Canada: Post-Accident Income Deductions For Self-Employed Insureds: Is It Better To Earn Than Receive?

Last Updated: September 29 2017
Article by Helen D.K. Friedman and Ariel Wong

In the long-waited appeal decision from the Financial Services Commission of Ontario ("FSCO"), Delegate Evans in Perth v. Surani (FSCO Appeal P16-00022) confirmed that a self-employed insured's post-accident business income is deductible from their income replacement benefits for the purposes of paragraph 7(3)(b) of the Statutory Accident Benefits Schedule – Effective September 1, 2010, O. Reg. 34/10 ("SABS").  Section 7(3)(b) provides that an insurer may deduct from an income replacement benefit: "70% of any income from self-employment earned by the insured person after the accident and during the period in which he or she is eligible to receive an income replacement benefit."

Mrs. Surani was a self-employed pharmacist in a family pharmacy business.  Following her December 12, 2010 accident, she (and her husband) claimed income replacement benefits ("IRBs") from Perth under the SABS.  Pursuant to paragraph 7(3)(b), Perth deducted the pharmacy's post-accident business income from Mrs. Surani's IRBs.  With this deduction, the business income reduced the payable IRBs for (both Mr. and) Mrs. Surani to zero.  The Suranis disputed the deduction on the basis "they" did not earn the income, their businesses did.

At the FSCO arbitration, Arbitrator Sone found the deduction was not available as Mrs. Surani's post-accident business income was not considered "earned income".  In coming to this conclusion, the Arbitrator relied on a definition of "earned income" from the Income Tax Act (Canada) (R.S.C., 1985, c. 1) ("ITA"). In particular, she held that the ITA definition of "earned income" in section 146(1)(a)(ii) included the taxpayer's income from a business carried on by the taxpayer "actively engaged in the business".  Arbitrator Sone found Mr. Surani continued to be "actively engaged" in the business, as he carried on a consulting business for some time after the accident before ceasing, arranged for a replacement worker for Mrs. Surani in Scarborough, hired additional workers in Scarborough and Waterloo, and made all financial decisions for the business.  On the other hand, Arbitrator Sone found the tasks Mrs. Surani performed at the pharmacy after the accident were "trivial, minor, and insufficient" for her to be considered to be actively engaged in the business, and thus her post-accident income was not "earned income" and hence not deductible.

Director's Delegate David Evans ("Director's Delegate") on appeal found the Arbitrator misapplied the ITA concept "actively engaged in the business" and held the ITA definition was irrelevant to the SABS, as the phrase "earned income" did not appear as such in s. 7(3)(b) of the SABS.  Further, he held that the term "earned income" in the ITA is a term of art with a meaning limited by its context such that it is not relevant to the determination of profit. The Director's Delegate held that a self-employed person's income is the profit from the business, both before and after the accident.  Therefore, post-accident profit is deductible from IRBs.  The cost of Mrs. Surani's lack of active participation in the business post-accident had already been taken into account in calculating the IRBs amount by inclusion of post-accident losses.   Failing to then allow for the deduction for the same reason effectively meant that her lack of active participation was counted twice in the IRBs calculation.

The Director's Delegate considered principles from earlier FSCO decisions like Iankilevitch and CGU Insurance Company of Canada (FSCO P03-00013, August 30, 2004) where the Arbitrator held that where the corporation is the claimant's alter-ego such that the claimant treats the company's revenues and expenses as her own, she will generally be treated as self-employed.  The objective is to ensure that the insured person receives an IRB that fairly and realistically reflects her actual income situation, avoiding both over- and under- compensation.  The Director's Delegate held that the SABS now imports that principle into legislation (paragraph 7(3)(b)).

The Director's Delegate reiterated that is it not the role of accident benefits to put insureds in the same position as they were pre-accident.  The mere fact that the company profits were reduced does not entitle an insured to benefits.  Beyond this, if a "replacement person" effectively costs the pharmacy more, the reduced post-accident profits would reduce the amount of the deduction, providing for a balance in the accident benefits system.  He concluded that pre-accident self-employed income and loss is determined based on profits under the ITA, and post-accident loss is also based on that of the business, subject to limitations to prevent exaggerated losses. In particular, the Director's Delegate found that the legislature could not have intended that an insured could continue to profit from a business, yet not have that profit deducted from her IRBs as post-accident income.  As with post-accident loss, post-accident income has broader elements than just the insured's active participation in the business.  Since Mrs. Surani's active participation had already been accounted for in the determination of post-accident loss, the Director's Delegate did not see why her active participation had to be again accounted for in determining post-accident income.  On a more fundamental basis, an IRB only becomes payable if the applicable pre and post 104 disability tests are met.  It was agreed Mrs. Surani could not engage in the essential tasks of her self-employment, which is why she qualified for the benefit in the first place.  To require active engagement as a condition precedent to the deduction, would render s. 7(3)(b) redundant.

Most importantly, the Director's Delegate agreed the 2010 change in wording from income "received" after the accident to "income from self-employment earned by the insured person" did not create a requirement for active engagement post-accident in order for the deduction to apply.  Rather the change in wording simply reflects the pre-existing practice of treating "received" as "earned".  The amendment simply clarified the practice.

This FSCO appeal decision reaffirms the principles enunciated in existing FSCO case law, in particular: (i) Iankilevitch, and (ii) Garic and Markel Insurance Company of Canada (FSCO A07-000909, December 29, 2009), affirmed on appeal (P10-00003, May 9, 2012).  Surani also affirms the correctness of the insurer's approach to deduction of post-accident income from IRBs for self-employed insureds, a practice which had not been called into question until Arbitrator's Sone's decision in February of 2016.  The decision clarifies the role and purpose of the accident benefits system, which is a welcome clarification to most insurers.

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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Helen D.K. Friedman
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