What are discount rates and present day values?

Discount rates are used to calculate the present day value of a loss of future income or cost of future care that is awarded as a lump sum in personal injury cases. The discount rate assumes that the lump sum will be invested and will earn enough income to create a sufficient stream of compensation for the injured party over the appropriate time frame, with the fund being fully exhausted at the end. This is one methodology of calculating and compensating future financial loss endorsed by the so-called 1978 “Trilogy” of catastrophic injury cases decided by the Supreme Court of Canada.

Under s. 56(2) of the Law and Equity Act, RSBC 1996, c. 253, the Chief Justice of the Supreme Court prescribes the discount rates for personal injury cases in BC. Chief Justice Hinkson did this on April 30, 2014, changing the discount rate under s. 56(2)(a) to 1.5%, and the rate under s. 56(2)(b) to 2.0%:  B.C. Reg. 74/2014. The previous rates of 2.5% and 3.5%, respectively, had been in place since August 25, 1981:  B.C. Reg. 352/81.

Three factors determine the “real” rate of return reflected by the discount rate: interest rates, inflation rates and labour productivity.

Creation of the discount rate

Before 1978, expert evidence on interest, inflation and labour productivity was required to be presented at trial in order to determine the appropriate discounting to apply to future losses and to arrive at a present value figure (the damages award).

As a result of the “Trilogy” cases at the Supreme Court of Canada in 1978, several provinces legislated discount rates. The purpose of the discount rate was to avoid overcompensation and provide a standardized means for calculating the real rate of return.

In British Columbia, the Law & Equity Act implemented the above legislative discount rate in 1981. Alberta and Newfoundland and Labrador do not have prescribed discount rates, thus, they must be calculated by leading evidence. Only Ontario provides a calculation for assessing discount rates rather than prescribing a fixed rate.

Implications of a decrease in the discount rate

If an injured party is meant to be provided with $1,000 annually for 30 years, a small change in the discount rate can have a significant impact over the long term. For example the present value of $30,000 varies with the applicable discount rate:

Discount Rate Lump Sum Award
1.5% $24,016
2.5% $20,930
3.5% $18,392
4.5% $16,289

In short, the lower the discount rate, the higher the damages award for future loss. Given the current economy, specifically low interest rates, it is very likely that the discount rate will be lowered. The impact of such a change is that defendants/insurers will be required to pay a higher lump sum for damages for future income loss and cost of care.

For a recent BC Supreme Court decision about discount rates, see: Riding-Brown v Jenkins, 2015 BCSC 1751.