Financial Services Commission

Commission des services financiers de l’Ontario

Neutral Citation: 2000 ONFSCDRS 73

Appeal P99-00024

OFFICE OF THE DIRECTOR OF ARBITRATIONS

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Appellant

and

JEFFREY EMBURY

Respondent

Before:

David R. Draper, Director's Delegate

Counsel:

Todd J. McCarthy (for State Farm)

Tammy Ring (for Jeffrey Embury)

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 denied and the arbitration order dated April 26, 1999, is confirmed.
State Farm Mutual Automobile Insurance Company will pay Jeffrey Embury's reasonable appeal expenses.

April 17, 2000

David R. Draper Director's Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

This is an appeal by State Farm Mutual Automobile Insurance Company ("State Farm") from an arbitration order dated April 26, 1999. The dispute involves an extremely narrow issue:

In calculating Jeffrey Embury's loss of earning capacity benefits ("LECBs") under Part VI of the SABS-1994,¹ should a disability tax credit for which he qualified after the accident, and as a result of the accident, be taken into account in determining his "pre-accident earning capacity" under s.29(5)?

State Farm challenges the arbitrator's conclusion that the disability tax credit should be considered. Although it seems unlikely that post-accident factors are included in the determination of "pre-accident earning capacity," I am not persuaded that the arbitrator erred in his interpretation of the legislation.

II. BACKGROUND

Mr. Embury, a 15-year-old student, was seriously injured in an automobile accident in October 1994. Because he was unable to continue his education, State Farm paid him weekly education disability benefits ("EDBs") under Part III of the SABS-1994 when he turned sixteen.² While there is no dispute about the amount of the EDBs, a review of its calculation helps put the LECB provisions in context.

Unlike income replacement benefits under Part II of the SABS-1994, EDBs are not based on the insured person's pre-accident income. Instead, they are based on Ontario's average weekly earnings ("AWE") — a Statistics Canada figure.³ According to s.15(5), the AWE is used to calculate the insured person's gross annual income, set at 52 times the AWE for the month of June in the year immediately preceding the year in which the benefit is first payable. Assuming Mr. Embury turned 16 in 1995, this means June 1994.⁴

The insured person's gross annual income is then converted to a net weekly amount according to either section 81 or 82 of the SABS-1994. These sections are general provisions used to convert gross annual income to net weekly income for various types of benefits, including LECBs, income replacement benefits, deemed post-accident income, temporary supplements to LECBs, and death benefits.⁵ The difference between the two sections is that section 81 involves a calculation based on a formula, while s.82 gives insurers the option of electing to use tables issued by the Commission. State Farm had not elected to use the tables and, therefore, did the calculation under s.81.

The net weekly income is then used to calculate the benefit. For EDBs, the amount is 50 per cent of the insured person's net weekly income.⁶ Like other weekly benefits, this amount does not change, although it is subject to adjustments allowed under the SABS-1994 for such things as post-accident income, collateral benefits and indexation, as well as specific provisions dealing with insured persons over the age of 65.

After 104 weeks of disability, an insured person, like Mr. Embury, who continues to qualify for EDBs becomes eligible for LECBs.⁷ LECBs are a permanent weekly benefit intended to recognize the long-term impact of the accident on the person's earning capacity.⁸ According to s.28(2) of the SABS-1994, LECBs for students are based on the difference between their pre-accident earning capacity ("PEC") and 90% of their residual earning capacity ("REC"). The parties agreed that Mr. Embury's REC was zero. The issue was how to calculate his PEC.

Section 29 of the SABS-1994 deals with the determination of PEC, establishing different approaches depending on the type of weekly benefit the insured person was receiving before qualifying for LECBs. As with EDBs, the calculation of PEC for students is based on Ontario's AWE — the Statistics Canada figure. According to s.29(5), PEC is determined by the formula, D x E, where:

D = the factor in the Table to this subsection set out opposite the range that includes the age the person has attained at the time the weekly loss of earning capacity benefit is to be paid,

E = the net weekly income determined in accordance with section 81 or 82 using a gross annual income from employment equal to 52 multiplied by the Average Weekly Earnings for Ontario, Industrial Aggregate, for the month of June in the year immediately preceding the year in which the determination of pre-accident earning capacity is first made under this section, as published by Statistics Canada under the authority of the Statistics Act (Canada).

TABLE

Age Range (Years)	Factor
16 or over but under 18	0.55
18 or over but under 20	0.60
20 or over but under 22	0.65
22 or over but under 24	0.70
24 or over but under 26	0.75
26 or over but under 28	0.80
28 or over but under 30	0.85
30 or over	0.90

This calculation differs from the calculation of EDBs in two respects. First, the AWE is taken from a different month — June of the year immediately preceding the year in which LECBs are payable. For Mr. Embury, this is June 1995, whereas his EDBs were based on June 1994.⁹Second, EDBs are 50 per cent of net weekly income, while PEC is based on a factor from 55 to 90 per cent depending on the insured person's age at the time the LECB is to be paid. Presumably, this represents the generally lower income earned by young people, with the factor not reaching 90% (the factor used for insured persons who initially received income replacement benefits¹⁰) until age 30.

Once the insured person's PEC is determined, this amount is reduced by his or her REC. In determining REC, students are covered by the same rules as those in other benefit categories. It is based on the gross annual income that the person could earn from the type of employment that best satisfies the criteria in s.30(2). The gross annual income is then converted to net weekly income using the calculations in s.81 or the tables in s.82 — the same provisions discussed above. In Mr. Embury's case, however, the parties agreed that his REC was zero. As a result, his LECBs are equal to his PEC.

The dispute in this case involves the calculation of Mr. Embury's net weekly income — "E" above. More specifically, the issue is the conversion from gross annual income, determined using the AWE, to net weekly income.

At some point after his accident, Mr. Embury qualified for a disability tax credit under the Income Tax Act¹¹ He contends that this tax credit is included in the calculation of his net weekly income under s.81(l), with the effect of increasing his LECBs.¹² Subsection 81 provides 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

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.

Mr. Embury submits that this calculation includes the income tax payable on the gross annual income which, according to s.85, specifically includes the disability tax credit among the limited deductions and tax credits that can be considered:

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:

Alimony and maintenance payments deduction.
Basic personal tax credit.
Married person's tax credit or equivalent to married tax credit.
Age tax credit.
Disability tax credit.
Unemployment insurance premium tax credit.
Canada Pension Plan tax credit.
Quebec Pension Plan tax credit.

According to counsel, the difference between the parties' positions is roughly $20 per week. If the disability tax credit is not considered, Mr. Embury's LECBs are $271.94. If they are, his LECBs are $294.23.

The arbitrator accepted Mr. Embury's position. Although he agreed that the disability tax credit could not be fairly considered in making a realistic assessment of Mr. Embury's pre-accident earning capacity, he held that the PEC for students is a notional amount based on the AWE. The tax calculation is used only to convert this amount from gross to net. Because the legislation specifically includes the disability tax credit, without limitation, as part of the income tax calculation, the arbitrator was not prepared to read in any limitation.

State Farm argues that it is not asking that words be read into the SABS-1994, but only that the calculation of PEC be read in context. In its submission, LECBs involve a comparison between the insured person's earning capacity at the time of the accident and his or her residual earning capacity at particular points after the accident. Therefore, it argues that PEC must measure the insured person's situation at the time of the accident, not after. A disability tax credit that only arises after the accident, it contends, does not affect the insured person's pre-accident earning capacity and, therefore, cannot be included. On the contrary, State Farm argues that it would be antithetical to the legislative scheme to include it.

III. ANALYSIS

This appeal raises an interesting question of timing. Is the insured person's tax liability evaluated on his or her situation at the time of the accident, at the time the LECBs become payable, or at some other point? Unfortunately, the legislation does not provide a clear answer.

Despite the term, "pre-accident earning capacity," the average weekly income for students is not based on a measure taken at the time of the accident, or before. It is based on the AWE for the month of June in the year before LECBs are payable. This will be at least six months after the accident and, potentially, much later.¹³ According to the s.81 of the SABS-1994, the income tax to be deducted is the amount payable "by the person . . . on the gross annual income from employment." But at what point is this evaluated? Which tax year is used — the year preceding the accident, the year of the accident, or the year LECBs become payable? What if following the accident, but before LECBs are payable, the insured person is married, turns 65, starts making support payments or, as here, qualifies for a disability tax credit?

These questions are not unique to students. Timing issues also arise in relation to other categories of benefits. For example, an insured person who was employed at the time of the accident can have his or her net weekly income based on the 156 weeks before the accident.¹⁴ Which tax year is used, and how are changes in the insured person's tax liability addressed? In other words, how closely does the tax calculation in s.81 track the income under consideration?

Looking at the SABS-1994 as a whole, it is my view that the conversion from gross to net was meant to be a simple calculation, not requiring a precise analysis of the insured person's tax liability. The focus is on the determination of the insured person's gross annual income, which is calculated differently depending on the person's situation and the type of benefit involved. Once this amount is determined, for whatever purpose, it is then converted to net weekly income using the formula in s.81 or, if the insurer has made the appropriate election, the s.82 tables published by the Commission.

Leaving aside situations of delay, I conclude that the insured person's tax liability is determined at the time the calculation is done. Stated differently, once the insured person's gross annual income is determined according to the relevant section of the SABS-1994, the income tax is the amount payable on that amount by that person at that time. This means that not only are current tax rates used, but also that the insured person's current tax status governs. This is the simplest approach, promoting the prompt payment of benefits.

This approach also makes sense. As a general statement, LECBs are meant to measure changes in earning capacity, not tax liability. This suggests that the same rules should apply to both parts of the equation. Consider the insured person who is married after the accident, but before LECBs come into play. If the resulting tax credit is taken into account in calculating the REC, but not the PEC, the impact of the accident will be diluted to some extent.

I acknowledge that this analysis may be less persuasive for the disability tax credit. There is a reasonable basis for asking how a tax credit resulting from the accident can affect the insured person's pre-accident earning capacity. This argument would be far stronger, however, if the calculation of PEC was based on the insured person's actual pre-accident situation. As the arbitrator points out, the measure of PEC for students is a notional amount established in the legislation — an amount not even based on a pre-accident period.

State Farm argues that the use of a post-accident AWE does not detract from the fact that PEC is a measure of the insured person's pre-accident earning capacity. Relying on my decision in Lehman and GAN Canada Insurance Company, (FSCO P97-00064, August 10, 1998), it argues that later information can be relevant to the determination of pre-accident income. The difficulty is that it is hard to identify precisely what the PEC for students represents. Going back to the arbitrator's comments, it is a notional amount, making it appropriate to simply follow the calculations in sections 81 and 85 at the time they are to be done.

This formulaic, but simple, approach is also reflected in the tables used under s.82. The tables were published by the Commission in November 1993 based on 1994 tax rates, and have not been updated. This means that any insurer that elected to use the tables will convert the gross annual income of its insureds based on 1994 tax rates, regardless of the year under consideration. For example, the REC of someone injured in October 1996 would not become an issue until October 1998. Although the REC would be based on 1998 wages, the conversion from gross annual income to net weekly income would be based on the 1994 tax rates used in the tables.

Finally, State Farm submits that Mr. Embury's interpretation is inconsistent with the treatment of those who initially qualified for income replacement benefits as employed, not self-employed, at the time of the accident. According to s.29(1) of the SABS-1994, their PEC is deemed to be the net weekly income used to calculate their income replacement benefits. This means they are stuck with this calculation even if their tax liability has changed by the time LECBs are payable, due either to changes in their personal situation or in the tax rates.

Again, this submission has some merit. In the Lehman decision, cited above, I compared the provisions dealing with the different types of benefits in interpreting s.29. I did not conclude, however, that there were no differences. In my view, the inclusion of the disability tax credit in s.85, with no restrictions, is hard to ignore. It at least creates an ambiguity that, given the broad and liberal approach taken with this type of legislation, should be resolved in favour of the insured person.

IV. APPEAL EXPENSES

This appeal raised a legitimate issue, with both sides participating effectively and appropriately. However, given the outcome, Mr. Embury should receive his reasonable appeal expenses, as allowed under the regulations.