Ontario Insurance Commission

Commission des assurances de l’Ontario

Neutral Citation: 1997 ONICDRG 139

Appeal P96-00055

OFFICE OF THE DIRECTOR OF ARBITRATIONS

PASQUALE ROCCA

Appellant

and

GAN CANADA INSURANCE COMPANY

Respondent

Before:

Susan Naylor, Director’s Delegate

Counsel:

Leo Klug (for Mr. Rocca)

Ralph D’Angelo (for GAN Canada)

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

The appeal is dismissed and the arbitrator’s order dated May 29, 1996 is confirmed.
No appeal expenses are payable.

July 25, 1997

Susan Naylor Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

This is an appeal of an arbitration decision dated May 29, 1996, concerning the amount of Pasquale Rocca’s weekly income replacement benefits. Mr. Rocca is the president, secretary-treasurer and only director of a family business incorporated as 872991 Ontario Inc. operating as Convenient Car and Truck Rental (“Convenient”). According to the corporate records, he holds the sole class A voting share. His wife, Margherita, holds the other two non-voting shares.¹ His two children, Patrizia and Filippo, work for the company while they attend university. The company is in the business of renting and leasing motor vehicles, with a retail sales side. It has no other employees.

Mr. Rocca claims that he was an employee of Convenient and earned a regular weekly gross salary of $1,739 starting five weeks before the accident. The timing is important. Under the applicable regulations,² benefits are based on the insured person’s annualised gross income from employment (including self-employment)³ for one of three periods: the four weeks, the 52 weeks or the 156 weeks before the accident, whichever is most favourable. However, a person who was self-employed at any time during the four weeks before the accident cannot designate the four-week period as the basis for calculating benefits.⁴

The issue in arbitration and on appeal is whether Mr. Rocca was self-employed under these rules. If he is able to utilise the four-week period, his benefits would be $933.92 weekly. If not, they would be substantially lower although the precise amount is disputed. To date he has been receiving benefits at the minimum rate of $185 a week.

The arbitrator conducted a two-day hearing during which he heard testimony from Mr. Rocca, members of his family and his accountant, Frank Presta. I have the benefit of a transcript of their testimony. GAN Canada Insurance Company (“GAN Canada”) did not call any witnesses or file any reports.

The arbitrator rejected Mr. Rocca’s position that he was an employee of the company and held him to be self-employed. He postponed ruling on the precise amount of Mr. Rocca’s benefits until more information was presented. He awarded Mr. Rocca his arbitration expenses, except for the expenses of calling Mr. Presta as a witness. Mr. Rocca appeals the finding that he was self-employed at the relevant time and the disallowance of expenses connected with Mr. Presta.

II. BACKGROUND

As set out in the arbitrator’s decision, for a number of years Convenient, (incorporated in 1989) operated out of two locations - in Bolton and on Weston Road, in the City of York. Mr. Rocca, who is a licensed mechanic, worked largely out of the Weston Road premises. The company had several employees there. The rental side of the business was mostly run out of the Bolton location by Mrs. Rocca, with the assistance of Patrizia and Filippo. Some casual labour was also used.

Convenient had not been very profitable; Mr. and Mrs. Rocca did not draw a salary in 1992, 1993 and 1994. The company was financed by shareholder loans, which were reduced in 1992 and 1993. Mr. Rocca cannot be considered an employee of the company during these years.

Starting in 1992, Patrizia and Filippo each received $35 a week. They both worked in the business while at school and later university. Their involvement increased over time. At the time of the accident in February 1995, Patrizia was a second-year commerce student at the University of Toronto. She was responsible for the company’s book-keeping. Filippo was in the first year of a degree program.

In September 1994, the company relocated all its operations to Bolton. The Weston Road employees were terminated several months earlier. In December 1994, the family met with their accountant, Mr. Presta, to discuss the financial direction of the company and the tax situation. According to the evidence, they expected the company to be more profitable in 1995, due to the rationalisation of the company’s operations and a substantial upswing in revenues in the last quarter of 1994.⁵ It is the family’s position that as a result of that meeting, they decided to implement salaries for all of them for their contribution to the company.

At the meeting, Mr. Presta outlined options for remuneration given existing tax rules - a draw on shareholder loans or the payment of a salary or a combination of these. The arbitrator summarised Mr. Presta’s testimony - fairly, in my view - as follows:

Mr. Presta, the accountant, testified that he felt uncomfortable reducing the shareholders’ loans of approximately $300,000 because if the company’s net income exceeds $200,000, it would lose the small business deduction. Accordingly, he advised the family that they could consider taking out salaries. He did not suggest a figure for the salaries. During his testimony, Mr. Presta also commented that most clients have a mix of shareholder loan repayments and salary payments, and that at the end of 1995, you could see which mix was the most favourable for tax purposes.

(Decision, page 5)

According to the evidence, later that month, Patrizia phoned Mr. Presta and asked him how to set up a payroll. She told him that she was going to implement a salary scheme for the family but did not mention any specific amounts. Mr. Presta had no further involvement in this aspect after their discussion.

According to their testimony, the family agreed that Mrs. Rocca be paid $500 gross a week and Patrizia and Filippo should each get $350 gross a week. These salaries were arrived at based on the earnings of employees in equivalent positions, and were to be paid one week in arrears. They decided that Mr. Rocca should net $1,000 a week - and worked backwards to a gross figure of $1,739.00. Patrizia set up the payroll ledger as of Wednesday, January 11, 1995, roughly five weeks before the accident. The salary amounts were duly recorded on a weekly basis, along with statutory deductions for Unemployment Insurance, Canada Pension Plan contributions and federal income tax.

Mr. Rocca testified that he received a regular salary of $1,000 net until shortly after the accident. The gist of his testimony was supported by Patrizia. The payroll ledger, a number of cheques and bank statements were filed to prove payment. They showed that Mr. Rocca made out a corporate cheque for $900 dated January 24,⁶ and cashed on January 26, 1995. He testified that he made up the balance from petty cash. The ledger allocated this to the week of January 11 to January 17, 1995. Mr. Rocca made out a second $1,000 cheque dated January 31, 1995, drawn on a different company account, which was cashed on February 3, 1995.

Two further cheques for $1,000 also on this account were dated February 7, 1995 and February 14, 1995. These were deposited in the company’s other account on February 17, 1995, two days after the accident. However, Mr. Rocca testified that he took the money out of petty cash before then. A fifth cheque made out by Mrs. Rocca and dated February 21, 1995 was deposited on March 1, 1995. Payments then stopped.

The other family members did not draw their new salaries. Patrizia and Filippo continued to be paid $35 a week. In August, 1995, a lump-sum payment, said to represent salary arrears, was made to them and Mrs. Rocca. There is some dispute about whether the arrears excluded the $35 payments. No statutory deductions had been remitted as of the date of the hearing in early 1996.

After Mr. Rocca’s accident, the rest of the family continued to run the business alone, but revenues were reduced. They tried to find a mechanic to replace Mr. Rocca’s services, but were unsuccessful.

III. ANALYSIS

As a matter of law, an incorporated company is a separate entity distinct from its shareholders. However, as in other areas of law, Commission adjudicators have held that this does not necessarily end the inquiry as to whether someone who has incorporated a company to carry on a business should be treated as an employee of that corporation or as self-employed.⁷ Particularly in the case of closely-held family corporations, adjudicators have looked beyond the form of the corporate structure.

Some of the applicable principles were discussed in Piper and Zurich Insurance Company, (December 6, 1993, OIC A-002585), aff’d (May 1, 1996, OIC P-002585), in which the controlling shareholder of a small family electrical business was held to be an employee of the company. Mr. Piper operated the business with his son, who assumed an increasingly important role. During the five years before the accident, Mr. Piper received a regular wage, with bonuses at Christmas. The company financed its payroll out of profits in good years and out of retained earnings in tougher times. The arbitrator found on the facts that Mr. Piper and his son “shared a long-term mutually beneficial relationship that is facilitated by the legal structure of the company” and that his weekly salary of $600 was “a real salary, regular, constant and reasonable, within the context of the company’s overall history.”

The arbitrator’s decision was upheld on appeal by the Director of Arbitrations, who described the facts as “compelling, and possibly unique”. She distinguished other cases put before her on the basis that those shareholders had arranged their affairs to make their salaries a minor component of their remuneration or to re-allocate significant funds to themselves through lower tax vehicles.

The arbitrator here distinguished the facts in Piper. He concluded that any decisions that had been made about remuneration represented no more than a versatile working arrangement for tax management purposes and did not affect Mr. Rocca’s true employment situation. The crux of his findings is contained at page 8 of his decision. After reviewing the evidence and Piper, he stated:

In this case, I find that consistent pattern of salary-based payments lacking. At best, whatever decisions had been made regarding salary payments were made to reduce taxes and were likely subject to revision at the end of the fiscal year. I am not convinced that these decisions could meaningfully affect Mr. Rocca’s employment status. The facts do not compel me to find that Mr. Rocca was an employee of Convenient. I find that he was self-employed.

Mr. Rocca argues that the arbitrator erred in concluding that there must be a consistent pattern of salary-based payments. I agree with Mr. Rocca that had the arbitrator decided the issue on this factor alone, there would be reason to object. An employee is entitled to use the four-week period even though the period is wholly unrepresentative of his or her usual earnings picture or involves only a single payment.

In my view, however, that is not what the arbitrator concluded. He looked to Mr. Rocca to establish his employment situation. Looking at the overall situation, he was not persuaded that the arrangement the family made equated to a contract to pay regular, set wages, or that any payments Mr. Rocca received represented earnings under a contract of employment. The indicia of an employee/employer relationship were lacking. In essence, he did not believe that the terms of the salary scheme made business sense or that the explanations given fitted the picture of employees working under a contract of service for wages. Having reviewed the arbitration record, including the transcript, I find that there was a sufficient basis for the arbitrator’s conclusion.

Under the salary scheme, the company’s wage expense would have increased from $ 28,771⁸ in 1993 to a projected $153,000 in 1995. Mr. Rocca, who had not been paid a salary in the previous four years, would have been entitled to around $90,000. The new payroll would have been the second highest expense item. Prior to this time, Convenient had not been very profitable. According to the financial statements, its net earnings for 1992 came to $7,110 on revenues of roughly $400,000, it lost $26,236 on revenues of $500,000 in 1993, and in 1994, the company’s net income came to $7,070 on revenues of close to $500,000.

Not surprisingly, the arbitrator questioned how the company could afford the new salaries. The explanation that increased revenues and decreased expenses was expected to cover them did not appear reasonable or realistic. While there was an upturn in revenues in the Fall of 1994, business fluctuated. In fact, revenues were substantially down in January and February 1995, even over the prior year’s figures. Moreover, while the consolidation of operations would have resulted in some savings, the amount of the expected savings was unclear.

There was also the fact that no one other than Mr. Rocca collected their new salary when it was due. Patrizia and Filippo continued to collect the $35 they had received all along, without regard to a salary structure. Apart from Mr. Rocca, the family’s remuneration took the form of a lump sum in mid-year, purportedly representing arrears. From the 1995 T4 slips filed on appeal, it appears that a second lump sum covering the balance of the year must have been paid since, according to the evidence, no further payments had been made as of the date of the hearing. In addition, deductions were made on paper only; no remittances had been made as of the date of the hearing. Although Revenue Canada was advised of the termination of previous employees, it was not told that the company had employees again. These circumstances do not suggest an employee-employer relationship based on the terms of any new salary arrangement.

The record also shows that family members disagreed over the starting date for the salary scheme and on whether the $35 a week was deducted from the accrued amounts. These discrepancies contribute to the view that what transpired was, if anything, more in the nature of a working arrangement for tax purposes and did not change the underlying rights and obligations of the parties involved.

Although Mr. Rocca received some payments, the history of these payments - which the arbitrator described as “confusing” - does not indicate that he considered himself an arms-length employee of the company. While Patrizia was in charge of the book-keeping, she seemed to have little involvement making out the cheques. Mr. Rocca wrote all but one of the cheques out himself, and he paid himself out of petty cash in the majority of instances.

Mr. Rocca seeks to rely on his 1995 tax return and 1995 T4 slips issued by Convenient in respect of the family. These documents were prepared after the hearing and not available to the arbitrator. Although the documents could, in theory, have been completed before the hearing in early 1996, it would not be reasonable to have expected that to happen. However, even if the new documents are admitted, they do not add much to the evidence.

While tax returns and T4 slips are important evidence, they are not definitive. The weight to be attributed to them depends, among other things, on the circumstances under which they were prepared. The issue is Mr. Rocca’s employment status in the four weeks before the accident, as of the beginning of 1995. The documents in question were prepared in June 1996, after the arbitrator’s decision was issued and in the knowledge of his adverse findings. Moreover, there is little “down- side” to the filings at this point in time.⁹ The amount of statutory accident benefits at stake vastly exceeds the family’s total liability to Revenue Canada and Mr. Rocca himself claimed a substantial refund. In view of these factors, I do not consider that much weight should be attributed to the documents in this case.

Previous appeal decisions, starting with Calogero and The Co-Operators General Insurance Company, (February 13, 1992, OIC No. P-000251), have clearly established that it is not my function to rehear the case or second-guess the arbitrator’s assessment of the evidence. The arbitrator was in a better position to evaluate all the evidence. Provided the record discloses sufficient evidence to support the arbitrator’s findings, they should not be disturbed on appeal. Nothing in the evidence points to an error of law or fact or a misapplication of principles by the arbitrator to justify my interfering in the result. In my view, the arbitrator’s conclusion that Mr. Rocca was self-employed is supportable on the evidence. This disposes of Mr. Rocca’s appeal on this point.

IV. MR. PRESTA’S EXPENSES

The arbitrator awarded Mr. Rocca his expenses but disallowed expenses connected with Mr. Presta’s attendance at the hearing. The arbitrator’s reasons are set out on page 10 of his decision. He found Mr. Presta’s testimony to be “vague in several respects and of no help on the issue of quantum”.

Mr. Rocca appealed this order on the basis that it was agreed all along that quantum would not be an issue at the hearing. The transcript shows this is the case. However, I am not convinced that I should interfere with the arbitrator’s exercise of discretion solely on this ground, because it was not the only basis for his decision.

The arbitrator also felt that Mr. Presta’s evidence was unhelpful and vague about some key areas. A review of the transcript bears this out. For example, he was unable to provide specifics about any savings in expenses resulting from the consolidation of corporate operations. He did not know what the August 1995 payments to the family represented. These were important lines of inquiry and reasonably fell within the expected sphere of his professional expertise.

In Allison and Markel Insurance Company of Canada, (August 21, 1996, OIC P-001231), I made some general comments about the discretion to award expenses, and the appeal function in relation to it:

An award of expenses is a matter within the discretion of the arbitrator, although the discretion must be exercised reasonably. Because the discretion is given to the arbitrator, it should not be interfered with lightly on appeal. The arbitrator is able to consider the evidence in totality, including observing and hearing any witnesses, and usually is in the best position to assess the merits of the case and the way it was handled by the parties. Generally, his or her determination should not be disturbed unless the party appealing the order can point to a serious error in the exercise of the discretion: for example, the arbitrator adopted a wrong approach, based the decision on irrelevant considerations or inadequate evidence, or failed to look at the merits of the individual case by inappropriately fettering his or her discretion......

In this case, I am not satisfied that the arbitrator acted unreasonably in the exercise of his discretion. Mr. Rocca was unsuccessful on the merits of his case both at arbitration and on appeal and has provided me with insufficient reason why the arbitrator’s discretion was not properly exercised.

V. APPEAL EXPENSES

Although appeal expenses do not strictly follow the result, they are not generally awarded to an unsuccessful appellant unless the appeal raises a significant issue.¹⁰ While Mr. Rocca provided a transcript and extensive written and oral submissions that were helpful, his objection was primarily to the weight the arbitrator attributed to the evidence. He did not point to any specific errors in the arbitrator’s review of the evidence. In my view, the appeal does not raise sufficient grounds to warrant an order requiring GAN Canada to pay for Mr. Rocca’s appeal expenses.