mitigate its losses when the wrong occurred. In this case, damages are not said to have crystallised until the date on which the plaintiff first had the opportunity to mitigate its loss.10

One such departure occurred in Kinbauri Gold Corp v. Iamgold International African Mining Gold Corp. In Kinbauri, the Ontario Court of Appeal was assessing damages for failure to deliver shares in accordance with a share purchase agreement. At the time of breach, there was no reasonable substitute in the market. The Court determined that Kinbauri's losses would not be crystallised until the plaintiff had a 'reasonable opportunity to go to into the market and replace the shares promised to it'.11

iv Financial projections

In Canada, damages are awarded on a 'once and for all' basis at the date of trial. In many circumstances, such as personal injury cases, losses are expected to continue into the future. Therefore, for the court to adequately assess damages, it must 'peer into the future' and fix damage the best it can.12 Courts will often use financial projections, developed by experts, to aid in the assessment of future losses.

The method chosen for developing a financial projection is highly fact-dependant. For instance, where the loss is suffered by a corporation, a financial expert may determine the appropriate methodology by reviewing a corporation's financials and corporate documents, interviewing key employees, researching industry-specific factors and risks, applying factual and legal assumptions he or she has been asked to assume, and considering any practice standards put in place by organisations under which he or she is certified.

v Assumptions

Quantifying a but-for position necessarily requires assumptions. An expert opinion may include two kinds of assumptions.

The first type of assumption is a factual or legal assumption that is provided to the expert by counsel. Factual assumptions upon which an expert opinion is based must be proven 'before any weight at all can be given to an expert's opinion'.13

The second type of assumption is imposed by the expert to simplify or clarify the basis of the report. The degree to which this type of assumption can be made depends on the scope of the expert's report. Because a different set of assumptions could lead to an entirely different opinion, the assumptions used by an expert form a common topic for cross-examination.

vi Discount rates

In breach of contract cases, it is typical to apply a discount rate to future losses to reflect the time value of money.14 The discount rate is typically regarded as a matter for expert evidence, and thus the setting of a discount rate is a question that is largely factual.

Canadian courts also apply discount rates to tort law damage awards for future cost of care and pecuniary losses to account for interest that successful plaintiffs will earn on the lump sum that they receive that they otherwise would not have earned.15 This discount rate reflects the time value of money – the fact that a given sum of money is worth more now than in the future, based on the effects of interest, inflation and income taxes on the damage award.

Whether the tort discount rate is legislated or is determined by the court based on the evidence before it varies by jurisdiction. In some jurisdictions evidence may be led to rebut discount rates imposed by statute or regulation.16 The table below sets out the legislated discount rates for tort damage awards (where they exist) in each province and territory.

JurisdictionType of pecuniary lossStatute or regulationDiscount rate
AlbertaN/AN/ANo mandatory discount rate
British ColumbiaFuture cost of careLaw and Equity Regulation, BC Reg 352/81 Section 1(b)2%
Future wage lossLaw and Equity Regulation, BC Reg 352/81 Section 1(a)1.5%
ManitobaFuture costs of care and wage lossThe Court of Queen's Bench ActCCSM c C280, Section 83(2)3%
New BrunswickFuture pecuniary lossRules of Court, NB Reg. 83-72, Section 54.10(2)2.5%
Newfoundland & LabradorN/AN/ANo mandatory discount rate
Northwest TerritoriesFuture pecuniary lossJudicature Act, RSNWT 1988, c J-1, Section 57(1)2.5%
Nova ScotiaFuture pecuniary loss other than future loss of business incomeNova Scotia Civil Procedure Rules, Royal Gaz 19 November 2008 Section 70.06(1)2.5%
Future loss of business incomeNova Scotia Civil Procedure Rules, Royal Gaz 19 November 2008 Section 70.06(2)A party may prove a discount rate to be used in calculating the difference between estimated investment and price inflation rates for calculating the value of damages for future loss of business income
NunavutFuture pecuniary lossJudicature Act, CSNu, c J-10 Section 56(1)2.5%
OntarioFuture pecuniary lossRules of Civil Procedure, RRO 1990 Reg 194 Section 53.09For first 15 years (post-trial) the greater of the average of the value for the last Wednesday in each month of the real rate of interest on long-term Government of Canada real return bonds, monthly series, as published in the Bank of Canada'sWeekly Financial Statistics for the period commencing on 1 March and ending on 31 August of the year before the year in which the trial begins, less 0.5% and rounded to the nearest 0.1%; and zero 2.5% for any period thereafter
Prince Edward IslandFuture pecuniary lossRules of Civil Procedure s. 53.092.5%
QuebecFuture loss of wages and earning capacityReg 1(1) under Civil Code of Quebec Article 16142%
Other loss resulting from inflationReg 1(2) under Civil Code of Quebec Article 16143.25%
SaskatchewanFuture pecuniary lossThe Queen's Bench Rules, Sask Gaz 27 December 2013, 2684Section 9-21(1)(b)For first 15 years (post-trial) the greater of the average of the value for the last Wednesday in each month of the real rate of interest on long-term Government of Canada real return bonds, monthly series, as published in the Bank of Canada'sWeekly Financial Statistics for the period commencing on 1 March and ending on 31 August of the year before the year in which the trial begins, less 0.5% and rounded to the nearest 0.1%; and zero 2.5% for any period thereafter
YukonN/AN/ANo mandatory discount rate
vii Discount factors

Where a plaintiff has established wrongdoing, and has proven that the plaintiff would have had a reasonable chance or opportunity to achieve a benefit or avoid a loss had it not been for the defendant's wrongdoing, the plaintiff is entitled to damages for that lost opportunity. Because the probability of the plaintiff achieving a benefit is uncertain, the court can choose to apply a discount factor (as distinct from a discount rate) to the damages award relative to the probability that the benefit would have been earned or the loss successfully avoided.

The determination of an appropriate discount factor is an imprecise exercise based on the facts and circumstances of each case.17 While the court is required to consider the risks that affect the probability that a benefit will be realised, a mechanistic or cumulative approach to the assessment of those risks has been rejected in favour of a holistic approach.18 Generally, as the likelihood of the lost opportunity materialising decreases, the discount factor applied increases.

In cases where the court does not have sufficient evidence to evaluate the risks associated with obtaining the benefit, it may choose not to apply a discount factor.19 The burden of providing that evidence rests on the defendant.

For example, in Performance Industries Ltd v. Sylvan Lake Golf & Tennis Club Ltd, the plaintiff claimed damages for lost profits for a planned residential development that was prevented by the defendant's breach of a land sale contract. The plaintiff led expert evidence regarding the scale of likely development and the cost and time required to complete it. The trial judge awarded damages for loss of profit without applying a discount factor. On appeal, the defendant argued that the trial judge ought to have applied a discount factor given the risks that the development may never have proceeded, including that the plaintiff lacked the financial resources to complete the project or could not have completed the project in the time required. The Supreme Court of Canada rejected this argument, citing the defendant's failure to provide any rebuttal evidence at trial to substantiate these risks.20

The recent decision of the British Columbia Court of Appeal in Cellular Baby Cell Phones Accessories Specialist Ltd v. Fido Solutions Inc underscores that the burden is on the defendant to prove, with evidence, that there are risks that should result in application of a discount factor:

In assessing quantum, the court is trying to determine a past hypothetical, not historical, situation. The situation is hypothetical and fraught with difficulties of proof because the conduct of the defendants have made it so. Therefore, once it has been proven on a balance of probabilities that it was the defendants' conduct which caused the plaintiffs' loss, any doubt should result in favour of the plaintiffs.21
viii Currency conversion

The Federal Currency Act requires damage awards to be made in Canadian currency.22 Disputes involving foreign currency can raise issues relating to fluctuations in relative currency values between the date of the breach, the commencement of the action, the date of judgment and the date of payment.

Currency conversion is treated differently across Canadian jurisdictions. In British Columbia, for example, statute stipulates that the last day before the day on which a payment on a judgment is made is the date for currency conversion.23 However, courts have said that date only applies if the plaintiff would be 'most truly and exactly compensated if all or part of the money payable under the order is measured' in a foreign currency 'and converted to Canadian currency on the day before the payment of the judgment'.24 Under the Ontario statute, the court is granted discretion to specify a different date if the judgment date would be inequitable to any party.25

Historically, Canadian courts held that the date of the breach was the correct date of assessment for currency conversion.26 In the late 1970s, influenced by similar legal developments in England, the assessment date was changed to the date of payment.27 Recent jurisprudence has tended to be more flexible in determining the assessment date to ensure that the successful plaintiff is not made to bear the risk of currency fluctuations, and that the defendant does not receive a windfall.28 The British Columbia court has also considered the conduct of the defendant in determining whether to have the currency conversion date set on the date the judgment is issued, as opposed to the day before payment is due, as outlined in the BC statute. In Wei v. Mei, because of the defendant's dishonest conduct throughout the trial, the court concluded that the defendant was likely to attempt to delay payment of the judgment to a time when exchange rates were favourable to its position. To prevent this, the court fixed the currency conversion date as the date the judgment was issued, rather than a future date prior to payment.29

Naturex Inc v. United Naturals Inc provides an example of the courts shifting the assessment date to prevent the defendant from receiving a windfall. Between commencement of the action and the date of judgment, the Canadian dollar had declined relative to the US dollar, meaning the defendant would benefit, as fewer US dollars would be needed to pay the judgment.30 To prevent this windfall for the defendant, the court chose the date of the commencement of the action as the most equitable date to set the exchange rate.31

In Dow Chemical Canada ULC v. NOVA Chemicals Corporation, a case of breach of contract and conversion that arose out of a joint venture to operate an ethylene plant, both parties agreed that the experts would present their damages calculations in US dollars.32 Because a portion of the damages (the allocation damages) resulted from periodic breaches of the contract over 12 years, it was difficult for the court to fix a single conversion date for the damages that would be equitable.33 To resolve this, the Alberta Court of Appeal chose to award damages based on a monthly or periodic update of the exchange rate over the period in which the allocation damages were incurred, and to convert the balance of the damages to Canadian currency as of the date of judgment.34 This case exemplifies Canadian courts' broad discretion to set currency conversion dates in any way that achieves justice.

ix Interest on damages

Plaintiffs are awarded pre-judgment interest on damages in recognition of the time value of money. Because the plaintiff does not receive the award until long after the wrongdoing, it has been deprived of the use of that money in the interim. In all Canadian jurisdictions, a simple pre-judgment interest rate is set by statute.35 However, many provincial statutes allow judicial discretion to vary the statutory rate, or to decline to award pre-judgment interest altogether, depending on what is fair in the circumstances.36

For example, in cases where the plaintiff is forced to borrow funds to replace money that has been wrongfully withheld, the court can award the rate at which the funds were borrowed even if that is higher than the statutory rate.37

In addition to statutory interest, Canadian courts have a common law discretion to award interest as a measure of damages. In Bank of America Canada v. Mutual Trust Co, the Supreme Court of Canada viewed this discretion as an important aspect of fully compensating successful plaintiffs, recognising that the value of a damage award depreciates over time.38

A court may also award compound interest on damages, as opposed to simple interest, pursuant to equitable principles or under common law. Bank of America provides that pre and post-judgment compound interest 'will generally be limited to breach of contract cases where there is evidence that the parties agreed, knew, or should have known, that the money which is the subject of the dispute would bear compound interest'.39

x Costs

In Canadian civil litigation the successful party is typically awarded at least a portion of its legal costs incurred in pursuing its claim.40 As with many things, Canadian practice in this regard is sometimes viewed as a halfway point between English and American practice. Canadian courts seek to balance compensating the successful party for having to bear the costs of litigation when its conduct has not been wrongful against the potential chilling effect of deterring meritorious claims by making the consequences of losing too high. An apt description of this balancing act was provided in Reese et al v. Alberta (Minister of Forestry and Wildlife) et al,41 and repeated in McAllister v. Calgary (City):42

The Canadian practice [of awarding party and party costs] reflects an attempt to balance two conflicting interests. On the one hand, it is argued that if a party is successful and there are no circumstances constituting blameworthiness in the conduct of the litigation by that party, it is unfair to require the successful party to bear any costs incurred by his counsel in prosecuting or defending the action. On the other hand, it is argued that if the unsuccessful party is required to bear all the costs of the successful party, citizens will be unduly hesitant to sue to assert their rights (even valid ones) or to defend their rights when sued. The partial indemnity practice as it exists in Canada is a compromise intended to give some scope in practice for each of the conflicting policy considerations.

In all Canadian jurisdictions, costs are awarded at the discretion of the courts.43 Most jurisdictions also have cost and tariff grids for the courts to use as a guideline for determining cost awards.44 However, because cost awards must be fair and reasonable in the circumstances, and because in some jurisdictions the cost grids are updated infrequently, courts have very broad discretion to depart from the grid.45

Costs are typically awarded on a partial indemnity scale, in the range of 55 to 66 per cent of the full costs.46 Courts may award substantial indemnity costs, which are higher than partial indemnity costs, as a way of censuring a party for engaging in conduct that has wasted time and court resources.47 Most courts have, either by formal rule or in principles developed through the common law, a series of criteria for increased costs to chastise a litigant for reprehensible behaviour, such as making unfounded allegations of fraud or dishonesty, or pursuing a meritless claim while being reckless with regard to the truth.48 Full indemnity costs may be awarded when the parties have agreed to them (typically in a contract), or in situations where the court wishes to sanction truly egregious behaviour that is 'reprehensible, scandalous or outrageous'.49

There are also cost rules to encourage parties to reach a settlement.50 Where one party has made an offer to settle that has been rejected, and the court ultimately awards damages of an amount equal to or less than the settlement offer, the offering party is entitled to an enhanced award of costs.51 For example, in Alberta, the offering party is entitled to double its costs for all actions taken subsequent to service of the offer (the defendant is also entitled to double costs if the action is dismissed after service of the offer), whereas in Ontario the offering party receives partial indemnity costs up to the date of the offer, and substantial indemnity costs from the offer date onward.52 How far in advance of the trial date an offer must be made for these rules to apply and how long such an offer must be left open for acceptance vary by jurisdiction.53

In exceptional cases, the court can award advance costs – in substance, an order requiring the defendant to fund the plaintiff's claim.54 Such orders are rare and exceptional, and typically would only be justified where there is some fiduciary or other special relationship between the parties.

Canadian courts also typically permit lawyers to take claims on a contingency basis, where the lawyer's fee is charged as a percentage of the ultimate recovery. Such agreements must be fair and reasonable to the client and are typically subject to judicial oversight and, sometimes, to judicial revision. In addition, Canadian courts have recently begun to view third-party litigation funding more favourably. A recent Supreme Court of Canada decision, while not deciding the question directly, is widely regarded as putting to rest the courts' former scepticism (or sometimes prohibition) of such arrangements.55

xi Taxation issuesQuantification of the damages award

Canadian courts are deferential to Parliament and the provincial legislatures on the question of how to tax damage awards.56 As such, in Canadian law there are no deductions for income tax from the quantum of awards that are compensation for lost taxable income, earnings or profits.57 The judgment-debtor must pay the full pre-tax amount to the judgment-creditor, who is then responsible for any tax liability on the award under the Income Tax Act.58

Tax benefits may reduce damage awards in certain limited circumstances where the plaintiff receives a tax benefit only as a result of the defendant's breach.59 These tax benefits must be quantifiable, and not merely speculative or hypothetical, in order to reduce a damage award.60

In Lilly v. Apotex Inc, a patent infringement case, the Federal Court declined to adjust the damage award for income tax even though the Court accepted that the plaintiff would have paid tax had it been able to earn the foregone profits.61 The Court found that any tax adjustment would be based on speculation, as no evidence had been adduced by either side regarding the plaintiff's tax rates or potential rebates.62 The defendant bore the burden of proving what the tax consequences would have been, and had failed to do so.63

Taxation of the damages award

Once a damages award has been paid out to the successful plaintiff, how it will be taxed will generally depend on what the award is meant to compensate for.64 If the award is in compensation for lost office, employment, business or property income, it will likely give rise to tax liability.65 Compensation awards for lost profits, finder's fees, and arrears on disability insurance benefits have also all been held to be taxable as income.66 Awards for damaged or destroyed property will be treated on account of capital as if the property had been sold, and may give rise to a taxable capital gain.67

Personal injury damage awards are not taxable as income.68 Even where the amount has been quantified with reference to loss of earning capacity on the part of the injured plaintiff, all awards under the head of pecuniary special or general damages will not be taxed.69 Punitive damage awards are also considered as non-taxable windfalls.70 From the perspective of the party paying the damage award, fines and penalties are not tax-deductible.71 Other amounts might be deductible depending on their nature.

xii Damages elections

The manner in which a plaintiff frames its damage claim can have a profound effect on recovery. One example is in the recovery of damages for breach of contract. Recovery of contract damages is generally limited to reasonably foreseeable consequences of the breach, which includes damage arising from special circumstances known to both parties at the time of contracting. This is sometimes thought of as limiting damage to the four corners of the contract. An arguable exception to this rule arises when, after part performance, the innocent party accepts the other party's anticipatory breach as a repudiation of the contract, bringing the contract to an end and crystallising the right to sue for damages. Some cases accept the idea that in this scenario, the contract ceases to exist, entitling the plaintiff to elect between general contract damages and quantum meruit damages.72 (A claim for quantum meruit damages is a restitutionary claim, made on the basis that there is no contract at all.73) While such a claim seems consistent with the notion that the contract falls away when the innocent party accepts the other's repudiation, it can give rise to damage awards that are fundamentally inconsistent with long-accepted principles of contract damages.

When the market value of the work performed up to the date of termination is greater than what would be owing under the contract, it is beneficial for an innocent party to elect quantum meruit damages as opposed to traditional contract damages. This could have the effect of putting the innocent party in a better position by virtue of the breach than it would have been in had the contract been performed, which is inconsistent with the general goal of contract damage awards.

Although not yet explicitly accepted in Canadian jurisprudence, the concept of a contractual ceiling, under which quantum meruit damages cannot exceed the contract price, is gaining support. It has been recognised in the United Kingdom74 and in the American Law Institute's Restatement of the (Third) Law, Restitution and Unjust Enrichment (2010), which states that '(p)erformance based damages are measured by . . . (b) the market value of the plaintiff's uncompensated contractual performance, not exceeding the price of such performance as determined by reference to the parties' agreement'.75 The idea of a contractual ceiling was also discussed in a 2019 High Court of Australia decision, Mann v. Paterson Constructions Pty Ltd.76 Here, the majority of the High Court held that the value of a quantum meruit award should generally not exceed the portion of the overall contract price that is attributable to the work.77 However, the Court left open the possibility that the innocent party could recover quantum meruit compensation in excess of the contract price in cases where it would be 'unconscionable to confine the plaintiff to the contractual measure'. It remains to be seen whether Canadian courts will apply these principles to similarly limit quantum meruit claims that exceed contract damages.