Law Times

PAGE 6 COMMENT Law Times Group Publisher ..... Karen Lorimer Associate Publisher .... Gail J. Cohen Editor ........... Gretchen Drummie Associate Editors ..... Helen Burnett . . . . . . . . . . . . . . . . . . . . . .Robert Todd Copy Editor .......... Matt LaForge CaseLaw Editor ..... Jennifer Wright Art Director .........Alicia Adamson Production Co-ordinator .. Mary Hatch Electronic Production Specialist ............Derek Welford Advertising Sales .. Kimberlee Pascoe . . . . . . . . . . . . . . . . . . . . . . . . Kathy Liotta . . . . . . . . . . . . . . . . . . . . . . . .Rose Noonan Sales Co-ordinator ........Sandy Shutt ©Law Times Inc. 2008 All rights reserved. No part of this publication may be reprinted or stored in a retrieval system without written per- mission. The opinions expressed in articles are not necessarily those of the publisher. Information presented is compiled from sources believed to be accurate, however, the publisher assumes no responsibility for errors or omissions. Law Times Inc. disclaims any warranty as to the accuracy, completeness or currency of the contents of this publication and disclaims all liability in respect of the results of any action taken or not taken in reliance upon information in this publication. Editorial Obiter Mustapha, who became depressed and phobic after finding a dead fly — and the parts of another — floating inside a sealed water bottle, has lost a damages award of $341,775 from Culligan of Canada Ltd. The Supreme Court of Canada has ruled that not only was the Ontario Court of Ap- peal right to slap away the award made in 2005 by the Superior Court, but he also has to cough up costs. Perhaps he should have heeded the proverb, "the fly flutters around the candle till it gets burnt," and quit after the appeal court told him to buzz off. The Supreme Court said the bottling O company couldn't be found liable for psy- chological damages because it could not have reasonably foreseen the consequences of Mustapha finding the insect. It all started in 2001 when while re- Fly in his ointment ne thing can be said of Waddah (Martin) Mustapha: there are no flies on him. Or in him. placing the bottle of water in his home dispenser, Mustapha and his wife noticed a dead fly inside the new, unopened con- tainer. "Obsessed with the event and its 'revolting implications' for the health of his family, he developed a major depressive disorder, phobia, and anxiety," said the Su- preme Court's nine-page judgment. He sued Culligan and won. In his deci- sion, Superior Court Justice John Brock- enshire said the Windsor hairdresser self- described that he could not get the fly in the bottle out of his mind. He endured a number of issues, including nightmares; loss of sense of humour; an inability to drink water; constipation; "can no lon- ger take long and enjoyable showers, and instead, after lengthy treatment can only take perfunctory showers with his head down so the water does not strike his face"; and his sex life suffered. In short, expert evidence was he suffered "nervous shock." Brockenshire found that seeing flies in the water resulted in "recognizable psy- chiatric injury" and awarded Mustapha $80,000 in general damages, $24,174 in special damages, and $237,600 in dam- ages for loss of business. In 2006 the appeal court overturned on the basis that the injury was not reasonably foreseeable and thus didn't give rise to a cause of action. Justice Robert Blair said that "on the findings made by the trial judge, it is apparent that Mr. Mustapha suffered sig- nificant and lingering psychiatric injury as a result of the fly-in-the-bottle incident." But Blair said a defendant can't be liable for damages of psychiatric harm where the harm, "by any objective measurement, consists of an exaggerated reaction by an obsessive person of particular sensibilities to what, in reality, is a relatively minor and trivial incident — the sight of a dead fly in a bottle of consumer water." The Supreme Court upheld the ap- peal court in a 9-0 decision. The top court agreed Mustapha suffered real psychological harm, but Justice Beverley McLachlin said he had to show that it was foreseeable that a person of "ordinary fortitude would suf- fer serious injury from seeing the flies in the bottle of water he was about to install. This he failed to do." She added that Mustapha's claim "fails because he has failed to establish that his damages were caused in law by the defen- dant's negligence. In other words, his dam- ages are too remote to allow recovery." The outcome isn't a surprise. But while we would have loved to have been a fly on the wall when the SCC decided to hear this case, what really gives us the bug-eye is that in the U.S. — given our differences in tort law — Mustapha's case likely would fly. — Gretchen Drummie A fundamental understand- ing of the role of marginal rates of tax is essential in personal tax planning. Canadian individual income tax rates are progressive — the percentage rate of tax increases as income rises. A taxpayer's marginal rate is the per- centage rate on his or her top dol- lar. We refer to this as the taxpayer's tax bracket. Understanding marginal tax rates Financial province of residence. In Ontario, for example, the combined federal and pro- vincial top marginal tax rate is 46.41 per cent (2008). The marginal tax rate is a crucial number for all tax plan- ning. We measure potential tax savings by multiplying the dol- lar amount saved by the taxpayer's marginal tax rate. For example, an For 2008 the basic federal marginal tax rates on ordinary income are as follows: Taxable Income: On the first $37,885 ......................................15% On the next $37,884 .....................................22% On the next $47,415 .....................................26% On taxable income above $123,184 ............29% Provincial taxes are extra and vary between provinces. Some — such as Alberta — have a flat tax of 10 per cent of taxable income. Others have a progressive structure that increases with taxable income. Surtaxes and special levies can also raise the marginal rate of tax. Thus, an individual's ultimate tax burden depends upon his or her Ontario married couple each of whom earned $50,000 paid tax of $10,157 in 2007, which is $8,900 less than if only one of the spouses had earned $100,000. Hence, the benefits of splitting income be- tween spouse if possible. Let us consider a simple ex- ample: suppose that your em- ployer offers you a salary increase By Vern Krishna of $10,000. How much better off are you after the increase? The an- swer depends upon your marginal rate of tax. Assuming a marginal tax rate of 40 per cent, the salary increase is worth $6,000 net af- ter taxes. If, however, you are in a 50-per-cent tax bracket, the in- crease is worth only $5,000 net. In a 50-per-cent tax bracket, you would be better off getting a $6,000 non-taxable benefit, which would be a pre-tax equivalent of $12,000. Thus, the benefit of any increase in income is a direct func- tion of the applicable marginal tax rate. The higher an individual's marginal rate of tax, the greater the tax that he must pay. Looked at from the perspective of expenses, the higher the margin- al rate, the greater the value of tax savings from expense deductions. For example, assume that a lawyer www.lawtimesnews.com Matters with a 33-per-cent marginal rate pays deductible profession- al annual fees of $1,500. The tax saved on the fees is $495 — that is, $1,500 multiplied by 0.33. A taxpayer in a 50-per- cent tax bracket would save $750. Thus, the lower income taxpayer actually pays more net of tax than a higher marginal rate taxpayer does. The progressive tax rate struc- ture means that individuals should arrange their affairs to reduce their marginal rate. Every dollar of savings has a value equal to the amount saved multiplied by the marginal rate of tax. However, the Income Tax Act has special rules — the "attribution rules" — that prevent individuals from shifting their income to family members with lower tax rates. Assume, for example, that Anne, a merger and acquisitions lawyer, has a marginal rate of tax of 46 per cent bracket. She gives her spouse (John) — a legal aid lawyer in a 33-per-cent bracket — $100,000 to invest in bonds that pay $5,500 interest each year. Anne will be taxable on the interest JUNE 2, 2008 / LAW TIMES Law Times Inc. 240 Edward Street, Aurora, ON • L4G 3S9 Tel: 905-841-6481 • Fax: 905-727-0017 www.lawtimesnews.com President: Stuart J. Morrison Publications Mail Agreement Number 40762529 • ISSN 0847-5083 Law Times is published 40 times a year by Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9 905-841-6481. lawtimes@clbmedia.ca CIRCULATIONS & SUBSCRIPTIONS $141.75 per year in Canada (GST incl., GST Reg. #R121351134) and US$266.25 for foreign address- es. Single copies are $3.55 Circulation inquiries, postal returns and address changes should include a copy of the mailing label(s) and should be sent to Law Times Inc. 240 Edward St., Aurora, Ont. L4G 3S9. Return postage guaranteed. Contact Helen Steenkamer at: hsteenkamer@clbmedia.ca or Tel: 905-713-4376 • Toll free: 1-888-743-3551 or Fax: 905-841-4357. ADVERTISING Advertising inquiries and materials should be directed to Sales, Law Times, 240 Edward St., Aurora, Ont. L4G 3S9 or call Karen Lorimer at 905-713-4339 klorimer@clbmedia.ca, Kimberlee Pascoe at 905- 713-4342 kpascoe@clbmedia.ca, Kathy Liotta at 905-713-4340 kliotta@clbmedia.ca or Sandy Shutt at 905-713-4337 sshutt@clbmedia.ca or Rose Noonan at 905-713-4340 rnoonan@clbmedia.ca Law Times is printed on newsprint containing 25-30 per cent post-consumer recycled materials. Please recycle this newspaper. income even though John legally earns the income. Thus, tax conse- quences are not always the same as commercial consequences. The tax rule deems Anne to have earned the interest for tax purposes. The purpose of the attribution rules is to prevent Anne and her spouse from saving $715 —13 per cent of $5,500 — tax as a family unit. But, the rules aren't even-hand- ed. Assume that Anne and John get divorced and Anne becomes bankrupt and cannot pay her tax bill of $150,000. The Canada Revenue Agency can get at John's assets even after the divorce settle- ment for any deficiency up to a maximum of $100,000. Thus, John is liable for Anne's taxes even though he legally owns the bonds. Clearly, John Maynard Keynes had not read any tax law when he said that the avoidance of taxes is the only intellectual pursuit that carries any reward. LT Professor Vern Krishna, is counsel at Borden Ladner Gervais LLP, and exec- utive director of the CGA Tax Research Centre at the University of Ottawa. vkrishna@blgcanada.com.

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