1) Economic Loss
When the long-form Census was eliminated in 2011 there was significant criticism in both Canada and abroad. Over 500 professional organizations in Canada protested the decision to replace the long form Census in 2011 with a shorter one. There were several issues. The 2011 Census had less information than before, but the information collected also wasn’t comparable or consistent with previous iterations.
Regardless of your political leanings, if you work in the field of economic loss and business valuations, the Liberal party’s decision to bring the mandatory long-form Census backing May 2016 should make you rejoice. It makes our life easier and ultimately will provide our clients with better analysis and data in our expert economic loss reports.
The 2011 Census eliminated several key and important data sets that we use to project and estimate earnings of self-employed and employed individuals. Among the most important – average salary by occupation and age ranges. Previously, we could filter employment earnings by 10 year age ranges: 25-34, 35-44, and so on. The data provided information about earnings increases over the duration of a career in a specific occupation.
This was of particular importance when projecting the lifetime earnings of a student or young adult that had yet to join the workforce. It provided an idea of how an individual’s earnings would increase with experience.
With more information available there shouldn’t be a large discrepancy between two expert’s opinion regarding future earnings for an individual in a specific occupation. Consider a university student in the last year of studies. The student had yet to decide on a career, but had applied to graduate programs including law school. Projecting the individual’s earnings would be speculative, but the long-form Census has data that can assist in providing ranges of earnings for different occupations.
The factors to consider in projecting lifetime earnings include:
- Education level
- Full-time or part-time hours
With the long-form Census, we can provide several different scenarios for earnings based on the individual’s pre-injury goals. Their undergraduate transcripts can be examined to determine the likelihood that they would have attended law school.
Consistency between data sets is important because we can track whether wages are increasing over the years or not. The year data is collected is important relative to the date of the accident. The 2006 Census would be appropriate to project earnings for an accident in 2005 and during the time period from 2006 to 2010.
Ultimately, an expert’s economic loss report will now be more detailed and more helpful to determine pre-injury projected earnings especially in the cases of young adults and individuals that were pursuing post-secondary education at the time of the injury.
2) Business Valuation
One of the more significant adjustments made to the income statement of a private business to normalize before-tax earnings in the business valuation process in Toronto is to adjust employee salary and owner salary to the estimated market wage.
Consider a family member that provides a service to a private business, but has been compensated at a constant salary for tax purposes. Based on the service the family member provides – bookkeeping, office management, paralegal, the long-form Census will provide detailed salary information and allow for more accurate adjustments in the business valuation process.
The adjustment for owner and management salary requires the same type of detailed information. It is rare that an owner of a Canadian private business draws a salary that would be considered market rate for the services provided by the owner. There are executive compensation tools that can used to determine economic or market wages depending on an industry and executive position, but it was difficult to use the 2011 Census. An executive with 20 to 30 years of experience in an industry is more likely to earn higher salary and compensation than an executive with 5 years of experience. The lack of salary information by age range in the 2011 Census made it difficult to estimate management salaries.
3) More Information the Better
The adage ‘the more the better’ certainly applies to information. We are in the information age and access to data continues to develop and improve. As experts, we need to support assumptions in our economic loss or business valuation reports with data and information. The return of the long-form Census will help support the analysis in our reports and help our clients understand our economic loss calculations and conclusions.