Financial Services Commission

Commission des services financiers de l’Ontario

Neutral Citation: 1998 ONICDRG 51, 1998 ONFSCDRS 51

Appeal P98-00002

Appellant/Respondent

and

Respondent/Appellant

Before:

David R. Draper, Director’s Delegate

Counsel:

Joel B. Kohm (for George Biliouras)

Richard F.L. Rose (for Allstate)

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 arbitration order dated December 5, 1997 is confirmed.
No appeal expenses are payable.

October 13, 1998

David R. Draper Director’s Delegate

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Both parties appeal from an arbitration decision dated December 5, 1997. George Biliouras submits that the arbitrator erred in rejecting his claim for income replacement benefits (“IRBs”) at a higher rate. More specifically, he argues that the profit he earned on the sale of a residential property was business income and, therefore, should be included in the calculation of his IRBs. Allstate Insurance Company of Canada (“Allstate”) also appeals, claiming it should not be required to pay Mr. Biliouras’ arbitration expenses.

II. BACKGROUND

Mr. Biliouras was injured in a motorcycle accident on October 25, 1995. He was 25 years old and had his own hardwood floor refinishing and driveway asphalting businesses that he started in or about 1994. Based on the income information provided, Allstate paid IRBs at the minimum rate of $185 per week.

The dispute involves a residential property at 5 Frizzel Avenue (“5 Frizzel”). Mr. Biliouras’ brother, Jim, purchased the property in 1989, after it had been condemned. The arbitrator found that he completed 60-70 per cent of the planned renovations, but by 1991, was having financial problems. Mr. Biliouras came to his brother’s assistance by taking a 25 per cent interest in May 1991, and then taking full title in October 1991. He financed the purchase with two mortgages totalling $235,000. Within three weeks of taking title, Mr. Biliouras listed the property for sale and continued to do so on a relatively continuous basis. It finally sold in January 1995 for $316,000.

In the spring of 1996, Mr. Biliouras filed his 1995 income tax return, reporting a taxable capital gain of $32,604 from the sale of 5 Frizzel. His lawyer then wrote to Allstate, claiming this represented an actual taxable gain of $43,472 that should be included in the calculation of the IRBs. Allstate responded that capital gains are not included in pre-accident income and, therefore, the IRBs would continue at $185 per week.

Mr. Biliouras applied for mediation. The dispute was not resolved, but during the mediation process, he learned that capital gains are not included in the calculation of IRBs under the Statutory Accident Benefits Schedule - Accidents after December 31, 1993 and before November 1, 1996, O.Reg. 776/93, as amended (“the SABS-1994”). Acting on this information, Mr. Biliouras filed an amended 1995 income tax return, listing the proceeds from the sale of 5 Frizzel as business income. He did this knowing that it would increase his tax liability.

The arbitration hearing took place over two days in September 1997. The issue was whether the net proceeds from the sale of 5 Frizzel should be treated as business income from self-employment or a capital gain pursuant to section 83 of the SABS-1994. The arbitrator heard from six witnesses, including an accountant for each side.

The arbitrator issued her decision on December 5, 1997, denying Mr. Biliouras’ claim. She found that the proceeds of the sale could not be considered in the calculation of Mr. Biliouras’ IRBs for two reasons. First, he was not self-employed with respect to his dealings with 5 Frizzel. Second, even if he was self-employed, the proceeds were more in the nature of a capital gain than business income. Mr. Biliouras appeals from this decision.

Although Mr. Biliouras was unsuccessful, the arbitrator exercised her discretion under subsection 282(11) of the Insurance Act, R.S.O. 1990, c.I.8, as amended, to order Allstate to pay his arbitration expenses. Allstate contests this part of the order.

III. INCOME REPLACEMENT BENEFITS

A. The Approach to the Legislation

Mr. Biliouras claims the arbitrator applied the wrong test. Specifically, he contends that she erred in applying Commissioner’s Guideline No. 1/95, Guideline for Identifying Self-employed Individual, to the question of whether he was self-employed. This Guideline, he submits, is not meant to distinguish between employment or business income and investment income. It differentiates between employment and self-employment where, as it states, “it has already been established that the individual is employed.”

In Mr. Biliouras’ submission, the arbitrator should have referred to the criteria in Revenue Canada’s Interpretation Bulletin (IT-218R) for determining whether a gain from the sale of real estate will be considered income or capital. He argues that when these criteria are used, his profit from the sale of 5 Frizzel qualifies as business income consistent with his amended tax return.

I agree with Mr. Biliouras that the Commissioner’s Guideline does not apply directly to his situation. However, the arbitrator merely found it “useful” in setting out indicators of self-employment. In adopting this approach, she followed the decision in Segal and Zurich Insurance Company, (OIC A-014646, March 13, 1997), a case involving a retiree who had significant pre-accident income from investments that he managed. The issue was whether this was income from self-employment. Arbitrator Seife held that it was not sufficient that the insured person was engaged in an activity for financial remuneration. It had to be established that the activities constituted self-employment. In answering this question, he clearly states that although the Commissioner’s Guideline is not directly applicable, it is helpful. For the following reasons, I agree with this approach.

IRBs are calculated according to section 10 of the Statutory Accident Benefits Schedule — Accidents after December 31, 1993, and before November 1, 1996, O.Reg. 776/93 (“the SABS - 1994”). They are 90% of the person’s “net weekly income from employment as determined in accordance with sections 81 or 82,” with a minimum of $185. “Employment” includes self-employment, as set out in section 5:

For the purpose of this Regulation, a person is employed if for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment, or is the holder of an office, and “employment” has a corresponding meaning.

Sections 81 and 82 set out the rules for calculating income from “employment” or “self-employment,” without using the terms “business” or “business income.” The first question, therefore, is whether the person was engaged in employment (or self-employment) for salary, wages, other remuneration or profit, within the meaning of section 5. This is the approach taken by the arbitrator and, in my view, it is correct.

Mr. Biliouras relies on section 83 of the SABS-1994, arguing that if the profits from 5 Frizzel qualify as business income under the income tax legislation, then it should be treated as income from self-employment for the purposes of calculating his IRBs. Section 83 provides as follows:

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,

(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).

[emphasis added]

As the arbitrator held, however, this section does not come into play unless it is first determined that the person has income from self-employment. A consistent pattern of reporting income as business income would likely be good evidence of self-employment, but the question of self-employment must be answered first. If the insured person has income from self-employment, then section 83 clarifies that it is to be calculated in the same manner as business income under the federal and provincial income tax legislation. This is the second question addressed by the arbitrator in her decision: If Mr. Biliouras was self-employed in relation to 5 Frizzel, was his profit from the sale income or capital? Again, I find she took the right approach.

“Business” is given a particular and very broad meaning under the Income Tax Act. It includes “a profession, calling, trade, manufacture or undertaking of any kind whatever and . . . an adventure or concern in the nature of trade.” The tax cases and Interpretation Bulletin IT-218R are based on this definition. This is emphasized in the majority decision of the Supreme Court of Canada in Friesen v. Canada, 1995 CanLII 62 (SCC), [1995] 3 S.C.R. 103, dealing with whether property held by a taxpayer was inventory of a business under subsection 10(1) of the Income Tax Act. At page 30, Justice Major states that “if Parliament had intended to restrict the ambit of s.10(1) to taxpayers which ‘carry on business’ it would have done so.”

In my opinion, the SABS-1994 does not adopt the broad, income tax definition of “business” as synonymous with “self-employment.” The test for self-employment is in section 5, requiring that the insured person “is engaged in employment” for salary, wages, or other remuneration or profit. In my view, this wording is more akin to “carry on business” and should be given its ordinary meaning. This makes sense in a system that, at least in a general sense, deals with interruptions in activity due to accident-related injuries. I find, therefore, that the arbitrator correctly considered Mr. Biliouras’ activities in relation to 5 Frizzel, including his intentions, and concluded that it did not amount to self-employment.

Finally, the Commissioner’s Guideline also refers to “business,” using a definition similar to that in the Income Tax Act (Canada). As discussed above, however, the Guideline only applies if it has already been established that the insured person was employed, but there is a question whether it should be viewed as employment or self-employment. In addition, the definition in the Guideline requires “an activity that is carried on for profit,” words not found in the tax legislation.

B. Was Mr. Biliouras self-employed?

The arbitrator found that the evidence did not support Mr. Biliouras’ contention that he was self-employed with respect to 5 Frizzel. In fact, she found that the evidence “overwhelmingly” supported the opposite conclusion. As she states at page 15, Mr. Biliouras “claims he was in the business of building and renovating properties, but he neither built nor completed the renovation of any building.”

Previous decisions have consistently held that my role on appeal is not to second-guess the arbitrator’s assessment of the evidence. She had the advantage of hearing the witnesses and could assess the documentary evidence in light of their testimony. The question on appeal is whether she erred in law by, for example, making findings without any evidentiary basis or applying the wrong criteria for determining self-employment.

The issue before the arbitrator was whether Mr. Biliouras’ activities in relation to 5 Frizzel amounted to self-employment. In finding it did not, she refers to the following indicators:

Mr. Biliouras did not register a sole proprietorship for a business dealing in property renovation or sales.
Mr. Biliouras did not have a business address or location for a business dealing in property. Rather, 5 Frizzel was the residential address for members of his family and one other tenant.
During the more than three years he owned 5 Frizzel, Mr. Biliouras did only minor renovation work.
Mr. Biliouras initially filed an income tax return showing the profits from the sale of 5 Frizzel as a capital gain, not business income.

There was ample evidence to support the arbitrator’s finding and, in my view, the factors she considered are appropriate. There was very little evidence of any self-employment in the ordinary sense of an enterprise or business in which the person is engaged for profit. Beyond listing the property for sale, Mr. Biliouras did almost nothing in relation to 5 Frizzel or any other property. He ran his floor refinishing and driveway businesses, but there is no suggestion that these businesses included a real estate or general contracting component. Nor were there any trappings of a separate business such as business cards, letterhead, or general business activity.

Mr. Biliouras argues that he attempted to purchase another property, showing he was moving into business of buying, renovating and reselling properties. However, the arbitrator refused to give much weight to this evidence because he was only able to provide an unsigned version of an Agreement of Purchase and Sale. Despite Mr. Biliouras’ objections, the arbitrator was entitled to discount his testimony due to the lack of supporting documentation. She found a persistent gap between his stated intentions and his actions, forcing her to look for objective confirmation of his testimony.

Even if the arbitrator accepted that Mr. Biliouras made an offer on another property, I am not persuaded that it would have advanced his claim to any significant extent. The purported offer on the other property was made in April 1995, after he sold 5 Frizzel. This seems consistent with his position until the sale of 5 Frizzel is examined closely. As part of the deal, Mr. Biliouras agreed to do some renovations requested by the purchasers. However, he failed to do them, forfeiting part of the holdback. In my view, therefore, this evidence does little to show that he was in the business of purchasing, renovating and selling properties.

Finally, I agree with Allstate that the arbitrator could have relied more heavily on Mr. Biliouras’ tax returns. Not only did he initially report the profit from the sale of 5 Frizzel as a capital gain, there was no pattern established in his earlier tax returns of treating the income and expenses relating to 5 Frizzel or any other property as business-related. Given the timing of the amended filing, it is hard to view it as a genuine attempt to more accurately reflect his financial position. Instead, it looks like an attempt to improve his financial position by accepting a higher tax liability in exchange for additional IRBs that would more than make up the difference.

C. Business income or capital gain?

The decision that Mr. Biliouras was not self-employed in relation to 5 Frizzel makes this second issue irrelevant. As discussed above, the Income Tax Act definition of “business” and its treatment of business income only comes into play if the injured person was self-employed. That is not the situation here. Like the arbitrator, however, I will deal with the tax issue in case the decision on self-employment is wrong.

While it is unusual for a taxpayer to argue that proceeds from the sale of property are business income, not a capital gain, Mr. Biliouras presents plausible arguments that his profits from 5 Frizzel could be treated as income under the Income Tax Act. He contends that he meets the criteria set out in Interpretation Bulletin IT-218R, as follows:

his intention was to purchase the property, fix it up and sell it for a profit.
his intention remained consistent and was feasible, as evidenced by the profit he made.
he had related skills and experience for this type of business
the level of his financing made it impractical to hold the property as a capital asset and rely on it to generate income through rent.
although the property was held for a relatively lengthy period, he was constantly advertising it for sale.

As the arbitrator states in her decision, the distinction between business income and a capital gain is a question of fact, with no single factor being determinative. She accepts that a single transaction can be considered a business, although it is more likely to be a capital gain. After reviewing the evidence and considering the indicators set out in Interpretation Bulletin IT-218R, she concludes that the profit from 5 Frizzel was more in the nature of a capital gain than business income. In doing so, she refers to appropriate factors, including Mr. Biliouras’ lack of qualifications, the fact that he did not register or incorporate a real estate or renovation business and the very limited work done on the property.

Mr. Biliouras argues that the arbitrator did not reject his evidence about his plans for the property and, therefore, should have found that he was engaged in a business within the meaning of the Income Tax Act. However, I agree with Allstate that, consistent with the court decisions, the arbitrator was not prepared to rely solely on Mr. Biliouras’ stated intentions. She looked at what actually occurred, finding few indications that this was a business. In my view, this conclusion was available from the evidence and, therefore, I am not prepared to interfere.

IV. ARBITRATION EXPENSES

Because Mr. Biliouras applied for arbitration after November 1, 1996, arbitration expenses are determined according to the amendments brought in by the Automobile Insurance Rate Stability Act, S.O. 1996, c.21. Section 282(11) now gives arbitrators a discretion to award expenses to either party according to criteria set out in section 12 of O.Reg. 464/96 (“the expenses regulation”).

Allstate submits that this was not an appropriate case for awarding expenses. It contends that not only was Mr. Biliouras wholly unsuccessful, he should not be rewarded for pursuing a claim based on refiling his income tax return after learning at the mediation that his income from the sale of 5 Frizzel would only be considered if it was business income, not a capital gain.

Previous appeal decisions have held that the old expense provisions created a broad discretion that should not be lightly disturbed on appeal.¹ In my view, this applies equally to the new provisions.

The arbitrator awarded expenses based on the complexity of the case. This is one of the criteria in the expenses regulation and, therefore, was an appropriate consideration. She clearly was not persuaded that the application was frivolous or that Mr. Biliouras’ decision to file an amended tax return was dishonest or an abuse of process. Degree of success is only one factor in deciding whether to award expenses and, in this case, I find there was a reasonable basis for the arbitrator’s conclusion that the complexity and novelty of the issues warranted expenses.

V. APPEAL EXPENSES

While I am not prepared to interfere with the arbitrator’s decision to award Mr. Biliouras his appeal expenses, I am not persuaded he should also receive his appeal expenses. He presented his arguments to the arbitrator and was given clear reasons why she did not accept them. The appeal raised legitimate issues and was well-presented, but the arguments were essentially the same ones made to the arbitrator. In my view, they are not sufficiently significant that Allstate should be required to pay Mr. Biliouras’ expenses at both levels despite his lack of success. Therefore, the parties will bear their own appeal expenses.