Dizzy Discount Rates
“The most powerful force in the universe is compound interest.”
Albert Einstein
The term “discount rate” means the same as “interest rate.” It is used to compute the net present value (discounted value) of a cash flow.
Discount rates used in tort cases are intended to provide a sum of money that, if invested properly, will produce the desired future income stream growing at the rate of inflation. (This explains why discount rates for a future income stream, which grows with inflation, are much lower than discount rates for level payments.)
In Canada, the amount that the plaintiff will recover for future care varies dramatically by province. Below are the “discounted” amounts needed to provide $50,000.00 per year (payable monthly), and supposedly growing at the rate of inflation (CPI), for a period of 40 years for the provinces of British Columbia and Ontario.
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Province
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Present Value Amount for $50,000.00 per annum over 40 years (paid monthly)
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Legislated Rate
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British Columbia
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$1,084,776.64
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3.5%
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Ontario
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$1,542,216.20
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0.75% first 15 years
2.5% thereafter
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Investing in Canada is relatively homogeneous. There is no reason to believe that a plaintiff in British Columbia could out-invest a plaintiff in Ontario and would therefore require less money (damages).
Where high discount rates reduce the damages awarded, a structured settlement is really needed. The tax-free nature of a structured settlement allows the plaintiff an advantage over conservative, taxable investments.
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