Canada: Current Issues In Calculating Income Replacement Benefit Entitlements – You Decide!

Potential issues of disagreement


In calculating Income Replacement Benefit entitlements (IRBs), we routinely encounter certain issues where there are unresolved disagreements between insureds, insurers and their respective accounting experts over the interpretation of Ontario Regulation 34/10, the Statutory Accident Benefits Schedule (SABS), which became effective for all motor vehicle accidents occurring on or after September 1, 2010 (the new SABS). Of course, resolution of these issues is a matter of law beyond the expertise of accountants. As such, we have selected three of these issues for your consideration.

Are Income Replacement Assistance (Collateral) Benefits Deductible Before Or After Tax?

The SABS has historically based the computation of IRBs on an after-tax basis. Controversy has arisen under the new SABS as to the deductibility of tax on collateral benefits received.

Collateral benefits may or may not be subject to income tax. For instance, all CPP disability benefits are taxable and the taxability of short and long-term disability benefits depend on the policy terms. Where taxable, under the previous legislative regime (the old SABS), section 7(1) specified that IRBs are reduced by the "net weekly payments for loss of income received by or available to the insured". Section 4(1) of the new SABS defines "other income replacement assistance" as "the amount of any gross weekly payment for loss of income that is received by or available to the person as a result of the accident". On the surface, it would seem simple. Previously it was "net" and now it's "gross." But is it so simple?

In the first instance, the new SABS amended the computation of IRBs from 80% of "Net" (after tax) pre-accident income to 70% of "Gross" (pre-tax). We believe this was done to avoid the difficulty and imprecision involved in calculating applicable income taxes; the difference of 10% being a rough approximate average. Under this view, while calculation of collateral benefits on a gross basis under the new SABS would be consistent with the goal of avoiding tax computation discrepancies, there was no equivalent leveling of the playing field with a similar 10% adjustment; say to 90% of gross benefits. Was this intentional, and if so why, or simply an oversight?

Secondly, on September 28, 2010, less than a month after the effective date of the new SABS, Anand v. Belanger [2010] O.J. No. 1835 was decided. Notwithstanding that it was a tort case related to an MVA which occurred prior to September 1, 2010, the relevant issue at hand was the interpretation placed on the wording "received by" in determining the deductibility of benefits received on a gross or net basis (net of legal fees and disbursements in that case). The wording "received by" occurs equally in both the old and the new SABS in relation to the deductibility of collateral benefits, and accordingly, the date of the MVA in the Anand v. Belanger case is arguably of no relevance.

Justice Stinson decided in this case that he was unable to agree with the conclusion that the words "received by" means gross receipts, and held that only net proceeds after deduction of legal fees and direct taxes thereon (in that matter) qualify as "payments received" by a plaintiff.

Specifically, Justice Stinson concluded that "To follow the defendant's approach would be to place an injured plaintiff who has recourse to IRBs or LTD coverage in a worse position than someone who does not. Such a result would be illogical". Similarly, it may be argued that to place an IRB claimant who has recourse to LTD benefits in a worse position than someone who does not, due to income tax payable on such LTD benefits, would be equally illogical.

The principle behind the deduction of collateral benefits is to ensure that the insured is not reimbursed for their income losses more than once. After such deduction, however, the principle pursued by Justice Stinson is that the insured should equally not be placed in a worse position vis-a-vis their IRBs than had they not received such collateral benefits. Given that IRBs are not taxable, an insured that is in receipt of taxable collateral benefits would be worse off in aggregate if their collateral benefits are deducted from their IRB entitlement on a before-tax basis than had they not received such collateral benefits at all, to the extent of the taxes payable on such benefits, as demonstrated in the example below:

Weekly Benefits Received
  No LTD LTD Deducted
Net of Tax
LTD Before-Tax
IRB Received:
70% Of Net Pre-Accident Income Amount
Less: LTD Receive
(a) $350 $350 $350
Gross LTD $0 $200 $200
Less: Tax $0 ($20)  
LTD Deduction (b) $0 $180 $200
IRB Received (c)=(a)-(b) $350 $170 $150
LTD Received:
Gross LTD $0 $200 $200
Less: Tax $0 ($20) ($20)
LTD Received (d) $0 $180 $180
Total Benefits Received (c)+(d) $350 $350 $330

We note that since January 1, 2015, under revised CRA guidelines, disability insurance carriers are required to deduct income taxes at source from taxable disability benefits. Accordingly, beneficiaries typically receive only net, after tax benefits.

So, what trumps what here? Is the simple, apparently-clear amendment from "net" to "gross" in the SABS paramount? Or does the principle decided in the subsequent Anand v. Belanger case supersede, though it was not specific to income taxes under IRB computations, and notwithstanding the fact that the wording "received by" occurs in both the old and the new SABS? You decide!

What Constitutes Post-Accident Earned Income For Self-Employed Insureds?

Self-employed insureds may face an intractable dilemma after an MVA. How do they look after the "goose" while they are in bed recovering and unable to work at all or otherwise disabled from working as they did before; and how should this be translated into calculating their IRBs? Their businesses represent their livelihood, and that of their families, which they cannot afford to neglect, forcing them in many cases to return to work, or at least to some level of work, prematurely.

For purposes of calculating the insured's IRBs, should they be treated differently from employed workers who have the comparative luxury of full recovery, and under what circumstances is income earned by the business considered deductible post-accident income?

Subsection 7(3) provides for the deduction from IRBs during the eligible period of 70% of any:

  1. gross employment income received by the insured as a result of "being employed" after the accident. (The italicized words were added under the new SABS); and
  2. gross self-employment income
  3. "earned by" the insured after the accident.

Per subsection 6(1), IRB's are payable for the period in which an insured suffers a substantial inability to perform the "essential tasks" of his or her employment or self-employment.

Where a person receives income in the post-accident eligible period when the insured is not able to work, is such income post-accident "earned" income, i.e. where the self-employment business continues to operate and income is earned therein?

Self-employment businesses under the new SABS may be structured as sole proprietorships or through private corporations in which, per subsection 3(1), the insured is a controlling mind of the business carried on through one or more such private corporations, some or all, of whose shares are owned by the insured.

Subsection 6(2) of the old SABS provided for the deduction from income replacement benefits of 80% of "net income received by the insured person in respect of any employment subsequent to the accident." The addition of the words "being employed after the accident" in the current legislation was arguably intended to clarify those situations where a person was unable to engage in any employment after an accident.

Nevertheless, some insurers view any business income earned during such period as deductible irrespective of the insured's capacity. Others take the position that any efforts, no matter how minimal, short of a complete inability to work, such as answering the phone or the hiring of replacement workers is sufficient to qualify self-employment income as earned and result in full deductibility. Is this reasonable?

Let's examine the relevant jurisprudence on this issue. In Tran and TD Home And Auto Insurance Company FSCO A05-001715, Arbitrator Ashby wrote that "Subsection 6(2) of the Schedule permits an insurer to deduct: "80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident." However, Mr. Tran by meeting the test in subsection 5(2)(b) is incapable of engaging in employment during the period relevant to these proceedings. Engaging in post-accident employment is a condition precedent to an insurer's reliance on the provisions of subsection 6(2). Therefore, TD Home cannot deduct, from Mr. Tran's income replacement benefits, 80 per cent of the loan payments made to him by Bi View."

In Heath v Economical [(2009), ONCA 391, Canlii], Mr. Justice Simmons wrote that "The phrase "engaging in" should be interpreted from a qualitative perspective and as meaning more than isolated post-accident attempts to perform activities that a claimant was able to perform before the accident. The activity must be viewed as a whole, and a claimant who merely goes through the motions cannot be said to be "engaging in" an activity. Moreover, the manner in which an activity is performed and the quality of performance post-accident must also be considered. If the degree to which a claimant can perform an activity is sufficiently restricted, it cannot be said that he or she is truly "engaging in" the activity."

The above interpretation is consistent with the decision of Mr. Justice Brockenshire in De Frias v. Lumbermens Mutual Casualty Company [2000] O.J. No. 63, in commenting on the interpretation of similar wording in Bill 164, and with the FSCO appeal decision in Jevco and Lacroix, Appeal Order P04-00025 in which the Director's Delegate wrote that "Brockenshire J. appears to be saying that, since the applicant was no longer able to work after the accident he was not engaged in employment, so the continued post-accident payments made on his behalf by the employer were not "in respect of any employment subsequent to the accident'. Those payments were therefore not deductible from IRBs."

One of the issues before the court in Gill v. Zurich Insurance Co. (1999), O. J. No. 4333 (On S.C.), was whether Ms. Gill met the criterion of "totally disabled from gainful employment". The defence argued that Ms. Gill's demonstrated ability to hire a replacement worker, to do some periodic intermittent reception work, as well as short periods of light housekeeping on a sporadic basis, constituted an ability to engage in an occupation for which she was reasonably suited.

With respect to the issue of what constitutes post-accident employment, in Gill v. Zurich Insurance Co. [(2002), O. J. 889], Madam Justice Eberhardt noted that the term "gainful employment" must be given a rational meaning, and that the performance of trivial tasks, such as the possible answering of a phone, hiring of and provision of instructions to replacement workers, does not constitute "gainful employment".

Similarly, the term earned income must be given a rational meaning.

Madam Justice Eberhardt referenced Foden v. Co-operators Insurance Association (Guelph) ((1978), 20 O.R. (2nd) 728) and Isabel Pedden v. Dominion of Canada General Insurance Co. (FSCO, A-008977 (Dec. 29, 1995), and wrote that "Total disability" irrespective of the technical variations in the language employed, should be given a rational and practical construction", and that "An applicant is not required to engage in trivial or inconsequential work, work for which he or she is over qualified, or work for which he or she is completely unsuited by background."

In Watson v. Dominion of Canada General Insurance Co.[2000] O.J. No. 928 (ON S.C.), involving a 20-year old who sustained a brain injury in a car accident, Justice Klowak wrote that "Although the job provided by his parents in their own business may have the appearance of employment, I find that appearance to be a false one, created by the parents in order to bolster this man's feelings of self worth, in the hopes of improving his overall condition...In my view, the "income received or available", as well as the "occupation or employment" must be true income from true occupation or employment, and not what is little more than a non arms-length gift masquerading as income from parents, who fortunately, have been able, at least for the present, to create that fiction. There will be no deduction from the benefits payable in that regard."

But what are the criteria for determining if a self-employed insured has earned post-accident income where it is not clear cut? Is the "substantial inability to perform the essential tasks" test in 6(1) relevant during the 104 week post-accident period, or is it applicable only for the determination of eligibility for IRBs?

In Arieh Zupnik vs. State Farm (FSCO A12-001968), Arbitrator Kowalski wrote that "I find that as part of developing a property from beginning to end, concluding with a sale and follow-up inspections, Mr. Zupnik's work included meeting with and paying subcontractors, site inspections, overseeing and/or completing repairs, and working with a real estate agent to sell the home. Mr. Zupnik did all of these things after the accident."

Mr. Zupnik claimed that monies he received from his business to the 104-week post-accident mark should not be deducted from IRB's because he could not do any physical work after the accident and therefore did not earn any income. It is noteworthy that Arbitrator Kowalski did not dismiss his claim on the principle that income earned from the insured's business is post-accident income regardless of the insured's ability to work. Rather, she dismissed his claim on her finding that Mr. Zupnik misrepresented that he could not, or did not, work after the accident but in fact continued to work, completing the tasks required at that particular stage of the project development without interruption. She dismissed his claim that, as a hands-on builder, he only worked "when shovel hit the ground".

Following the Zupnik case, it would seem that where a self-employed insured returns to work in a modified capacity, an examination is required of the roles and tasks he performed before and after the accident up until the 104 week mark (after which the "complete inability" eligibility criteria applies) in order to determine the reasonability of deducting post-accident income earned by the business. In "shades of grey" cases it is particularly incumbent on the parties to weigh the factual matrix in a fair and reasonable manner. But is this happening and is it realistic or practical to expect all such cases to be resolved in arbitration?

Following a fair weighing of the circumstances, if it appears that the insured did not return to meaningful self-employment activity, yet continued to receive income from the business during this time, if not self-employment income, then what does such income represent? Is it in the nature of charity or an honorarium or is it passive business or investment income? Is it any different than the purely financial investment made by a sleeping partner in a business for this period of time? What if a taxi driver who is unable to drive after the accident, leases out his plates, conducting the negotiations and arrangements for this from his bed. Does this constitute post-accident earned income? You decide!

How Should Pre-Accident Income Of Self-Employed Insureds Be Calculated?

The SABS has historically provided insureds with options in order to maximize their IRBs. Employed insureds have been allowed to choose the greater of their annualized income earned in the 4 weeks or in the 52 weeks before the accident. Self-employed insureds have been allowed to select the greater of their income earned in the last completed fiscal year of their business or in the 52 weeks before the accident. Controversy has arisen under the new SABS with the use of the 52 week income period for self-employed insureds.

The new SABS provides eligibility criteria under subsection 5(1)2 and computation criteria under subsections 4(2)2, 4(2)3 and 4(3) for the determination of a self-employed individual's pre-accident income for IRB purposes.

Subsection 5(1)2 states that the insurer shall pay an income replacement benefit if the insured:

  1. was self-employed at the time of the accident, and
  2. suffers, as a result of and within 104 weeks after the accident, a substantial inability to perform the essential tasks of his or her self-employment.

Subsection 4(2)2 states that gross annual employment income is determined as gross employment income in the 52 weeks before the accident if,

  1. the person qualifies for a benefit under subparagraph 1 i of section 5 and was self-employed at any time during the four weeks before the accident, or
  2. the person qualifies for a benefit under subparagraph 1 ii of section 5.

Subparagraph 1i of section 5(1), deals with insureds who were employed at the time of the accident or were in receipt of employment insurance benefits etc.

Subsection 4(2)3 states that if the person described in subsection 4(2)2i was self-employed for at least one year before the accident, the person may designate as his gross annual employment income, the amount of his gross employment income earned during the last fiscal year of the business that ended on or before the day of the accident.

Subsection 4(3) states that a self-employed person's weekly income or loss from self-employment at the time of the accident is the amount that would be 1/52 of the amount of the person's income or loss from the business for the last completed taxation year as determined in accordance with Part I of the Income Tax Act (Canada).

Given that subsection 4(2)2i apparently allows only for insureds that were simultaneously both employed (under subsection 5(1)1i) and self-employed at any time during the four weeks before the accident, some insurers and expert accountants insist that a self-employed insured's pre-accident income can only be calculated pursuant to subsection 4(3) of the SABS and, therefore, does not allow for pre-accident income to be calculated on the basis of income earned during the 52 weeks prior to the loss. This interpretation by implication, takes the view that the definitions of the terms "gross weekly employment income" and "weekly income from self-employment" are separate and distinguishable from one another. On the face of it, this is arguably correct. But was this the intention of the drafters and, if so, is it reasonable? Or was it simply an oversight?

Firstly, this represents a departure from the old SABS where, under subsection 8(2), an insured who was eligible for an income replacement benefit under section 4.1, and who was self-employed, at any time during the four weeks before the accident, had the choice of either the 52 week period before the accident or the last completed fiscal year for the business before the accident. Section 4.1 refers to insureds who were "employed" at the time of the accident and there was no specific eligibility criteria for self-employed insureds. No insurer or expert accountant, to our knowledge, disputed the option of self-employed insureds to use the 52 week period under the old SABS.

Given its reference to persons that were self-employed at any time during the four weeks before the accident, is the reference in subsection 4(2)2 of the new SABS to "employment income" which is in fact intended to include income from self-employment, in the same way that the reference to "employed" insureds under the eligibility criteria in section 4.1 of the old SABS clearly included self-employed insurers?

What is the implication of the interpretation that only section 4(3) may be applied to self-employed individuals? In an article published on September 1, 2010, Michael Sigsworth of ADS Forensics, wrote "So, if indeed there is no 52-week calculation for self-employed individuals, only income or losses from the business for the last completed taxation year will be included in the calculation of their pre-accident income. This does pose a significant inequity for individuals who have a business that has yet to complete a taxation year."1

Let's examine some simple examples. Insured A who was employed for 50 weeks, earned $100,000, and then was unemployed in the final two weeks prior to the accident, would clearly be entitled to an IRB of $400 per week, pursuant to subsections 5(1)1(ii) and 4(2)2ii.

But insured B who started a business 50 weeks prior to the accident and remained self-employed at the time of the accident, (i.e. had not completed a fiscal year) and earned $100,000 in that time, would be entitled to an IRB of nil under subsection 4(3). Was this intended and, if so, why?

Some expert accountants even maintain that in the case of the same insured A above, who started a business in the final two weeks before the accident immediately after the termination of his employment (i.e. was not employed at the time of the accident but only self-employed and had not completed a fiscal year of his business), and had earned $4,000 income in that two week period (i.e. at the same income rate of $2,000 per week), would be entitled to an IRB of nil under subsection 4(3) precluding him from using the income he earned while employed under subsections 5(1)1ii 4(2)2ii. Could this really have been the intention of the framers, in effect to punish him for starting a business rather than remaining unemployed?

Should this interpretation of the SABS, which can be argued as technically-correct, be applied regardless of the circumstances or implications? You decide!


Finally, there is an overarching matter to consider in deciding the merits of the arguments in these and other issues, where there remains legitimate doubt in the law. Given the remedial nature of the SABS legislation, is there any scope or reasonable argument to be made for interpreting a lack of clarity or precision in favour of the insured? You decide!

This article was originally written for and published by The Litigator.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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