Neutral Citation: 1999 ONFSCDRS 125

FSCO A95-000106

BETWEEN:

PASQUALE ROCCA

Applicant

and

GAN CANADA INSURANCE COMPANY

Insurer

REASONS FOR DECISION

Before: David Evans

Heard: February 22, 23, March 23, and April 21 and 21, 1999, at the Offices of the Financial Services Commission of Ontario in Toronto

Appearances:

Michael Gillen for Mr. Rocca

Ralph D'Angelo for Gan Canada Insurance Company

Issues:

The Applicant, Pasquale Rocca, was injured in a motor vehicle accident on February 15, 1995. He applied for and received statutory accident benefits from Gan Canada Insurance Company ("GAN"), payable under the Schedule.¹ The parties have had a number of disputes relating to Mr. Rocca's claims for income replacement benefits and were unable to resolve them through mediation. Mr. Rocca applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

In an earlier decision in this matter dated May 29, 1996, subsequently upheld on appeal,² I held that at the time of the accident Mr. Rocca was self-employed at the family business, 872991 Ontario Inc., carrying on business as Convenient Car and Truck Rental ("Convenient"). Subsequently, the parties were not able to agree upon the amount of Mr. Rocca's benefit, which in turn depends upon Convenient's profits and its apportionment (whether to him entirely or in some proportion among the family members).

The issues in this hearing are:

What was Convenient Car and Truck Rental's profit for 1994?
How should that profit be apportioned?
What claim code applies?
Is Mr. Rocca entitled to his expenses incurred in this arbitration proceeding?

Mr. Rocca also claims interest on outstanding benefits.

Result:

Convenient Car and Truck Rental's profit for 1994 was $50,000.
Mr. Rocca's portion of that profit is 50 percent.
Claim code 1 will be used to determine Mr. Rocca's net income.
Mr. Rocca is entitled to his expenses incurred in this arbitration proceeding.
Mr. Rocca is entitled to interest from 15 days after the application for benefits.

EVIDENCE AND ANALYSIS:

Convenient was incorporated in 1989, with Mr. Rocca, Convenient's president, secretary, and sole director, receiving a single Class A voting share, and Mrs. Margherita Rocca receiving two non-voting shares. For a number of years, the couple operated Convenient out of two properties (Mrs. Rocca worked mainly in Bolton, while Mr. Rocca worked mainly at Weston Road) until they consolidated operations in Bolton in September 1994. During the months before his accident, Mr. Rocca attended auctions to purchase cars for resale, repaired them, and supervised autobody men. He was not very involved in the renting of vehicles, unlike Mrs. Rocca and her daughter, Patrizia, who had taken over the bookkeeping for Convenient prior to the accident. The Rocca son, Filippo, helped out with minor repairs and sales. The receipts of the business in 1994 were almost $500,000. Mr. Rocca stopped working after the accident, and the business has now folded.

As I found that Mr. Rocca was self-employed, subsection 7(3) of the Schedule prevents him from designating the four weeks before the accident to determine his pre-accident gross annual income from employment; fiscal year 1994 has been used as the basis for the 52-week pre-accident period. According to the company's financial statements, Convenient lost money in 1991 and 1993, and made very modest profits in 1992 and 1994. Section 83 of the Schedule essentially equates Mr. Rocca's self-employment income with Convenient's profits as determined under the Canadian and Ontario Income Tax Acts. Furthermore, I had suggested in my first decision that an appropriate split of the profits would be 50 percent to Mr. Rocca. GAN had retained Mr. James Forbes, a chartered accountant, now of PriceWaterhouseCoopers, who determined in a report dated August 6, 1996 that, based on Convenient's tax-adjusted pre-accident net income of $8,142, Mr. Rocca would only be entitled to the minimum weekly benefit of $185.

After the appeal decision in 1997, Mr. Rocca took the position that the corporate financial statements and income tax returns were inaccurate, in that many personal expenses had been entered as corporate expenses. (He thus avoided income, goods and services, and provincial sales taxes). Removing these expenses would increase the profits, with respect to which Mr. Rocca claimed that 100 percent should be apportioned to him as pre-accident income. Larry Lancefield, forensic accountant, eventually identified in his report dated February 3, 1999 personal expenses charged to the company during fiscal 1994 in the range of approximately $37,000 to $57,000 (depending on the treatment of a claimed $4,000 in parts given away and $16,000 for costs associated with cars used by the four family members). Mr. Forbes replied with a report dated February 17, 1999 in which he added back personal expenses originally attributed as company expenses where "adequate verifiable supporting documentation exists" of approximately $21,000 while ignoring the parts given away and the cars used personally.

At the beginning of the current set of hearings, Mr. D'Angelo asked for a ruling on whether I had already found in the first decision that the split of the profits should be 50 percent to Mr. Rocca. I ruled that I had only made a non-binding comment for the parties to consider while they attempted to determine the quantum between themselves.

At the end of the hearing, Mr. D'Angelo submitted that Mr. Rocca cannot reinvent his finances in order to obtain higher benefits. He relied on the Decision on Quantum by Arbitrator Palmer in Bonitatibus and Wellington Insurance Company.³ However, Arbitrator Palmer had accepted the tax returns as accurate representations of both the corporation's and the Applicant's income in 1990 and 1991. She then accepted that the Applicant clearly had the right to structure his financial affairs, within the law (my emphasis), in whatever manner he chose. She concluded that she could not then accept evidence inconsistent with those accurate representations merely to maximize the benefit. In this case, I find that the financial statements and tax returns did not accurately represent Convenient's (and hence Mr. Rocca's) income, nor did Mr. Rocca structure his financial affairs within the law. On the second point, section 83 of the Schedule provides that "a person's income from self-employment shall be determined" (my emphasis) according to the income tax rules for determining the company's profits; those rules were not followed in initially setting the company's profits. (Bonitatibus dealt with the earlier Schedule, which has no equivalent to section 83.) Accordingly, I find it necessary to determine the company's profits.

Mr. Rocca initially testified about the personal expenses he ran through the company books. After his testimony and that of Mr. Lancefield, additional hearing time was required. Mr. Forbes then prepared another report dated March 17, 1999, in which he included additional items as personal expenses, such as the Superior Propane invoice for gas delivered to Mr. Rocca's home. However, he also found that a personal prepaid insurance expense had not in fact been attributed to the company, contrary to what Mr. Lancefield had believed, so that the personal expenses identified by Mr. Lancefield had to be reduced by a minimum of $2,500. Furthermore, he found that the company had paid approximately $3,000 more in insurance than initially thought, which would reduce the profit by that amount. I allowed this report in as evidence but granted a further adjournment in order for Mr. Rocca to consider it, since it was provided essentially on the day of the resumption. On the final days of the hearing, Mr. Rocca conceded these points on insurance. Despite these adjustments, a considerable difference remains between the two assessments. In his last report, Mr. Forbes set the revised net income of Convenient at almost $30,000. Leaving aside the issue of the parts given away and the cars used personally, and correcting for the insurance and some other errors (for instance, Mr. Lancefield included as a personal expense $2,156.21 from cheque 2169 towards the Toronto-Dominion VISA bill when apparently the personal portion had already been removed from the accounts), I calculate that a difference of approximately $8,500 remains.

On the final days of the hearing in April 1999, I also allowed Mr. Rocca to file documents and give testimony about the parts given away. (I had previously excluded the documents, as he had initially sought to file them on what was supposed to be the final day of the hearing in February 1999.) Based on the invoices he produced, he claimed an additional $6,197 and not the $4,000 originally set out in Mr. Lancefield's report. He also filed a Canadian Automobile Association ("CAA") booklet "1993-1994 Car Costs" to claim higher car costs than his initial estimate of $4,000, since the CAA estimated annual costs at between $6,000 and $7,000. Adding in the lower range for the CAA's costs multiplied by the four cars and adding the claimed amount for the parts given away would bring the net income to approximately $70,000.

I find it very difficult to obtain anything like a precise figure for the company's profits in this situation. Part of Mr. Rocca's claims include pure estimates. For instance, he estimated that 60 percent of the total PetroCanada bill for 1994 was personal, so Mr. Lancefield added back approximately $3,500 to the company profits (this explains part of the $8,500 difference between his figures and Mr. Forbes'). Mr. Lancefield testified that some items such as the "Blue Goose" membership and attendance at its convention were probably of benefit in a business relationship, just not for this particular company of Mr. Rocca's. Why should a business expense incurred for another company simply be added to this company's profits? Mr. Rocca sought to treat an expensive cellular phone as a personal expense, yet he testified that he did use cell phones sometimes for business purposes. Regarding the parts given away, there were inconsistencies between what Mr. Rocca recalled and the information provided in letters that were written in the weeks before the April 1999 hearing days. Furthermore, it appears that at least some of the parts were "given away" in a barter system: Jerry Abballe wrote on March 26, 1999, that he had Mr. Rocca paint his vehicle and in return he delivered a hot tub to Mr. Rocca. Rosa Minna wrote that, in exchange for Mr. Rocca's repairs, her husband performed some brick work on Mr. Rocca's residence. Regarding the personal use of the vehicles, Mr. Lancefield testified that $4,000 was a number he had seen on T4s before for personal use as an added benefit to the employee; Mr. Rocca is now seeking $6,000. However, Mr. Rocca also used vehicles for business purposes, such as going to automobile auctions. Furthermore, he is also seeking to add the personal use of vehicles by his family back into the company profits, yet he testified that one of the ways he provided compensation to his family other than direct salary was by letting them drive company vehicles. If that is compensation, then why should the amounts representing that compensation not be treated like any other salary? Salary decreases, not increases, profits.

On the other hand, I find that the figures determined by GAN need some adjustment as well. For instance, Mr. Forbes had removed any meals purchased during the week since they could have been for business purposes. However, he testified that since Revenue Canada only assesses 50 percent of meal expenses as deductible he should have added back as a personal expense the other 50 percent. More importantly, Mr. Forbes simply excluded any amounts that could not be precisely determined. However, I find it likely that there was some personal use by Mr. Rocca of his vehicle, leading to some personal proportion of the gas bills. Regarding the parts given away, some of them were clearly to other family members for which undoubtedly there was no barter system in effect.

This leads me to an important point of view that both Mr. Forbes and Mr. Lancefield in effect shared. Mr. Lancefield testified that adding back 7 to 12 percent of the total company expenditures as personal expenses, as he was doing, was not unusual in overall terms, considering the fact this was a small business and considering the size of its revenues. Mr. Forbes testified that he would expect approximately 10 percent net income on such a business. In that light, I find that adding back personal expenses to reach a profit approaching $50,000 where the business earned $500,000 in 1994 is not unreasonable.

However, that does not mean that I find Mr. Rocca is entitled to allocate 100 percent of the profit to himself. Mr. Rocca had testified that he had intended to change the shareholder ratios to more closely reflect what was going on in the business. In that regard, I note that the rental income from Bolton for 1994 — the business that Mr. Rocca was not involved in — brought in over 20 percent of the company income ($110,000). As Mr. Presta (Mr. Rocca's former accountant) had testified at the first hearing, sometimes the shareholdings at a point in time are not indicative of an individual's efforts in the company. Similarly, although Mr. Rocca was the sole voting shareholder, I find that other family members played an important role in helping decide the company's actions. Mr. Presta testified that it was initially Patrizia who approached him to suggest that the Weston Road operation should be closed and that later Mr. Rocca told him that they decided to close it, as Patrizia's analysis showed the location not to be profitable. Accordingly, I find that the appropriate split of Convenient's profit to Mr. Rocca is 50 percent.

Mr. Rocca also seeks a ruling on which a claim code should apply in order to determine his net income. Mr. Rocca seeks to use claim code 8 which, by decreasing his deemed tax, would increase his net income. He relies on a disability tax credit certificate signed on December 28, 1992, by Dr. H. M. Hernando. It indicates that Mr. Rocca was suffering marked restriction of dorso-lumbar back movements as well as concurrent mental emotional impairment due to marked post-traumatic reactive anxiety depression; these symptoms apparently arose from a sprain and strain of the dorso-lumbar spine in 1973. The disability tax credit is available where the conditions "cause the individual to be markedly restricted in his or her ability to perform basic activities of daily living." Bulletin IT-519R2 lists basic activities of daily living such as perceiving, thinking and remembering, feeding or dressing oneself, speaking in a quiet setting to another individual, hearing so as to understand in a quiet setting, eliminating and walking. It excludes activities such as working, housekeeping, and social or recreational activities. The certificate is untested by Revenue Canada, as Mr. Rocca has not filed personal income tax returns since the certificate was signed. Furthermore, I find it difficult to reconcile his testimony about the many hours a week he worked before the accident with marked restrictions in his ability to perform the basic activities of daily living as set out in the Bulletin. Accordingly, I find that his net income should be determined by using claim code 1.

The parties will now be able to determine the amount of the weekly income benefit. I heard submissions on what interest is payable. Although I do not have the calculation, it appears the amount of the benefit will be more than the minimum that was paid, leaving benefits outstanding. The benefit was payable under Part II of the Schedule. Subsection 62(1) of the Schedule provides that an insurer "shall mail or deliver a weekly benefit that is payable under Part II" within 14 days after the insurer receives an application for the benefit. Failure to comply renders the amount payable overdue: subsection 62(4). Section 68 provides that interest is due on overdue payments of benefits. As the language is mandatory, interest is owed from 15 days after the application for benefits.

EXPENSES:

I held in my first decision that Mr. Rocca was entitled to his expenses. This hearing was a continuation of that first hearing. I see no reason to alter my original ruling.

June 30, 1999

David Evans Arbitrator

Date