Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2000 ONFSCDRS 22

Appeal P99-00039

OFFICE OF THE DIRECTOR OF ARBITRATIONS

PASQUALE ROCCA

Appellant

and

GAN CANADA INSURANCE COMPANY

Respondent

Before:

Stewart McMahon, Director's Delegate

Counsel:

Michael J. Gillen (for the Appellant)

Robert H. Rogers (for the Respondent)

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 without expenses.

March 18, 2022

Stewart McMahon

Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

On February 15, 1995, Mr. Pasquale Rocca was injured in a motor vehicle accident. Mr. Rocca applied to GAN Canada Insurance Company (“GAN”) for weekly income replacement benefits (“IRBs”), on the basis that he was an employee of a closely held company that he controlled. GAN took the position that he was self-employed, and the matter proceeded to arbitration. The arbitrator concluded that there was an insufficient history of regular pay cheques to support the submission that he was an employee of the company. He ruled that Mr. Rocca’s benefit should be calculated on the basis that he was self-employed.

The level of the benefit was not dealt with at this first hearing. Unfortunately, the parties had opposing views on two matters that prevented them from reaching agreement.

First, they could not agree on how much profit the company earned in the year preceding the accident. Mr. Rocca took the position that the company’s financial statements underestimated its profit because many of the expenses paid through the company’s books, were in fact personal expenses. He argued that these expenses should be ‘backed out’ when his IRBs were calculated. The accountant retained by GAN accepted that there were personal expenses that ought to be ‘backed out,’ but the parties could not agree on the division between personal and business expenses.

Second, the parties disagreed on how much of the company’s profit should be attributed to Mr. Rocca, and how much to his wife and two children, all of whom were active in the business. Ancillary to this issue, was the question of what claim code should be used to calculate Mr. Rocca’s tax liabilities. Mr. Rocca argued that claim code 8 should be used as it accounted for his pre-existing disability, and his wife’s dependency upon him. The Insurer challenged both these assertions and argued that claim code 1, the basic code, should be used. The matter proceeded to a second hearing. The arbitrator found it impossible to determine the company’s profits precisely. He used his best judgement and fixed the profit at $50,000. Neither party contests this ruling. He attributed half of the company’s profits to Mr. Rocca, who has appealed this portion of the decision. The arbitrator also rejected Mr. Rocca’s assertion that claim code 8 was applicable. Mr. Rocca has not contested the rejection of the prior disability claim, but continues to maintain that if all of the company’s profit is attributed to him, his wife has no independent source of income, and hence he would be entitled to claim her as a dependant.

II. BACKGROUND

In 1989, Mr. Rocca incorporated a company that carried on business under the name Convenient Car and Truck Rental. The company was incorporated with Mr. Rocca as its sole director. He was issued one class “A” voting share, and his wife was issued two class “B” non-voting shares. There were two principal aspects to the business. As the company name implies, it rented vehicles to the public. In addition, Mr. Rocca had a motor vehicle dealer’s licence and he bought, repaired and then sold used vehicles through the company.

Initially, the company operated from premises in Toronto. It later opened a second location in Bolton. In the first few years, Mrs. Rocca ran the rental operation with the assistance of some hired office and garage help. The children, who were in high-school, worked part-time in the office and cleaned the rental cars. Mr. Rocca, who is a mechanic, maintained the rental fleet, but the used car business occupied most of his time.

In early 1994, the daughter, Patrizia, who was by then studying towards a Bachelor of Commerce degree, analysed the profitability of the Toronto office and concluded that they would be better off closing it, laying off the office staff and consolidating the operation in Bolton. The family met as a group and decided on this course of action. Mrs. Rocca continued to run the rental operation. The two children began to put in full-time hours. The daughter took over the books, and worked in the office. The son cleaned cars and taxied customers to and from their homes. He also obtained a dealer’s licence and helped his father on the sales side of the business.

In the early years, the company reported little, if any profit. However, as noted above, the company generated revenues beyond its true expenses. In one year, Mrs. Rocca was paid a modest manager’s salary. The children were paid $35 per week. Mr. Rocca was not paid a salary, but family expenses were put through the company’s books, and company cars were made available to all family members for their personal use. In addition, both Mr. and Mrs. Rocca had contributed significant sums to the company by way of shareholder loans raised by placing mortgages on the matrimonial home and other assets. In good years the loans were paid down.

Revenues in the last quarter of 1994 were particularly good, and expenses were down because of the consolidation and lay-offs. The family met late in the year, and with the advice of their accountant decided that each member of the family should be paid a regular salary. The amount of the salary was to reflect their respective roles. Mr. Rocca was to be paid $1,739 per week, Mrs. Rocca $500 per week, and the two children $350 per week. Mr. Rocca received a few pay cheques prior to the accident on February 15, 1995. Neither Mrs. Rocca, or the children received any pay cheques prior to the accident, but in mid-August they each received lump sum payments, representing wages that had accrued from early January.

The family also discussed changing the company’s share structure. Mr. Rocca was to retain a 40% interest. Mrs. Rocca was to have a 30% interest, and the children were each to be given a 15% share. However, the accident intervened and this plan was never implemented.

The family tried to find a replacement mechanic without success. The existing vehicles were sold off during the course of the following year. The rental operation was closed in mid-1995. Mr. Rocca sought an order attributing all of the profit to him. The arbitrator’s rational for dividing the profit amongst the family is succinctly set out in the following passage:

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.

III ARGUMENT AND ANALYSIS

Mr. Rocca submits that the following four factors should be considered when assessing the extent to which the company’s profits should be attributed to any one individual:

• share structure

• expectation of profit

• contribution of the individuals

• degree of risk

Counsel for GAN noted that no authority was cited for this proposition. He stated that the only expert evidence on the point came from the accountant retained by the Insurer, who commented on only two of the factors: the share structure and the contribution of the individuals. However, I note that in his submissions, the Insurer’s counsel also referred to the family’s plans to begin paying a proper wage to each member of the family, which can be related to the “expectation of profit” factor. Counsel’s principal concern appeared to be the reliance upon the “degree of risk” factor when considering a closely held family company.

In my view, even if all four factors are considered, the arbitrator’s attribution of one half of the profits was well within the proper exercise of his discretion, and accordingly, I need not decide if the risk factor should be omitted.

Counsel for both parties relied on evidence generated at the first hearing that dealt with the employee versus self-employed issue. This makes sense, as much of the evidence at that hearing touched on the factors set out above. The arbitrator also referred to this evidence. Accordingly, when reviewing the reasons to determine if the arbitrator considered the relevant evidence, I think reference should be made to both sets of reasons.

(i) Share Structure

The passage from the arbitrator’s reasons quoted above includes a reference to the share structure. So does the first decision. At the end of that decision, the arbitrator makes reference to the division of the shares between Mr. and Mrs. Rocca and suggests that they should consider this fact when dividing the profits between the family.

On appeal, Mr. Rocca focuses on the fact that he held the only voting share, and argues he had complete control of the company. However, the arbitrator correctly looked beyond the share structure and examined how decisions were in fact made. The arbitrator comments on the role of other family members in shaping the direction of the company, noting specifically Patrizia’s role in consolidating operations in Bolton. Patrizia’s evidence in particular, comments upon the pivotal role played by Mr. Rocca, but is also replete with references to the family meeting to make decisions as a group. Reference could also have been made to the accountant’s evidence that he met with the family as a whole to discuss the salary question, or Mrs. Rocca’s role in managing the rental part of the business.

Mr. Rocca criticizes the arbitrator’s reliance upon his evidence that he intended to “change the shareholder ratios to more closely reflect what was going on in the business.” He argues that because the shareholdings were not changed, the evidence of intention was irrelevant. This may be so if one is considering the shareholdings in isolation, but Mr. Rocca’s intention also speaks to his views on the relative contributions made by the family members.

(ii) Expectation of Profit

The arbitrator did not comment specifically on this factor in his summary of why he allocated only half of the profit to Mr. Rocca, but his review of the evidence touches on the issue. In any event, I am satisfied that a consideration of this factor supports the arbitrator’s ruling.

Mr. Rocca’s submissions on appeal tied control of the company to the “expectation of profit” factor. He submitted that because he had the sole voting share, and was the only director, he was the only one who could reasonably have expected to share in the profits. I have a great deal of trouble with this assertion. First, the company had never paid a dividend, and there was no evidence concerning who might have been paid dividends in the future. Accordingly, I do not believe there is an evidentiary basis for Mr. Rocca’s submission. Second, if any inference were to be drawn, I would think that the more natural one would be to presume that if the profit was to be paid out by way of dividends, they would be split between Mr. and Mrs. Rocca’s shares, thereby reducing the total tax liability.

Mr. Rocca argues that even if Mrs. Rocca may have had an expectation of profit, the children could not have, because they did not hold any shares. This may be true if one limits this factor to profits in the sense of the payment of dividends. However, this is too narrow an approach. The more appropriate question is: what if any material compensation did the family members expect to receive? Mr. Rocca’s counsel argued that the family members did not expect to receive anything directly. He argued that in practise all the profits went to Mr. Rocca, who in turn took care of the family’s needs. This argument might have had some resonance if the company had declared profits that were all paid out to Mr. Rocca, who in turn spent the money from his own account on the family’s expenses. However, the evidence does not support this submission. First, the family members did receive some direct compensation from the company. For example, they had the use of company cars and credit cards, and their tuition was paid. Second, the remaining “profits” were not attributed directly to Mr. Rocca, who would then use them for the family’s benefit. Instead, the family’s expenses were paid directly from the company’s accounts without attributing them to any particular family member.

Mr. Rocca argues that he was the “key man” and that when he was unable to contribute to the business it soon folded. Accepting this as true, it does not follow that all the profits should be attributed to him. He may have been an essential player, but the company could not have earned the profits without the contributions of the other family members. Since the company had not formally attributed all its earnings to one individual, it would be inappropriate to calculate IRBs on the basis that, post accident, one member of the family has all the income attributed to him or her. Either a share must be attributed to the other contributing family members as partners in the enterprise, or a wage must be attributed to their contribution. In either event, it would be a gross distortion to calculate Mr. Rocca’s IRBs without attributing some portion of the company’s profit to the other family members. The point can be illustrated by asking what position would have been taken if it had been the wife or one of the children who had been injured, rather than Mr. Rocca. Can there be any doubt but that they would have demanded IRBs, based on the argument that a portion of the company’s profit should be attributed to their efforts?

(iii) Contribution of the Family Members

Mr. Rocca argues that when the arbitrator considered the relative contributions made by the family members he focused on the amount of time contributed but failed to properly consider the “relative importance” of their contributions. However, a review of the reasons in the two decisions makes it clear that the arbitrator went far beyond a mere accounting of the time spent by each family member. The arbitrator reviewed in some detail the various contributions made by each family member. The mere fact that he attributed one half of the profits to a single member of the four person family, attests to the fact that he weighed the importance of their relative contributions.

Mr. Rocca also criticizes the arbitrator’s characterization of his involvement in the rental business as minimal. He argued that the failure of the business in the months following the accident is proof, that without him being available to repair the rental vehicles, at no cost to the business, it was not viable. The problem with this submission is that it does not accord with the evidence. Patrizia testified in chief that they shut down the rental operation because it was taking too much of their (the mother and two children) time and the customers were giving them too many hassles. In answer to the quite improper leading question “and your dad wasn’t available?” put to the witness at the end of the exchange, she merely answered “No.” When the matter was explored on cross-examination the witness agreed with the proposition that the family decided to get out of the rental operation because it was taking too much of the mother, daughter and son’s time. In neither exchange was there any mention that Mr. Rocca’s inability to repair the fleet was a significant factor. In fact, in an earlier part of Patrizia’s evidence, she stated that the rental fleet was routinely turned over, and hence was generally in good repair.

It is apparent that Mr. Rocca contributed to the rental business, but I am satisfied there was ample evidence to support the arbitrator’s finding that the level of involvement was not significant in comparison to the contributions made by the other family members.

(iv) Degree of Risk

To my mind the key point to keep in mind when considering this factor, is that Mr. Rocca did not bear all of the legal risks that could have accompanied a collapse of the company. Title to the family home was in Mrs. Rocca’s name. She mortgaged the property to secure a $200,000 loan that was used to finance the company’s operations.

In conclusion, when each of these factors is examined in light of the evidence presented, I am satisfied that it would be quite inappropriate to attribute all of the company’s profit to Mr. Rocca.

If the profits are to be split, what should Mr. Rocca’s share be?

How much of the profit to attribute to Mr. Rocca is a matter within the arbitrator’s discretion that will not be lightly disturbed. As already noted, the arbitrator took account of the relevant factors and pertinent evidence. Where the dividing lines should be drawn is far from precise, and the arbitrator must be given significant latitude. Attributing half of the company’s profits to a single family member attests to the fact that the arbitrator recognized and accepted the singularly important role played by Mr. Rocca. It also attests to his recognition of the fact that the other family members played important roles that could not be ignored. I think that both conclusions were well founded, if not inescapable.

Mr. Rocca argues that the 50% figure is arbitrary and without foundation. He argues that if he is not awarded all the profits he should be entitled to well over 50 per cent of them.

He notes that on the risk factor he has far more at risk than Mrs. Rocca and submits that the split should approach 75/25. However, I note that much of the risk factor relates to guarantees on company loans, rather than the infusion of new money. Putting up new money, must in my view be weighed more heavily. Mrs. Rocca’s contribution of $200,000 was the single largest contribution. On the share factor he argues he has the only voting share, and hence should get 100% of the profits. I have dealt with this at some length above and need say no more than I reject his hypothesis.

On the contribution factor he argues that the best evidence is the family’s intention to split the wages 60/40 in his favour. If this had been a long standing arrangement, I would have given this division more weight. In fact, it is questionable if the company would have been able to pay the family in accordance with their plan. The entire payroll would have amounted to in excess of $153,000 per year. It is not at all clear on the evidence that the company could have absorbed this cost. In fact the wife and the children were not paid until the rental inventory was paid off.

If the planned share re-allocation is considered the split would have been 40/60. In my view, the arbitrator correctly looked at each member’s involvement, in order to weigh their respective contributions. This cannot be done precisely. The arbitrator was called upon to exercise his discretion as best he could on the available evidence.

Considering all these factors I believe that the arbitrator’s decision to attribute 50% of the profits to Mr. Rocca was well within the appropriate range and fairly balances the interests, risks and contributions of all the family members.

Claim Code

Very little evidence was led on this point. Mr. Rocca’s principal argument was that if all of the company’s profit was attributed to him, it followed that his wife had no independent source of income. This argument has failed, and accordingly there is no basis to interfere with the arbitrator’s decision to apply claim code 1.

III. APPEAL EXPENSES

This question was addressed at the conclusion of the hearing. Both counsel were candid and reasonable in their remarks. Counsel for Mr. Rocca conceded that if the appeal were not successful, this was not the type of case that called for an expense order in his client’s favour. Counsel for the Insurer conceded that his client would only be entitled to expenses if the appeal were frivolous, which he conceded it was not. I concur with both counsels’ comments. Neither party is awarded expenses.

March 18, 2022

Stewart McMahon

Director’s Delegate

Date