Neutral Citation: 1999 ONFSCDRS 196
FSCO A97-002019
FINANCIAL SERVICES COMMISSION OF ONTARIO
BETWEEN:
JOYCE SWAIN
Applicant
and
ZURICH INSURANCE COMPANY
Insurer
REASONS FOR DECISION
Before: Eban Bayefsky
Heard: April 13, 1999, in Chatham, Ontario. Additional materials were received on May 14, 1999.
Appearances: James E. S. Allin for Mrs. Swain Ian M. Boundy for Zurich Insurance Company
Issues:
The Applicant, Joyce Swain, was injured in a motor vehicle accident on September 4, 1995. She applied for and received statutory accident benefits from Zurich Insurance Company ("Zurich"), payable under the Schedule.1 A dispute arose as to the quantum of Mrs. Swain's benefits. The parties were unable to resolve their disputes through mediation, and Mrs. Swain applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.
The issues in this hearing are:
Should the dividend income Mrs. Swain received in the 52 weeks prior to the accident be included in her gross annual income for the purposes of calculating her weekly income replacement benefits, pursuant to section 9(1)2 of the Schedule?
Should unemployment insurance premiums be deducted from Mrs. Swain's gross annual income in calculating her income replacement benefits, pursuant to section 81(1) of the Schedule?
Mrs. Swain claims interest on any amounts found to be owing, as well as her reasonable expenses of the arbitration. The Insurer claims its reasonable expenses of the arbitration.
Result:
The dividend income Mrs. Swain received in the 52 weeks prior to the accident shall be included in her gross annual income for the purposes of calculating the quantum of her income replacement benefits.
Unemployment insurance premiums shall not be deducted from her gross annual income in calculating the quantum of her income replacement benefits.
The parties shall calculate the quantum of benefits now owing to Mrs. Swain, with interest.
Zurich shall pay to Mrs. Swain her reasonable expenses of the arbitration.
Zurich's request for its expenses of the arbitration is denied.
EVIDENCE AND ANALYSIS:
Background:
Mrs. Swain was injured in a motor vehicle accident on September 4, 1995. At the time, she worked for Swain Brothers, a family locksmith and security systems business operated by Mrs. Swain and her husband, Wallace Swain. Mr. and Mrs. Swain are the president-director and secretary-treasurer of the company, respectively. They are also both shareholders in the company, Mr. Swain holding three common shares and Mrs. Swain holding two common shares. Mr. Swain's father, Alfred Swain, owns 18,900 class A special shares in the company. Together, these are the only shares issued by the company.
Regarding the day-to-day operation of the business, Mrs. Swain performed a variety of functions, including bookkeeping, banking, managing accounts receivable, ordering supplies, answering phones, dispatching locksmiths, and cutting keys and reworking locks. There were five other people working at the shop, but none of them were shareholders. The Insurer concedes that Mrs. Swain was an employee of the corporation.
Mrs. Swain was paid a weekly wage by the company. Her salary would remain roughly the same from year to year, unless she and/or her husband needed additional funds, in which case they would take "draws" from the company. These draws were not available to other employees. On June 30, 1995 (in the year preceding the motor vehicle accident), the corporation declared $21,000 in dividends. This was in relation to monies already drawn by Mr. and Mrs. Swain and, therefore, no funds actually changed hands. $12,600 of the dividends were attributed to Mr. Swain, while Mrs. Swain "received" $8,400. Mr. Swain testified that the dividends were split between he and his wife on a 60-40 basis, according to the degree of control each had in running the business. Mr. Swain said that their accountant had advised them to record these amounts as dividends for tax purposes. In the 52 weeks preceding the accident, Mrs. Swain actually received approximately $3,000 in draws (in addition to her "regular" wages), significantly less than the roughly $8,000 attributed to her as dividends.
Mr. Swain testified that he and his wife understood these amounts to be part of their regular wages and remuneration since they arose from the daily effort they put into the business and the resulting success of the company. Mr. Swain stated that if there was something he and/or his wife needed and the company had sufficient funds, instead of using their personal bank accounts, they would take draws from the business. They felt they were entitled to use the company's money in this way since they worked for the business and were also owners.
The Swain's accountant, James Kearney, testified that for tax purposes, Mr. and Mrs. Swain could structure their business in such a way that they could take advances from the company as part of their regular remuneration and record this at year's end as a dividend declared by the company. Mr. Kearney stated that it was not particularly relevant how the amount was recorded, whether as a "dividend," "salary" or "bonus." However, there would be a greater tax benefit to the Swains if they characterized it as a "dividend." On cross-examination, Mr. Kearney acknowledged that, unlike employment income, dividend income was not necessarily related to one's labour and that it could, in fact, be related to various other factors, including the work of other employees at the business.
Zurich's accountant, Mr. J. B. Hoare, testified that the payment of a dividend to Mrs. Swain was not necessarily related to her wages from employment, but could simply be the form in which she was provided income as a shareholder. However, on cross-examination, he acknowledged that, as a shareholder, Mrs. Swain could elect to receive dividends from the company as part of her regular pay and that even if she had received all of her income in the form of dividends, this would not, in his opinion, affect her entitlement to income replacement benefits under the Schedule. However, Mr. Hoare suggested that the extent to which the dividends could be used in the calculation of her gross annual income depended on her contribution to the corporation and the generation of profits, but this appeared to be predicated on the assumption that Mrs. Swain might be considered self-employed (and not an employee of the company), something specifically rejected by the Insurer.
Findings:
I have no hesitation in finding that the dividends issued to Mrs. Swain in the year preceding the accident formed part of her regular remuneration and should be included in her gross annual income for the purposes of calculating her entitlement to statutory accident benefits. The "draws" she took from the company supplemented her wages and were an alternate form of compensation for her. They were declared as "dividends" for tax purposes, not because they constituted a different type of payment. Both Mr. and Mrs. Swain considered these amounts to be part of their regular wages and as flowing from the effort they put into the business. The dividends were declared in accordance with the relative control Mr. and Mrs. Swain exercised over the business. While the dividends were nominally related to Mrs. Swain's status as a shareholder in the company, I find that they were more directly related to her role as an employee of the business, as well as to her work as the company's secretary-treasurer. I, therefore, do not consider these amounts to be investment income in the sense that Mrs. Swain received payments from the company arising from her financial contributions to the business. Mrs. Swain made a nominal investment to become a shareholder (one dollar for each of her two shares) and took draws/dividends from the business that were ultimately related to her physical contribution to the business, not her financial investment in the company.
I note that dividends were only declared by the company twice in the years preceding the accident (1992 and 1995) and that, because she was only a 40% shareholder in the company, Mrs. Swain did not control the issuance of dividends. In my view, neither of these facts affects the characterization of the dividends for the purpose of calculating income replacement benefits. Mrs. Swain is free to choose the time-frame in which her accident benefits are to be calculated and a payment need not be made on an annual basis in order to be included in such a calculation. Similarly, the fact that she did not ultimately control when dividends would be declared does not change the nature of the dividends as compensation related to Mrs. Swain's labour within the company.
Zurich cited two cases in support of its position that the dividends should not be included in the calculation of Mrs. Swain's income replacement benefits: Bonitatibus and Wellington Insurance Company (OIC A-000082 (No. 2), April 8, 1993) and Rocca and GAN Canada Insurance Company (OIC A95-000106, May 29, 1996). In my view, neither decision applies to the case at hand. Bonitatibus involved a president and shareholder of a company who only received director's fees and dividends from his business, not a salary. The applicant there also provided inconsistent evidence about his income so as to maximize his statutory accident benefits. Finally, the arbitrator in that case found that dividend income was "derived from investment." None of these factors exists in the present case where draws/dividends were taken in addition to and as part of Mrs. Swain's salary and where Mrs. Swain provided consistent evidence in order to explain the tax reasons for characterizing the draws as dividends. Mrs. Swain's dividend income could also very reasonably be seen as arising from her labour and status with the company.
Similarly, in Rocca, the arbitrator found that the applicant was self-employed and that he could, therefore, not determine the appropriate quantum of benefits owing to the applicant. The arbitrator stated that post-accident business profits should be considered investment income, not income from employment, but this was in the context of the applicant not having worked since the accident. In any event, the arbitrator made these comments simply to assist the parties on the issue of quantum and did not make specific findings as to how dividends should be treated.
Zurich also argued that Mrs. Swain was adequately compensated for her work without including the dividends in her regular income. Zurich submitted that Mrs. Swain was, in fact, over-compensated given that she held considerably less authority within the company than Mr. Swain and because Mrs. Swain's post-accident replacement was paid less than she had been paid.
Zurich also argued that Mrs. Swain had not clearly established that the retained earnings giving rise to the draws and dividends related to her particular efforts at the company and that she could, therefore, not properly include them in her income for the purpose of calculating her statutory accident benefits.
In my view, however, the question of whether Mrs. Swain was properly compensated for her work (as compared to either her husband or her replacement) is irrelevant to whether the dividends ought to be included in her income. The issue is not whether she was properly paid, but whether what she received formed part of her regular employment income. Similarly, I find that Mrs. Swain was not required to establish that the draws/dividends were directly related to her particular efforts at the company. It is sufficient that she demonstrate that she received the draws/dividends as a contributing member of the company's staff, not simply as a financial investor in the business. I agree with Mrs. Swain's submission that it would be unduly complicated to determine what constitutes a person's regular employment income by attempting to discern precisely which parts of their remuneration were created as a result of their efforts. In this regard, I find that Zurich's argument is not assisted by the evidence of their accountant, Mr. Hoare. In my view, his evidence fully allows for the conclusion that Mrs. Swain's employment income could include the draws that were declared for tax purposes as dividends. And I have already found that Mrs. Swain need not establish a direct link between the company's retained earnings and her particular contribution to the business, assuming Mr. Hoare thought that this analysis ought to apply to Mrs. Swain's employment situation.
Finally, I agree with those arbitration decisions that have held that, in light of the remedial nature of the statutory accident benefits scheme, a person's employment income should not be restricted to the amount of his or her "salary" in the strict sense, but ought to include other sums forming part of the "value" or "money's worth" received in return for the insured person's labour.2
Contrary to Zurich's submission, I find the general reasoning of these cases applicable to Mrs. Swain's situation despite the fact that some of them deal with self-employed individuals.
I, therefore, find that the draws/dividends realized by Mrs. Swain should be included in her employment income for the purposes of calculating the quantum of her income replacement benefits.
The one difficulty with this finding is that the dividends declared by the company in 1995 did not reflect the draws taken by Mrs. Swain in the 52 weeks preceding the motor vehicle accident. The dividends (of which approximately $8,000 were attributed to Mrs. Swain) represent draws taken over a longer time period. In fact, Mrs. Swain only received roughly $3,000 in draws in the year preceding the accident. Therefore, in accordance with my earlier reasoning, I find that only those amounts related to Mrs. Swain's labour and/or employment in the previous 52 weeks should be included in her income calculation, not those amounts received or enjoyed in previous years and only declared in 1995 for tax purposes. In order for her to realize the benefit of the dividends, they must have been actually received in the year preceding the accident.3
However, on the basis of the materials submitted by the parties, I am unable to determine with any accuracy the actual amounts Mrs. Swain drew or received from the company in the relevant time-frame. I, therefore, remit to the parties the issue of the exact quantum of benefits owing to Mrs. Swain on the basis of those dividends actually received by her in the 52 weeks preceding the accident. I will remain seized with this matter, should the parties be unable to agree on the precise amount owing. I note, in this regard, that the parties were earlier able to agree on the proper quantum of benefits depending on whether dividends were to be included or excluded.
Unemployment Insurance Premiums:
Mr. Swain testified that unemployment insurance premiums were not deducted from Mrs. Swain's earnings because they had been advised by their accountant that they were both ineligible for unemployment insurance coverage and, therefore, did not need to deduct them. Their accountant, Mr. Kearney, confirmed that he gave the Swains this advice on the basis of discussions with the Unemployment Insurance Commission. Mr. Hoare testified that these amounts should have been deducted since, under the Employment Insurance Act and guidelines, Mrs. Swain did not control more than forty percent of the shares of the company. Following the hearing, Mr. Kearney confirmed Revenue Canada's position (through the Unemployment Insurance Commission Rulings department) that Mrs. Swain was exempt from paying unemployment insurance premiums because of her joint ownership of the business with her husband and despite only owning forty percent of the company's shares.
Pursuant to section 81(1) of the Schedule, Mrs. Swain's net weekly income is to be determined, in part, by deducting the "annual premium payable" by her under the Unemployment Insurance Act from her gross annual income. On advice from Revenue Canada, Mrs. Swain had not been deducting unemployment insurance premiums from her regular wages. This appears to be consistent with the guidelines issued by Revenue Canada which exempt non-arm's length employees from paying premiums. However, in my view, it is not necessary to decide whether this practice accords with the terms of the relevant legislation and guidelines. The reality of Mrs. Swain's situation is that Revenue Canada never required her to deduct unemployment insurance premiums from her wages. I find this sufficient to establish that these amounts were not "payable" within the meaning of section 81(1) of the Schedule. I, therefore, find that these amounts should not be deducted from Mrs. Swain's gross annual income for the purposes of calculating her entitlement to weekly income replacement benefits. Further, given my earlier finding regarding Mrs. Swain's dividends and the need for the parties to determine the correct quantum of benefits, I also remit to the parties the determination of the proper quantum excluding any unemployment insurance premiums from the equation. Again, I will remain seized should the parties be unable to agree on the amounts owing.
Expenses:
Both parties sought their expenses in this matter. In light of the above conclusions, I find it appropriate to award Mrs. Swain her reasonable expenses of the arbitration. I deny Zurich's request for its expenses. The parties are free to request an assessment of expenses should they be unable to agree on the amounts owing.
October 8, 1999
Eban Bayefsky Arbitrator
Date
Neutral Citation: 1999 ONFSCDRS 196
FSCO A97-002019
FINANCIAL SERVICES COMMISSION OF ONTARIO
BETWEEN:
JOYCE SWAIN
Applicant
and
ZURICH INSURANCE COMPANY
Insurer
ARBITRATION ORDER
Under section 282 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:
The dividend income Mrs. Swain received in the 52 weeks prior to the accident shall be included in her gross annual income for the purposes of calculating the quantum of her income replacement benefits.
Unemployment insurance premiums shall not be deducted from her gross annual income in calculating the quantum of her income replacement benefits.
The parties shall calculate the quantum of benefits now owing to Mrs. Swain, with interest.
Zurich shall pay to Mrs. Swain her reasonable expenses of the arbitration.
Zurich's request for its expenses of the arbitration is denied.
October 8, 1999
Eban Bayefsky Arbitrator
Date
Footnotes
- The Statutory Accident Benefits Schedule — Accidents after December 31, 1993 and before November 1, 1996, Ontario Regulation 776/93, as amended by Ontario Regulations 635/94, 781/94, 463/96 and 304/98.
- See, for example, Crevier-Lamarche and Missisquoi Insurance Company (OIC A96-000865, January 12, 1998), Vink and Co-operators General Insurance Company (OIC A-010589, July 6, 1995) and Morin and LumbermensMutual Casualty Company (OIC A-001311, June 16, 1993).
- I note that, in final submissions, Mrs. Swain's counsel indicated he would be content with this approach should I find that the dividends ought to be included in the quantum calculations.