Alan Stone v. Zurich Insurance Company, 1997 ONICDRG 33

Ontario Insurance Commission

Neutral Citation: 1997 ONICDRG 33

OIC A96-000915

Between:

Alan Stone, Applicant

and

Zurich Insurance Company, Insurer

Decision

Issues:

The Applicant, Alan Stone, was injured in a motor vehicle accident on January 1, 1994. He applied for and received statutory accident benefits from Zurich Insurance Company ("Zurich"), payable under the Schedule¹ The parties were unable to agree on the manner of calculating the Applicant's loss of earning capacity benefit. They were unable to resolve their dispute through mediation and Mr. Stone applied for arbitration under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The issues in this hearing are:

1. Is the Insurer entitled to determine residual earning capacity using section 82 of the Schedule, and if so, is the Insurer required to take into account income tax payable by the Insured on long term disability payments and Canada Pension Plan benefits received by the Insured?

Result:

1. The Insurer is entitled to determine residual earning capacity using section 82 of the Schedule without taking into account income tax payable by the Insured on long term disability payments and Canada Pension Plan benefits.

Hearing:

Counsel for the parties filed written submissions and participated in a teleconference on January 20, 1997. On January 20, 1997 I advised the parties that I would consider further written submissions filed before February 10, 1997.

Present at the Hearing:

Mr. Stone's Representative: Stephen B. Abraham Barrister and Solicitor

Zurich's Representative: Jarvis A. J. Scott Barrister and Solicitor

Before: William J. Renahan Arbitrator

Background:

The matter proceeded by way of an agreed statement of facts and submissions.

The Applicant was injured in a motor vehicle accident on January 1, 1994 and received weekly income replacement benefits from the Insurer for 104 weeks. The parties agreed that the Applicant was entitled to weekly loss of earning capacity benefits pursuant to Part VI of the Schedule. Section 28 of the Schedule provides that the amount of the weekly loss of earning capacity benefit is 90 per cent of the person's pre-accident earning capacity less 90 per cent of the person's residual earning capacity.

The parties agreed on the amount of the Applicant's pre-accident earning capacity. The Applicant underwent a residual earning capacity assessment at a Designated Assessment Centre, and the parties agreed that the Applicant can work part-time and that he can earn $82.56 gross per week at employment that satisfies the criteria set out in section 30 of the Schedule.

The definition of "residual earning capacity" in section 30 requires that the $82.56 gross weekly income be translated into net weekly income. The parties do not agree on how to translate $82.56 gross weekly income into net weekly income. The calculation is significant because the larger the residual earning capacity, the smaller the loss of earning capacity benefit. The Insurer used the tables prescribed by section 82 to calculate net weekly income at $80. The Applicant argued that because he receives nearly $30,000 per year in taxable disability payments from his employer and the Canada Pension Plan, the notional amount of $82.56 he is deemed to receive on account of his residual earning capacity is much less than $80 once his true income tax liability is taken into account. He argued that the formula set out in section 81 of the Schedule requires that his marginal income tax rate as determined under the Federal and Ontario Income Tax Acts be applied to reflect his true income tax liability. The Applicant submitted evidence that if his marginal income tax rate was applied to $82.56, his residual earning capacity expressed as net weekly income is $46.09.

Law:

Section 30 provides in part:

30.-(1) For the purpose of this Part, the residual earning capacity of a person shall be deemed to be the net weekly income determined in accordance with section 81 or 82 using the gross annual income that the person could earn from the type of employment that best satisfies the criteria set out in subsection (2).

The parts of sections 81 and 82 relevant to this hearing are as follows:

81.-(1) For the purpose of this Regulation, a person's net weekly income from employment shall be determined in accordance with the following formula:

A = B - C - D - E 52

where,

A = the person's net weekly income from employment,

B = the person's gross annual income from employment,

C = the annual premium payable by the person under the Unemployment Insurance Act (Canada) on the gross annual income from employment,

D = the annual contribution payable by the person under the Canada Pension Plan (Canada) on the gross annual income from employment,

E = the income tax payable by the person under the Income Tax Act (Canada) and the Income Tax Act (Ontario) on the gross annual income from employment.

82.-(1) Despite subsections 10(5) and 19(5) and section 81, an insurer may elect that, (a) in the case of persons whose income from employment does not include income from self-employment, all determinations required by this Regulation of a person's net weekly income from employment or net income in respect of an employment subsequent to an accident shall be made in accordance with the publication of the Ontario Insurance Commission dated November 25, 1993 and entitled "Net Weekly Income Table — Other than Self-Employment"; and

(2) Subject to subsection (3), an election under subsection (1) applies to all persons described in subsection (1) in respect of whom determinations of net weekly income from employment and net income in respect of an employment subsequent to an accident are required by this Regulation.

Section 85 provides:

85.-(1) For the purpose of this Regulation, the income tax payable by a person under the Income Tax Act (Canada) and the Income Tax Act (Ontario) shall be determined having regard to only the following deductions and tax credits that apply to the person under those Acts:

1. Alimony and maintenance payments deduction.
2. Basic personal tax credit.
3. Married person's tax credit or equivalent to married tax credit.
4. Age tax credit.
5. Disability tax credit.
6. Unemployment insurance premium tax credit.
7. Canada Pension Plan tax credit.
8. Quebec Pension Plan tax credit.

Analysis:

The first question is whether the application of the formula set out in section 81 ("the formula"), and the table prescribed by section 82 ("the table") to the same fact situation, results in different determinations of net weekly income. This question involves a consideration of the phrase "income tax payable by the person . . . on the gross annual income from employment" in paragraph 81(1) E.

Section 85 lists those items that are to be taken into account in calculating income tax payable in the section 81 formula. The list includes many of the major deductions from income and the major tax credits allowed by the Federal Income Tax Act. However, it does not include all deductions and tax credits. For example, no deduction is allowed for contributions to registered retirement savings plans or registered pension plans and no tax credit is given for tuition fees, dividend income, medical expenses or charitable donations. Accordingly, the formula set out in section 81 does not incorporate an insured's marginal income tax rate as determined under the Federal and Ontario Income Tax Acts.

Further, if the legislature had intended that the table reflect the insured's marginal income tax rate as determined under the Income Tax Acts, it would have been a simple matter to use words similar to those used in section 83. Section 83 provides that "a person's income from self-employment shall be determined in the same manner as the person's profit . . . . would be determined under the Income Tax Act." In my view, if the legislature had intended that the formula reflect the insured's marginal tax rate it would not have included section 85 but would have employed words similar to those used in section 83 such as the "person's income tax determined in the same manner as income tax would be determined under the Income Tax Act."

I do not find any legislative intent that the words "the income tax payable by the person . . . on the gross annual income from employment" in section 81(1) E include the higher income taxes the insured may have to pay on account of other taxable income increasing the insured's marginal tax rate. In my view, if the legislature had intended that section 81(1) E refer to total income tax payable by the person on total income, it would not have included the words "on the gross annual income from employment" in section 81(1) E.

Further, the insurer can elect to use either the formula or the table to calculate a number of benefits including income replacement benefits (section 10), deemed income from employment where the insured has responsibility to return to or obtain employment (section 13(4)), education disability benefits (section 15(5)), pre-accident earning capacity (section 29), residual earning capacity (section 30(1)), temporary supplement to benefits (section 32) and, death benefits (section 51). I find no legislative intent that use of the formula and table should generally result in different benefits and the insurer should have the right to select the lowest benefit.

The worksheet to the section 82 table takes into account the first five factors set out in section 85(1), that is, alimony payments deduction, basic personal tax credit, married person's tax credit, age tax credit and disability tax credit. These factors are fixed regardless of income. The remaining three factors, unemployment insurance premium tax credit, Canada Pension Plan tax credit and Quebec Pension Plan tax credit, like income tax, vary depending on the amount of income. I assume therefore that these remaining three factors are, like income tax, reflected in the table.

Since both the formula and the table rely on the same factors, since I heard no evidence that the calculation using the formula (using only the factors specified in section 85), generally results in a net weekly income different from that obtained by using the table, and since I find no legislative intent that the formula and the table should yield different results, I assume that the legislature intended that in most fact situations net weekly income calculations will be substantially the same whether the insurer uses the formula or the table.² Since the income tax credits under the federal Income Tax Act and referred to in section 85 may change slightly each year to reflect inflation and since the table has not been amended since it was published in November, 1993, I expect that the calculation of net weekly income using the formula may vary slightly from the calculation using the table. As well, the formula and table calculations may vary for insureds whose employment income is not subject to income tax or whose employment income is taxed in jurisdictions other than Canada and Ontario.

The Applicant raised a number of other arguments.

He submitted that the Insurer had to use the formula because section 82 did not apply. He argued that the temporal condition "net income in respect of an employment subsequent to an accident" in section 82 was not satisfied in that there was no real employment subsequent to the accident. In my view, the words "an employment" apply equally to a real and notional employment. Section 30 is not restricted in its application to real employment. Further, section 30 specifically allows the insurer to calculate the residual earning capacity in accordance with section 81 or 82.

The Applicant further argued that it is unjust to deduct a residual earning capacity from his pre-accident earning capacity which does not reflect his true tax position. Section 85 sets out the factors which are to be taken into account in determining income tax payable by an insured to arrive at "net income." The legislature has chosen only certain deductions and tax credits to arrive at net income. I find no legislative intent that the net income calculation reflect the insured's marginal income tax rate under the Federal and Ontario Income Tax Acts. Further, the fairness of the system of compensation must also reflect that weekly benefits are not taxable.

The Applicant further argued that the inclusion of temporary disability benefits and unemployment insurance benefits in section 9(6) for the determination of income replacement benefits illustrates a legislative intent that "gross income" not be restricted to just income received from employment. In my view, the opposite is the case. Section 9(6) demonstrates that where the legislature intended to include other income in the calculation of a benefit it specified the nature of that other income. I therefore conclude that where other income is not specified, it is not to be included in the calculation of a benefit.

Lastly, the Applicant argued that the Insurer cannot elect to use the table until it files an election to do so. Firstly, I am not satisfied that the use of the formula or table to most fact situations results in a significantly different net weekly income. Secondly, I am not aware of any authority which sets out procedures the insurer must follow in order to make an election to use the table. Accordingly, I am not satisfied that the Insurer has elected improperly.

The Applicant raised novel points of law and is entitled to his reasonable expenses.

Order:

1. The Insurer is entitled to determine residual earning capacity using section 82 of the Schedule without taking into account income tax payable by the Insured on long term disability payments and Canada Pension Plan benefits.

2. The Applicant is entitled to his reasonable expenses of the arbitration.

February 17, 1997

William J. Renahan Arbitrator

Date

Footnotes

1. 1The Statutory Accident Benefits Schedule — Accidents on or after January 1, 1994, called "the Schedule" in this decision. The Schedule is Ontario Regulation 776/93, as amended by Ontario Regulation 635/94.
2. 2In Neshkewe v. Royal Insurance, 1996 CanLII 8043 (ON CTGD), 31 O.R. (3d) 93 (Ont. Ct. (General Division), October 7, 1996) the Court found that the insurer was entitled to elect to use the table to calculate the benefit for an insured where the benefit calculated using the table was smaller than the benefit calculated using the formula. In this case the insured's pre-accident employment income was not subject to income tax because the insured was a registered Indian whose income was earned on an Indian reserve. In most cases employment income is taxable and in my view, this fact situation and decision do not illustrate a legislative intent that use of the formula and table will generally yield different results.