Neutral Citation: 1997 ONICDRG 215

OIC A96-001245

ONTARIO INSURANCE COMMISSION

BETWEEN:

CARLO MERCURI

Applicant

and

GENERAL ACCIDENT ASSURANCE CO. OF CANADA

Insurer

DECISION

Issues:

The Applicant, Carlo Mercuri, was injured in a car accident on July 1, 1995. He applied for and received statutory accident benefits from General Accident Assurance Company of Canada ("General Accident"), payable under the Schedule¹ The parties were unable to resolve their disputes through mediation. Mr. Mercuri applied for arbitration under the Insurance Act, R.S.O. 1990, c.I.8, as amended("the Act").

The issues in this hearing are:

1. What is the correct amount of Mr. Mercuri's weekly income replacement benefit (IRB)? Specifically, at the time of the accident, did Mr. Mercuri earn his income from self-employment or as an employee?

2. Was Mr. Mercuri overpaid by General Accident? If so, is he required to repay to General Accident any benefits he received?

3. Is Mr. Mercuri entitled to dependent care expenses under section 54(1) of the Schedule, from April 22, 1996 and ongoing?

4. Is Mr. Mercuri entitled to recover, under section 57(1)(a) of the Schedule, his expenses for the medical reports of Dr. Andrew Blitzer, Dr. Dana Wilson, and Dr. R. Chow; the accounting report of Price Waterhouse, and the accounting services of Mr. Dominic Scavuzzo?

5. Is Mr. Mercuri entitled to a special award pursuant to section 282(10) of the Act?

Mr. Mercuri also claims interest on any amounts owing and his expenses incurred in the hearing.

Result:

1. Mr. Mercuri was self-employed at the time of the accident. The correct amount of his IRB is $232.71.

2. Mr. Mercuri is not required to repay General Accident any benefits he received. General Accident shall return to Mr. Mercuri all deductions made under section 70(6) of the Schedule, together with interest calculated in accordance with section 68 of the Schedule.

3. Mr. Mercuri is not entitled to dependent care expenses under section 54(1) of the Schedule.

4. Mr. Mercuri's expenses for the medical reports of Dr. Andrew Blitzer, Dr. Dana Wilson and Dr. R. Chow; the accounting report of Price Waterhouse, and the accounting services of Mr. Dominic Scavuzzo are not expenses that are recoverable under section 57(1)(a) of the Schedule as they were incurred in preparation for litigation.

5. Mr. Mercuri is not entitled to a special award.

6. Mr. Mercuri is entitled to his expenses of this arbitration.

Amount of Weekly Income Replacement Benefits:

Background:

Mr. Mercuri is a demolition expert by occupation. At the time of the accident of July 1, 1995, he was 33 years old and married, with a one-year old son.

In his Application for Accident Benefits, Mr. Mercuri indicated that, in the 52-week period preceding the accident, he was employed by Teperman & Sons Inc. ("Teperman") as a demolition expert. The Employer's Confirmation of Income form he filed with his application indicates that he worked for Teperman as "a consultant, providing advisory and other services on demolition jobs." His gross income for the 52 weeks preceding the accident was stated to be $65,000.

Initially General Accident calculated Mr. Mercuri's IRB on the basis of information contained in the Employer's Confirmation of Income form. It determined his IRB to be $702.17 per week and started paying him at this rate on July 8, 1995.

On September 29, 1995, Mr. Mercuri advised General Accident that he was not an employee of Teperman. He indicated that he provided his services to Teperman as a self-employed consultant through a business called Capital Carpet Cleaning. He requested that his IRB be re-calculated as a self-employed person.

General Accident retained Mr. Gregory Hocking, chartered accountant with Hayes Smith &Associates Inc., to investigate Mr. Mercuri's claim. Based on Mr. Hocking's reports, General Accident concluded that at the time of the accident, and throughout the 52-week period preceding the accident, Mr. Mercuri was self-employed in an unincorporated business registered as Capitol Carpet Cleaning Service (Capitol), a business he had operated in partnership with his wife, Enea Mercuri, since January 5, 1993.

General Accident determined that based on Mr. Mercuri's income from Capitol, the correct amount of Mr. Mercuri's IRB was $232.71 per week. It advised Mr. Mercuri that during the 29 weeks in which he received benefits, he was overpaid by $13,614.34, and demanded that he repay this amount. Starting January 25, 1996, General accident paid Mr. Mercuri at the new rate of $232.71, less a 20 percent deduction credited towards the overpayment account, in accordance with section 70 of the Schedule.

Mr. Mercuri retained the services of Mr. John Seigel, chartered accountant with Price Waterhouse. Mr. Seigel disagreed with General Accident's conclusion that Mr. Mercuri was self-employed. In his report, Mr. Seigel concluded that Mr. Mercuri was paid by Teperman through Capitol "as if he was an independent contractor rather than an employee..solely for tax purposes." Mr. Seigel indicated that "Mr. Mercuri had no involvement with the carpet cleaning business and Mrs. Mercuri had no involvement with Teperman." He calculated Mr. Mercuri's IRB to be $769 per week, based on his income from Teperman for the 52-week period preceding the accident.

General Accident maintained its position that Mr. Mercuri was self-employed at the time of the accident, and that his IRB was $232.71 per week.

The Law:

Under the Schedule, a person's income from self-employment is treated differently than his/her income as an employee.

Section 10(1) of the Schedule provides that the amount of the IRB shall be 90 percent of the insured person's net weekly income from employment.² This amount is reduced by either 75 percent or 90 percent (whichever is applicable under section 10(4)), of any "net" income received during the period of disability subsequent to the accident, and by 100 percent of any "net" collateral sources of income benefits received. If the person was self-employed at the time of the accident, his/her IRB is augmented by 90 percent of any business losses he incurs after the accident.

For the purposes of determining the amount of their IRB, the Schedule gives employees the choice of using their gross income from employment for the 4 weeks, 52 weeks or 156 weeks before the accident, whichever is most advantageous to them. However, the option for self-employed persons is limited to the latter two.

Unlike an employee, a person's income from self-employment is determined in the same manner as his profit from self-employment would be determined under the Ontario and Canada income tax legislation.³

Summary of Evidence

I heard testimony from Mr. and Mrs. Mercuri, Ms. Carla D'Andrea, an employee of Capitol, Mr. Carlos Rodrigues, Capitol's carpet cleaning subcontractor, and Mr. Steven Teperman, Vice-President of Teperman. I also heard accounting evidence from Mr. Seigel and Mr. Hocking. The parties filed considerable documentary evidence, including the reports of the accountants, an agreement between Mr. Mercuri and Mr. Teperman, correspondence between Mr. Mercuri and General Accident, income tax returns for Mr. and Mrs. Mercuri and business records of Capitol.

Most of the facts of this case are not in dispute, and I find the salient facts to be as follows:

Mr. Mercuri's relationship with Teperman

Mr. Mercuri began working in the construction industry in 1986 as an employee of Greenspoon Brothers Inc. In 1992, he left Greenspoon to join Teperman. Before joining Teperman, Mr. Mercuri and Mr. Teperman signed the following agreement ("the Agreement"):

THIS AGREEMENT made the 1st day of February, 1992

between:

CARLO MERCURI/CAPITAL CLEANING

and

TEPERMAN AND SONS INC.

The above parties have agreed that CARLO MERCURI/CAPITAL CLEANING shall provide general advisory and consulting services to TEPERMAN AND SONS INC., related to its business operations.

The term of this agreement shall be open and commences the 1st day of July, 1992.

In consideration of the services provided by CARLO MERCURI/CAPITAL CLEANING, TEPERMAN AND SONS INC., shall pay a base bi-weekly rate of $1,846.14 plus applicable G.S.T.

Signed

Signed

CAPITAL CLEANING

TEPERMAN AND SONS INC.

Mr. Mercuri started his employment with Teperman on February 17, 1992. There is no dispute that until June 30, 1992, Mr. Mercuri was an employee of Teperman. During this period, Mr. Mercuri received T-4 slips from Teperman. Teperman deducted income tax, Canada PensionPlan (CPP) contributions, and Employment Insurance (EI) premiums from his pay cheques. Mr. Mercuri was covered under Teperman's employee extended health insurance plan and was eligible to receive Workers Compensation Benefits (WCB).

However, from July 1, 1992 to the date of the accident, Mr. Mercuri did not receive his pay cheques from Teperman. Instead, the cheques were made payable to Capitol, upon receipt of invoices from Capitol for Mr. Mercuri's services. Teperman paid Capitol $2,082.36 on a bi-weekly basis until July 1, 1995. (This amount included GST and a raise in Mr. Mercuri's remuneration). Teperman deducted no EI premiums, CPP contributions or income tax from Mr. Mercuri's remuneration. It did not issue Mr. Mercuri T-4 slips.

Mr. Mercuri and Mr. Teperman testified that they entered into the Agreement at Mr. Mercuri's request that "it would be much better to save taxes if Teperman paid [Mrs. Mercuri's] company." Mr. Teperman stated that he complied with Mr. Mercuri's request as he "saw nothing improper or illegal in the arrangement."

As far as both Mr. Mercuri and Mr. Teperman were concerned, the Agreement did not affect the employee-employer relationship that existed between them prior to July 1, 1992. They testified that Mr. Mercuri continued to work at Teperman's direction on a full-time basis until the date of the accident.

Mr. Teperman testified that during his years with the company, Mr. Mercuri had assumed a variety of duties assigned to him by the company, including operating equipment, supervising personnel and driving trucks. Mr. Mercuri's working hours were set by Teperman, and were generally from 7:30 a.m. to 4:30 p.m. He worked at night and on weekends, when required.

Mr. Teperman stated that after July 1, 1992, Teperman gave Mr. Mercuri a raise in salary and some "perks," such as a four-wheel-drive vehicle and supplementary health insurance coverage . Teperman also paid him a performance bonus of $10,000 in 1995.

Teperman continued to pay directly or reimburse Mr. Mercuri for all expenses he incurred on behalf of Teperman. Mr. Mercuri was provided with a credit card, a cellular phone and a two-way radio, at the company's expense. This arrangement continued until the date of the accident.

On cross-examination, Mr. Teperman agreed that, given the Agreement between the two parties, Mr. Mercuri could be considered as an independent contractor after July 1, 1992.

Mr. Mercuri has not returned to work at Teperman after the accident; and Teperman has not paid Capitol or Mr. Mercuri any amounts. Teperman did not issue a Record of Employment for Mr. Mercuri upon the termination of his employment.

Mr. Teperman testified that he was not aware of any difference between Capitol and Capital Cleaning. As far as he knew, Teperman's bookkeeper made out the cheques payable to the business of Mr. Mercuri's wife, in accordance with Mr. Mercuri's request. Teperman received no carpet cleaning services from Capitol.

Mr. Mercuri's relationship with Capitol

Capitol was registered as an unincorporated sole proprietorship on February 10, 1992 under the name of Enea Patano (now Mrs. Mercuri), who had owned and operated Capitol in partnership with her cousin, Ms. Lily Simone, since April 1987. Mrs. Mercuri testified that she (Mrs. Mercuri) became the sole registered owner of Capitol when her partner "quit" the business as a result of "a falling out" between them.

Mr. and Mrs. Mercuri were married on March 7, 1992. On June 16, 1992, two weeks before the effective date of the Agreement, Mr. Mercuri became the registered sole proprietor of an unincorporated business named "Capitol Carpet Cleaning Services "92" ("Capitol "92").

The records show that Capitol and Capitol "92 are virtually identical entities, except for the registered names of the proprietors. The principal place of business for both Capitol and Capitol "92' is the address of Mr. and Mrs. Mercuri's residence. The business activity carried on by both Capitol and Capitol "92 was described as providing service for carpet and upholstery cleaning.

Mr. and Mrs. Mercuri testified that Capitol "92 was registered with the intention of "rolling over" the business of Capitol into it. They testified that there was "bad blood" between Mrs. Mercuri and Ms. Simone, and they wanted to make sure that Ms. Simone could not get "her hands on anything." However, the plan to merge the two businesses never materialized. Capitol "92 never became operational. No business activity was carried out under its name. It had no bank accounts and filed no income tax returns.

Mr. and Mrs. Mercuri denied that the opening of Capitol "92 had anything to do with the Agreement. Considering the circumstances surrounding the registration of Capitol "92, I find their explanation that it was created in order to protect the assets of Capitol implausible. I find it more likely that Capitol "92 was registered with the intention of using it as a vehicle to implement the Agreement. I note that on February 1, 1992, when the Agreement was signed, Capitol was still a partnership between Mrs. Mercuri and Ms. Simone and Mr. and Mrs. Mercuri were not married.

Mr. and Mrs. Mercuri testified that Teperman's cheques for Mr. Mercuri's services were in Capitol's name and were deposited in Capitol's bank account. Mr. Mercuri had no authority to withdraw cash or to write a cheque in respect of this account. They testified that every time Mr. Mercuri needed money he had to ask Mrs. Mercuri and she would write him a cheque in his name.

Mr. and Mrs. Mercuri testified that the only business Capitol engaged in was providing carpet and upholstery cleaning services and that Mr. Mercuri did not participate in Capitol's business activities. He did not solicit business for Capitol, nor did he clean carpets or upholstery. He had no authority to make financial and other decisions, such as hiring or dismissing employees, on Capitol's behalf.

Ms. D'Andrea, a part-time employee of Capitol, testified that Capitol's business was run by Mrs. Mercuri and her employees, who worked out of the home-office in the Mercuri residence, solicit-ting business through telemarketing. The actual carpet cleaning was subcontracted to individuals who were paid on a percentage basis. Mr. Rodrigues was one of Capitol's subcontractors.

Capitol stopped operating on December 31, 1995, when it was sold.

Mr. Mercuri's Income Tax Returns

After July 1, 1992, Mr. Mercuri filed his income tax returns as a self-employed person, earning his income solely as a partner in Capitol. Mr. Mercuri adopted a taxation year other than the calendar year-end. In the 1994 return, Mr. Mercuri was shown to have a 70 percent partnership interest. In 1995, Mr. Mercuri's partnership interest was reduced to 60 percent. In their testimony, Mr. and Mrs. Mercuri contradicted the information they supplied in their tax returns. They stated that Capitol was in fact totally owned by Mrs. Mercuri, and Mr. Mercuri had no partnership interest in Capitol. They testified that they filed their income tax returns as partners for tax purposes only, upon advice they received from their financial counsellors.

Mr. and Mrs. Mercuri testified that Capitol's business revenue, as reported in the income tax returns, consisted of revenues from carpet cleaning services and Mr. Mercuri's earnings from Teperman. However, the business expenses pertained solely to Capitol's carpet cleaning activities. They testified that Capitol incurred no expenses in relation to Mr. Mercuri's services to Teperman and none were claimed in the tax returns.

Mr. Mercuri testified, and the tax records show, that in his income tax returns for 1994 and 1995, he claimed 70 percent and 60 percent, respectively, of Capitol's total business income as his income from self-employment. He also claimed a corresponding proportion of Capitol's total business expenses as his business expenses, despite the fact that none of the expenses related to his work for Teperman. Mr. Mercuri's 1994 income tax return shows Capitol's total revenue to be $75,624.72 (which included the proceeds from Teperman of approximately $60,000). The expenses totalled $63,865.⁴

Mr. Mercuri's 1993 income tax return was audited and re-assessed by Revenue Canada, who disallowed some of the expenses. His 1994 and 1995 returns were accepted as filed.

Mr. Mercuri agreed that, as a result of reporting his income from Teperman as self-employment income, and deducting Capitol's expenses as his business expenses, he was able to reduce significantly his taxable income. In the 52-week period preceding the accident, Teperman's cheques for Mr. Mercuri's services totalled over $63,000 (net of GST). However, for the same period, Mr. Mercuri's reported income was approximately $18,000.

He paid no income tax in 1994 and 1995. Instead, he received income tax refunds and GST rebates.

Mrs. Mercuri's personal tax returns correspond in all material respects to Mr. Mercuri's returns. In her 1993, 1994 and 1995 income tax returns, she reported her share of Capitol's business income at $6,000, $3,527.69 and $8,282.68, respectively. She paid $500 in income tax in 1993 (after a re-assessment by Revenue Canada). In 1994 and 1995, her income tax liabilities were $6.64 and $537.36, respectively.

Mr. Hocking and Mr. Seigel indicated that if Capitol's expenses were deducted from non-Teperman generated income only, Capitol would not have been a viable business. Absent the income from Teperman, the accountants estimated, Capitol would have been losing approximately $35,000 a year. Mr. and Mrs. Mercuri agreed with this view. They confirmed that Capitol was closed due to the loss of income from Teperman after the accident.

In cross-examination, Mr. Blouin suggested that if Mr. Mercuri was not a partner in Capitol, then Mr. and Mrs. Mercuri had misled Revenue Canada by certifying in their income tax returns that he had a partnership interest in Capitol and by misrepresenting the true nature of their income and expenses, with the intention of avoiding tax liabilities. Mr. and Mrs. Mercuri denied this and adamantly maintained that their income tax returns were prepared by their accountants who told them that they could represent themselves as partners in Capitol, for "income splitting" purposes, to reduce the family's overall tax burden.

Mr. Mercuri did not call the accountants whose advice he relied on in structuring his financial affairs to give evidence in this hearing. Although Mr. Mercuri stated that these accountants were paid to prepare his income tax returns, I note that the accountants did not sign the income tax returns, as required by the tax return forms.

The accountants who testifed before me, Mr. Hocking and Mr. Seigel, could not characterize the scheme as a legitimate spousal income splitting mechanism, given Mr. Mercuri's position that he was an employee of Teperman.

Mr. Seigel and Mr. Hocking agreed that in order to lawfully take advantage of "income splitting," the higher wage earner must be self-employed and the other spouse must have considerably lower or no income at all.

Mr. Seigel called the scheme a "pooling of sources of income" to save taxes; however, when pressed by Mr. Blouin, he stated: "...but for the scheme, Mr. Mercuri would have paid taxes in each of the three years. It may well be tax avoidance. I would say he is lucky he got away with it." Mr. Seigel agreed that the "income splitting plan in this case would have no chance of working if Mr. Mercuri remained an employee of Teperman in the relevant period."

Analysis and Conclusion;

As indicated above, the question I must answer is whether Mr. Mercuri derived his pre-accident income as a self-employed person, or as an employee of Teperman. The phrase "self-employed" is not defined in the Schedule. The Commissioner's Guideline for Identifying Self-Employed Individuals ("the Guideline")⁵ is to be used when, as in this case, it has already been established that the individual is employed, but it is unclear whether the individual is self-employed or what the relationship is between the individual and an employer.

The Guideline states that for the purposes of the Schedule, an individual is considered to be self-employed if the business he or she derives his or her remuneration from is not incorporated under any law. It provides a number of indicators of self-employment, in both "traditional self-employment" and "contract of service" situations, including the following:

The individual

• is an owner of an unincorporated sole proprietorship or a partner in a partnership (other than a limited partner).

• has an established location where business transactions take place.

• participates in the everyday operations of the business (not just an investor or receiving remuneration for purposes of income splitting).

• determines own method and schedule for accomplishing tasks.

• determines own hours and may not necessarily work a set number of hours per period (i.e., 40 hour week).

• negotiates the price of products or fees for services with the customer or client with the exception of regulated fields (i.e. physicians).

• determines the annual income as his or her profit from the business according to the Income Tax Act (Canada) and Income Tax Act (Ontario).

• is ineligible for regular Employment Insurance benefits.

• contributes the employer and employee contribution to Canada Pension Plan(CPP) for his or her own pension plan.

• collects and remits all taxes to different levels of government according to each respective tax legislation (i.e. GST, PST, source deduction from employees).

I heard conflicting opinions from Mr. Hocking and Mr. Seigel about the application of the above considerations to the circumstances of this case. Both accountants possess impressive credentials and experience in calculating benefits under the Schedule. Mr. Kasman and Mr. Blouin argued their respective positions cogently, both relying on the Guideline.

I find that there are some factors in the Guideline that support each party's position. Mr. Mercuri had a long-term relationship with Teperman and worked for Teperman on a full-time basis. He did not determine his own hours of work or the methods and schedule for accomplishing his tasks. I find these factors to be indicative of his status as an employee of Teperman. On the other hand, Mr. Mercuri had a business relationship with Teperman evidenced by a contract, he determined his annual income as his profit from a partnership in an unincorporated business (Capitol) according to the income tax legislation, and he collected and remitted taxes to different levels of government, i.e., GST. He was ineligible for regular EI benefits and contributed to CPP as a self-employed person. I find these factors to be indicative of self-employment.

The factors listed in the Guideline are not exhaustive, nor must they be given equal weight. In my view, the question of whether a person is self-employed or employed should not be determined simply on the basis of the preponderance of the factors listed. Arbitrators have consistently stated, and I agree, that in determining the issue, it is necessary to consider the facts of each case and examine the substance of each individual's financial situation, within the overall pre-accident context.⁶ For the reasons outlined below, I find the evidence discloses, on the whole, that Mr. Mercuri derived his income from self-employment, and his IRB must be determined in accordance with the provisions of the Schedule applicable to self-employed individuals.

Mr. Kasman argued that Mr. Mercuri's relationship with Capitol was for purposes of income splitting and that he was not a partner in Capitol. He submitted that Mr. Mercuri's relationship with Capitol and how he reported his income should not affect his status as an employee of Teperman. While I agree that, as a taxpayer, Mr. Mercuri is legally entitled to structure his financial affairs so as to take full advantage of the tax reduction mechanisms provided by law,⁷I find that the information in the income tax returns which he certified to be true, including the source and amount of his income, is relevant information that should be considered in determining his IRB under the Schedule.

Although important considerations, I do not find Mr. Mercuri's inability to "control" his work, i.e., his inability to determine his hours and the methods for accomplishing tasks, and his long-term, full-time relationship with Teperman, are determinative of the issue. In my view, in order to determine whether Mr. Mercuri is self-employed for the purposes of the Schedule, it is necessary to examine his relationship with Capitol and Capitol '92, and the information in his income tax returns.

I find that on July 1, 1992, Mr. Mercuri made an important financial decision. He modified his relationship with Teperman by entering into an agreement to provide his services through his own business. I find that he registered his own sole proprietorship business, Capitol "92, for the purposes of merging Capitol's business into one company and establishing himself as a self-employed person in partnership with his wife. He filed his income tax returns as a partner in Capitol, reporting a proportionate income and expenses of Capitol as his own income and expenses. I find that largely through ordering his financial affairs in this manner, he was able to avoid paying income tax on the proceeds from Teperman, for the two years preceding the accident.

I find that since July 1, 1992, Mr. Mercuri had held himself out to be a self-employed person and a partner of Capitol. I find he reported significantly lower income than his proceeds from Teperman, for the purpose of paying less income tax. While I agree that Mr. Mercuri rearranged his financial affairs for the purpose of tax reduction, I am not persuaded, as Mr. Mercuri claims, that this was achieved through a lawful spousal income splitting mechanism that maintained his status as an employee of Teperman.

To accept what Mr. Mercuri urges would be, in effect, to undo all of the above, disregard his certified declaration in his tax returns, and rely on testimony that is inconsistent with the documentary evidence.

I recognize that under the circumstances, a finding that Mr. Mercuri was self-employed may be detrimental to his IRB. However, I find this was a consequence that reasonably flowed from his own decision about his financial affairs. Under a different scenario, had Capitol's business been more successful, the same finding could work to Mr. Mercuri's advantage, and he would have likely taken the opposite view.

I understand that individuals do not always order their financial affairs with anticipation that one day they may be making a claim for accident benefits; however, I also feel that the Schedule cannot be used to "fix" retroactively financial decisions that proved to be improvident.

In conclusion, I find that Mr. Mercuri derived his income as a self-employed person, providing demolition services to Teperman through Capitol. On the facts of this case, I find that Capitol's revenues and expenses were generated from two sources: demolition work Mr. Mercuri performed for Teperman and carpet cleaning services that his wife and other employees provided to other customers.

Accordingly, I accept General Accident's calculation of Mr. Mercuri's IRB, which is premised on Mr. Mercuri having derived pre-accident and post accident income (loss) as a partner in Capitol. The method and figures used in the calculation were not challenged by Mr. Mercuri.

In the result, I find the correct amount of Mr. Mercuri's IRB is $232.71 per week.

Is General Accident entitled to a repayment?

I have found the correct amount of Mr. Mercuri's IRB to be $232.71 per week. General Accident seeks the repayment of $13,614.34, being the difference between what Mr. Mercuri was paid for 29 weeks (from July 8, 1995 to January 25, 1996) and what he was entitled to be paid for the same period.

Section 70(1) of the Schedule states:

A person shall repay to the insurer any benefit received under this Regulation that is paid to the person through error, wilful misrepresentation or fraud.

Fraud or wilful misrepresentation is not alleged in this case. General Accident alleges that the overpayment was caused through error attributable to Mr. Mercuri, and due to "the state of affairs he created."

Arbitrators have stated that to be entitled to a repayment, it is not sufficient for an insurer to establish merely that an applicant has received benefits to which he or she is subsequently adjudged not to be entitled. To give meaning to the terminology of the section, the stipulation that benefits be paid "through error" in order to be recoverable must require that responsibility for the payment be attributable in some material way to the actions of the applicant.⁸

I agree with this approach and adopt it for the purposes of this case. However, in the circumstances of this case, I am not persuaded that the error for the overpayment is attributable, in any material way, to Mr. Mercuri's actions.

This is not a case where Mr. Mercuri provided misleading information or where he failed to cooperate with the Insurer's request to provide additional financial information. He has made himself reasonably available for the Insurer's investigation of his claim and financial affairs. Ironically, General Accident's inquiry was triggered by Mr. Mercuri asserting that he was self-employed.

In all the circumstances, I find the overpayment resulted from a plausible difference in the interpretation of the legislation and Mr. Mercuri's justifiable understanding of his employment status. This is a complex case where reasonable people can differ. The fact that I have subsequently adjudged Mr. Mercuri's position to be incorrect should not be held against him. Accordingly, in the absence of any material act or omission on his part that has caused the overpayment, I cannot require Mr. Mercuri to repay any amount of the IRB General Accident paid to him.

In view of this finding, General Accident must return to Mr. Mercuri all deductions from his IRB, made in accordance with section 70(6) of the Schedule.

Dependent Care Expenses:

Under Section 54 of the Schedule, Mr. Mercuri would be entitled to any additional expenses reasonably incurred by him or on his behalf in caring for his dependants if he can establish that the expenses were incurred as a result of the accident.

Mr. Mercuri testified that prior to the accident, his wife cared for their son while she did her work at home. He stated that once his wife sold the business and started working, they had to put the child in a daycare because Mr. Mercuri could not care for him. Mr. Mercuri testified that he could not cope with the physical demands of his very active son because of the back injury he received in the accident.

Mr. and Mrs. Mercuri testified that Mrs. Mercuri closed the business in December 1995 because it was no longer profitable without the income from Teperman. Mrs. Mercuri stayed at home with the child until February 1996, when she found a job as a customer service advisor at Bally Chrysler. Mr. Mercuri returned to light-duty work on November 22, 1996. Their son was enrolled in a daycare facility starting April 22, 1996, at a cost of $25 per day. As of January 13, 1997, they had spent $3,175 in daycare expenses.

Mr. Mercuri argued that if it had not been for the accident, he would still be working at Teperman, his wife would not have had to sell her business, and she would have been able to care for their child while working at home. He submitted that he incurred the daycare expenses as a result of the accident. General Accident took the position that the child was not in daycare because of the accident. I agree.

I find that there is no reasonable temporal connection between the accident and the alleged aftermath. Capitol was sold in December, 1995, six months after the accident. Mrs. Mercuri started a new job in February 1996, and the child was not put in daycare until April 1996, approximately nine and half months after the accident and three and half months after Capitol was sold.

In addition, other than Mr. Mercuri's statement that he could not "keep up" with his child because of the condition of his lower back, I heard no evidence that Mr. Mercuri's medical condition prevented him from caring for his son. The question of his disability was not at issue in this arbitration. I have reviewed the three medical reports filed by Mr. Mercuri in relation to his claim for reimbursement of expenses. While these reports indicate that Mr. Mercuri suffered from low back pain and was unable to meet the heavy physical demands of his job as a demolition expert, they do not discuss his ability to lift or carry a two and a half-year-old child.

Accordingly, I am not persuaded, on a balance of probabilities, that the dependant care expenses were incurred as a result of the accident.

Medical/Accounting Reports and Accounting Fee:

Mr. Mercuri claims entitlement to the cost of the medical reports of Dr. Chow, a physiatrist, Dr. Wilson, an orthopaedic surgeon and Dr. Blitzer, his family physician. These reports are dated March 12, 1996; May 3, 1996 and May 15, 1996 (with an addendum dated May 15, 1996). He also claims his expenses for the Price Waterhouse report and the accounting fee of Dominic Scavuzzo. Mr. Mercuri claims he is entitled to recover these expenses under section 57(1) of the Schedule.

Section 57(1) requires the insurer to pay for all reasonable expenses incurred by or on behalf of the insured person in obtaining and attending an examination or assessment for the purposes of the Schedule or in obtaining a certificate or report for the purpose of the Schedule, including fees charged by a person who conducts an examination or provides a report.

Mr. Mercuri was referred to Dr. Chow and Dr. Wilson by his lawyer, Mr. Kasman, for an assessment of his disability. Mr. Kasman requested the reports, including those of Dr. Blitzer, after Mr. Mercuri retained him.

Following Dr. Blitzer's reports, General Accident provided Mr. Mercuri with membership in a fitness club, and arranged for a vocational assessment. However, Mr. Blouin argued that these reports were in the nature of medical-legal reports, and were not required for Mr. Mercuri's treatment.

Mr. Kasman submitted that the reports were reasonable and necessary for Mr. Mercuri's rehabilitation. He indicated that when the reports were written, Mr. Mercuri was still receiving IRBs. However, he conceded that "there was an issue as to the cause of his disability." Mr. Kasman emphasized the fact that the reports were all written before Mr. Mercuri filed his application for arbitration. He suggested that they should therefore be paid under section 57 rather than litigation expenses.

In my view, the purpose of section 57 is to facilitate the insured person's access to medical examination or assessment, and to obtain certificates or reports for the purposes of his/her rehabilitation or adjusting his claims under the Schedule. It does not cover the cost of medical reports, which are essentially obtained in confidence, in anticipation of litigation conducted under the dispute resolution provisions of the Insurance Act.

I have reviewed the reports in question, and the circumstances surrounding their creation. While General Accident agreed to provide Mr. Mercuri the fitness club membership and vocational assessment, probably as a result of the reports, I find the dominant purpose for the request and preparation of the reports was in anticipation of litigation regarding Mr. Mercuri's disability. Accordingly, I find the expenses for all three reports are more appropriately dealt with as litigation expenses.

With regard to the expenses relating to the report of Price Waterhouse and the accounting fees of Mr. Scavuzzo, Mr. Kasman has conceded in his submission that these expenses are incurred in respect of this arbitration. Therefore, these items will form part of my decision under the heading "expenses," below.

Special Award:

An applicant is entitled to a special lump sum award upon a finding by an arbitrator that the insurer unreasonably withheld or delayed benefits. Given my decision in this case that General Accident correctly calculated Mr. Mercuri's IRB, I find Mr. Mercuri is not entitled to a special award.

Expenses:

Both parties have claimed their expenses incurred in the arbitration. When Mr. Mercuri applied for arbitration on August 6, 1996, the Insurance Act did not allow an arbitrator to award expenses to an insurance company. However, the legislation was amended on November 1, 1996, allowing the arbitrator to award expenses to either party.

Section 282(11) of the Insurance Act states:

282 (11) The arbitrator may award, according to criteria prescribed by the regulations, to the insured person or the insurer, all or part of such expenses incurred in respect of an arbitration proceeding as may be prescribed in the regulations to the maximum set out in the regulations.

Mr. Blouin submitted that General Accident is entitled to its expenses under the amendment, despite the fact that Mr. Mercuri filed his application for arbitration prior to the date the amendment came into effect. He argued it is a procedural amendment and since the entire arbitration in this case was conducted after November 1, 1996, the arbitrator has discretion to order Mr. Mercuri to pay General Accident's expenses incurred in this arbitration.

Mr. Blouin stated that if the amendment is not applicable to this case, he would not challenge Mr. Mercuri's entitlement to his reasonable expenses incurred in this arbitration.

The issue raised by Mr. Blouin was addressed in the arbitration and appeal decisions Pinto and General Accident ⁹ which found that the amendments do not apply to arbitration applications filed prior to November 1, 1996.

I adopt the reasoning in these decisions for the purposes of this case, and therefore find the amendment does not apply to this case.

Mr. Mercuri did not succeed in his application; however, I find his claim is not without merit. I have therefore exercised my discretion under section 282 (11) of the Insurance Act to award him his expenses incurred in the arbitration.

If a dispute arises regarding expenses claimed by Mr. Mercuri, the parties may apply for an assessment, in accordance with the provisions of the Dispute Resolution Practice Code.

ORDER:

1. The correct amount of Mr. Mercuri's IRB is $232.71.

2. Mr. Mercuri is not required to repay General Accident any benefits he received. General Accident shall return to Mr. Mercuri all deductions made under section 70(6) of the Schedule, together with interest calculated in accordance with section 68 of the Schedule.

3. Mr. Mercuri is not entitled to dependent care expenses under section 54(1) of the Schedule.

4. Mr. Mercuri's expenses for the medical reports of Dr. Andrew Blitzer, Dr. Dana Wilson and Dr. R. Chow; the accounting report of Price Waterhouse, and the accounting services of Mr. Dominic Scavuzzo are not expenses that are recoverable under section 57(1)(a) of the Schedule. These expenses were incurred in preparation for litigation.

5. Mr. Mercuri is not entitled to a special award.

6. Mr. Mercuri is entitled to his expenses incurred in respect of this arbitration.

December 19, 1997

Asfaw Seife

Arbitrator

Date

APPENDIX

Hearing:

The hearing was held at the offices of the Ontario Insurance Commission in North York, Ontario, on January 27, 28 and 29, February 27 and April 25, 1997, before me, Asfaw Seife, Arbitrator. The proceedings were recorded by court reporters from Professional Court Reporters.

Present at the Hearing:

Applicant:

Carlo Mercuri

Mr. Mercuri's

Sheldon L. Kasman

Representative:

Barrister and Solicitor

General Accident's

J. Claude Blouin

Representative:

Barrister and Solicitor

Witnesses:

Carla D'Andrea

Steven Teperman

Carlos Rodrigues

Carlo Mercuri, the Applicant

Mrs. Carlo Mercuri

John Seigel, chartered accountant

Gregory Hocking, chartered accountant

Exhibits:

Exhibit 1

The Applicant's Document Brief

Exhibit 2

The Insurer's Document Brief

Exhibit 3

Document Replica - Business Name Registration

Exhibit 4

Capitol Carpet Cleaning - Cashtouch enrollment form

Exhibit 5

Bell Canada lease agreement

Exhibit 6

Utility bills, property taxes and cable bills

Exhibit 7

Telephone bills for Capitol Carpet Cleaning - 1993

Exhibit 8

Employee income received after MVA

Exhibit 9

Faxed letter of Dr. Steve Blitzer dated July 23, 1996

Exhibit 10

King-Reed investigation report, November 30, 1995

Exhibit 11

Letter from Crawford & Company, October 2, 1995

Exhibit 12

Payment schedule

(a) expenses that are eligible for capital cost allowance or an allowance on eligible capital property;

(b) capital gains or losses; or

(c) losses deductible under section 111 of the Income Tax Act (Canada).

Footnotes

1. 1The Statutory Accident Benefits Schedule — Accidents after December 31, 1993, and before November 1, 1996, called "the Schedule" in this decision. The Schedule is Ontario Regulation 776/93, as amended by Ontario Regulation 635/94 and 781/94.
2. 2The methods of calculating net weekly income for the purposes of section 10(1) (income prior to the accident) are set out under sections 81 and 82 of the Schedule.
3. 383.— For the purpose of this Regulation, a person's income from self-employment shall be determined in the same manner as the person's profit from the business in which the person was self-employed would be determined under the Income Tax Act (Canada) and the Income Tax Act (Ontario), but without taking into account,
4. 4This amount includes a $10,459.33 management and administration fee of Capitol's subcontractors; $4,183.74 spent on meals and entertainment; $10,289.91 were expenses relating to the business use of the family car; $4,033.00 pertained to the home office. Fees for legal, accounting and other professional services came to $4,146.00. Telephone and utilities amounted to $5,330.78. Wages for employees were $19,762. Miscellaneous expenses such as gifts, Christmas parties, and "sale incentives" given to staff amounted to $3,381. Mrs. Mercuri testified that all of these expenses were legitimate, and were incurred in respect of Capitol's carpet cleaning business only. The 1993 and 1995 returns contained similar expenses, in varying amounts.
5. 5Commissioner's Guideline for Identifying Self-Employed Individuals, No. 1/95, April 25, 1995, as amended May 13, 1995.
6. 6See for example, Piper and Zurich Insurance Company (December 6, 1993), OIC A-002585, confirmed on appeal (May 1, 1996), P-002585
7. 7See Bonitatibus and Wellington Insurance Company (April 8, 1993), OIC A-000082(2nd )
8. 8See for example Dana B. Levenson and The General Accident Assurance Company of Canada (February 18, 1992), OIC A-000260, decided under a similar provision of the Statutory Accident Benefits Schedule - for Accidents before December 31, 1993.
9. 9(April 10, 1997), OIC A96-001246, confirmed on appeal (November 26, 1997), P97-00031