Neutral Citation: 2004 ONFSCDRS 95

FSCO A00-000163

FINANCIAL SERVICES COMMISSION OF ONTARIO

BETWEEN:

ROBERT LACROIX

Applicant

and

JEVCO INSURANCE COMPANY

Insurer

REASONS FOR DECISION

Before: Eban Bayefsky

Heard: October 30 and 31, 2003, in Whitby, Ontario.

Appearances:

David J. Gillespie for Mr. Lacroix

Jamie Pollack for Jevco Insurance Company

Issues:

The Applicant, Robert Lacroix, was injured in a motor vehicle accident on June 10, 1994. He applied for and received statutory accident benefits from Jevco Insurance Company ("Jevco"), payable under the Schedule.¹ The parties disagreed as to the quantum of Mr. Lacroix's income replacement benefits ("IRBs") and loss of earning capacity benefits ("LECBs"). The parties were unable to resolve their disputes through mediation, and Mr. Lacroix applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

A hearing took place from June to December 2001 on the following issues:

1. Which of the following amounts are to be used in the calculation of Mr. Lacroix's IRBs and LECBs, pursuant to sections 10 and 29 of the Schedule?

i) Is Mr. Lacroix's base pay for the 4 weeks preceding the accident $4,459.68?

ii) Is the value of Mr. Lacroix's 4.5 weeks of annual vacation to be included in the calculation of his gross annual income ("GAI"), pursuant to sections 9 and 81 of the Schedule?

iii) Are Mr. Lacroix's employee benefits (Canada Pension Plan premiums, Employment Insurance premiums, employer health tax and workers' compensation premiums) to be included in the calculation of his GAI, pursuant to section 81 of the Schedule?

iv) Regarding the employer's pension contribution, is the "normal employer cost" of 2.97% (of an employee's annual wage) or the "required funding contribution" of 11.4% (of the annual wage) to be included in the calculation of Mr. Lacroix's GAI, pursuant to section 81 of the Schedule?

v) Is Jevco entitled to use the income tables under section 82 of the Schedule to calculate Mr. Lacroix's net weekly income from employment?

vi) Is Jevco required to index Mr. Lacroix's IRBs as of January 1, 1996, pursuant to section 79 of the Schedule

vii) Are Mr. Lacroix's disability pension benefits (from his employer, General Motors) a deductible collateral benefit, pursuant to section 75 of the Scheduee?

2. What is Mr. Lacroix's residual earning capacity for the purpose of calculating his LECBs, pursuant to section 30 of the Schedule?

3. Is Jevco liable to pay Mr. Lacroix a special award, pursuant to section 282(10) of the Insurance Act?

4. Is Mr. Lacroix entitled to interest on any amounts found to be owing, pursuant to section 68 of the Schedule?

On June 27, 2002, I ruled on these issues as follows:

1. The following amounts are to be used in the calculation of Mr. Lacroix's IRBs and LECBs:

i) Mr. Lacroix's base pay for the 4 weeks preceding the accident is $4,459,68.

ii) The value of Mr. Lacroix's 4.5 weeks of annual vacation is not to be included in the calculation of his gross annual income.

iii) Mr. Lacroix's employee benefits (CPP, EI, EHT and WSIB) are not to be included in the calculation of his GAI.

iv) The "normal employer cost" of 2.97% for the employer's pension contribution is to be included in the calculation of Mr. Lacroix's GAI.

v) Jevco is not entitled to use the income tables under section 82 of the Schedule to calculate Mr. Lacroix's net weekly income from employment.

vi) Jevco is required to index Mr. Lacroix's IRBs as of January 1, 1996.

vii) Mr. Lacroix's disability pension benefits are not a deductible collateral benefit.

2. Mr. Lacroix's LECBs shall be calculated on the basis that his residual earning capacity is zero.

3. Jevco is not liable to pay Mr. Lacroix a special award.

4. Mr. Lacroix is entitled to interest on the amounts now owing.

The parties were unable to agree on the precise amounts owing to Mr. Lacroix pursuant to these findings and returned before me in October 2003 on the following issues:

1. Is Mr. Lacroix entitled to interest on his LECBs as of June 10, 1996 (the 104-week mark) or as of June 27, 2002 (the date of my decision), pursuant to section 68 of the Schedule?

2. In determining the amount of long-term disability ("LTD") benefits deductible by Jevco under section 75 of the Schedule, is the tax Mr. Lacroix pays on his LTD benefits to be calculated on the basis of his total post-accident income or only on his LTD benefits?

3. Are the pension contributions General Motors makes on Mr. Lacroix's behalf taxable for the purposes of calculating Mr. Lacroix's net weekly income from employment under section 81 of the Schedule?

4. Are Mr. Lacroix's post-accident employee benefits a deductible collateral benefit, pursuant to section 75 of the Schedule?

Result:

1. Jevco shall pay Mr. Lacroix interest on his LECBs as of June 10, 1996.

2. In determining the amount of LTD benefits deductible by Jevco, the tax Mr. Lacroix pays on his LTD benefits shall be calculated on the basis of his total post-accident income.

3. The pension contributions General Motors makes on Mr. Lacroix's behalf are not taxable for the purposes of calculating Mr. Lacroix's net weekly income from employment.

4. Mr. Lacroix's post-accident employee benefits are not a deductible collateral benefit.

EVIDENCE AND ANALYSIS:

Interest

Pursuant to section 68 of the Schedule, the insurer shall pay interest on an overdue amount for "each day the amount is overdue from the date the amount became overdue at the rate of 2 per cent per month compounded monthly." Mr. Lacroix maintained that Jevco is required to pay him interest from the time he was owed LECBs, namely, June 10, 1996, the two-year mark. Mr. Lacroix cited the following passages from the Ontario Court of Appeal decision of Attavar v. Allstate Insurance Company of Canada (2003), 2003 CanLII 7430 (ON CA), 63 O.R. (3d) 199 in support of this argument:

Under s. 62(2), an insurer is required to mail or deliver an LECB at least once every second week while the insured person remains entitled to the benefit. Under s. 62(4), an amount payable under Part VI (Loss of Earning Capacity Benefits) of the Schedule is overdue if the insurer fails to comply with s. 62(2). Thus, under these provisions, Ms. Attavar was entitled to the amount of the LECB found owing by the trial judge by the second week after her weekly education benefit ended. Any amounts not paid by the insurer from that date were overdue and thus attracted interest under s. 68.

Although the amount of interest provided for in s. 68 is above the bank rate, I, like several arbitrators, regard s. 68 as compensatory, not punitive. The provision is designed to compensate insureds for the time value of money and to encourage insurers to pay accident benefits promptly. Without a provision like s. 68, insurers would have an incentive to delay paying benefits properly owing, thus forcing insureds to litigate their claims.

Jevco maintained that, in a manner similar to my finding on Mr. Lacroix's claim for a special award in the original hearing (namely, that Jevco had not unreasonably delayed or withheld benefits), it should not be required to pay interest from the two-year mark, since it calculated the quantum of Mr. Lacroix's LECBs on the basis of the information available to it at the relevant times.

I agree with Mr. Lacroix that there is a significant difference between a special award and the payment of interest. As noted in Attavar, the provisions governing interest are compensatory, not punitive. Special awards, on the other hand, are specifically designed to address an insurer's improper conduct. In my original decision, I found that there was insufficient evidence to conclude that Jevco had unreasonably withheld or delayed payments. In my view, this is not determinative of the issue of whether interest ought to be paid from the time LECBs commenced.

In my view, the Court of Appeal decision in Attavar is directly applicable to the case at hand. There, the insurer attempted to argue that it should not be required to pay interest from the first stages of the LECB claim since it had "paid Ms. Attavar the benefit recommended by the REC/DAC assessment." However, the Court stated that "[h]ad the drafters of the Schedule intended that insurers avoid s. 68 by paying the amount recommended by the REC/DAC assessment, they could have said so." The recent arbitration appeal cases of Glinka, Langdon, Khaledi and Amoa-Williams² (dealing, in part, with the payment of interest where an arbitrator has rejected the conclusions of a medical and rehabilitation DAC) found that the specific DAC process under section 45 for claiming medical and rehabilitation benefits displaces an "insurer's payment obligations and the corresponding statements about when a payment is overdue...." In those decisions, however, Director's Delegate McMahon stated that the sequence of events under section 45 "does what the Court of Appeal [in Attavar] said was absent in the LECB context." Therefore, based on Attavar, I find that Jevco should pay interest as of the two-year mark.

To the extent that error or fault on the part of an insurer is a consideration in the awarding of interest, in the circumstances of this case, I find that Jevco ought to pay interest from the two-year mark on the basis that it erred in its assessment of Mr. Lacroix's substantive and quantitative LECB entitlement. Jevco made LECB payments based on its own assessment of Mr. Lacroix's entitlement. As summarized at the outset of the original decision, Jevco originally set Mr. Lacroix's residual earning capacity ("REC") at a gross annual income ("GAI") of $37,918.40, based on his alleged ability to perform a job as a pressure sealer-tester (aircraft manufacturer) with an hourly rate of $18.23. Jevco made an LECB offer of $296.62 per week, less deductions under section 75 of the Schedule. A REC DAC was arranged given that Mr. Lacroix was deemed to have rejected both the PEC and REC offers. The REC DAC took place in the fall of 1997 and determined that Mr. Lacroix's REC was $24,534, based on his ability to work full-time as a Service Advisor. Based on the evidence at the hearing, I concluded that the REC DAC had erred in its assessment of Mr. Lacroix's REC. I found that Mr. Lacroix's LECBs ought to be calculated on the basis that his residual earning capacity was zero. Jevco subsequently determined Mr. Lacroix's LECBs to be $592.27 per week.

While I was not prepared to impose a special award on the basis that Jevco ought to have acted more expeditiously in determining and paying Mr. Lacroix's benefits, and while Jevco was largely successful on its interpretation of the inclusion of Mr. Lacroix's employment benefits in the calculation of his pre-accident earning capacity, I nevertheless found that Jevco had erred in its assessment of Mr. Lacroix's LECB entitlement, both in terms of his physical abilities and in terms of the calculation of his benefits. Specifically, I found that Mr. Lacroix's REC was zero and that his disability pension benefits ought not to be deducted from his IRBs or LECBs. I also found that Jevco was not entitled to use the income tables under section 82 of the Schedule to calculate Mr. Lacroix's net weekly income from employment. While Jevco did not improperly withhold or delay the payment of benefits, it did err in its assessment of Mr. Lacroix's substantive and quantitative entitlement. I, therefore, find that Jevco ought to pay interest on the benefits owing as of the time they became due, namely, the two-year mark.

Even if Jevco's assessment of Mr. Lacroix's LECB entitlement was limited to some extent by the information available to it at the relevant times (including the REC DAC's conclusions on Mr. Lacroix's ability to return to work), I find that this was only one aspect of Jevco's LECB determination. Jevco made certain determinations on its own, namely, that it had the right to employ the income tables under section 82 of the Schedule and could deduct Mr. Lacroix's disability pension benefits. I found that Jevco erred on these points. Jevco also sought evidence in addition to the REC DAC to support its position on Mr. Lacroix's LECB entitlement. Specifically, Jevco referred the matter to Mr. G. Pett, a vocational rehabilitation specialist, to review the medical and rehabilitation materials in the file to determine the appropriateness of the DAC's recommendation of the job of Service Advisor and whether any other positions would be more suitable for Mr. Lacroix. I rejected Mr. Pett's evidence in favour of the opinions of Mr. J. Kumove, Mr. Lacroix's "own" vocational rehabilitation specialist. Therefore, Jevco's LECB offer to Mr. Lacroix did not rest simply on certain limited financial information or the DAC's conclusions. I subsequently found Jevco to have erred in relying on these other points. In these circumstances, I find that Mr. Lacroix's loss of earning capacity benefits became overdue as of the two-year mark and that Jevco ought to pay interest from that time.

Taxation of Long-term Disability Benefits

Mr. Lacroix received post-accident income consisting of LTD benefits and taxable disability pension benefits. As noted in the initial decision in this matter, the parties agreed that Mr. Lacroix's LTD benefits were a deductible collateral benefit, pursuant to section 75 of the Schedule. However, the parties disagreed as to whether Mr. Lacroix's disability pension benefits were deductible. I found that they were not.

The parties now disagree as to whether, in determining the amount of LTD benefits to be deducted by Jevco, the tax Mr. Lacroix pays on his LTD benefits ought to be calculated on the basis of his total post-accident income (namely, on both his LTD benefits and his pension benefits) or simply on his LTD benefits. Mr. Lacroix advocates the first approach, which would increase the tax payable on his LTD benefits, and lower the amount of LTD benefits Jevco could deduct. Jevco supports the latter interpretation, which would lower the tax payable by Mr. Lacroix on his LTD benefits, but increase the amount of LTD benefits it could deduct.

In support of his interpretation, Mr. Lacroix cited the appeal decision in Stone and Zurich Insurance Company (FSCO P97-00014, January 12, 1998), a case dealing with the calculation of loss of earning capacity benefits, in which then Director's Delegate Draper stated:

The structure of the SABS - 1994 suggests that the deduction of collateral benefits takes place after the calculation of the LECBs. Therefore, even if Mr. Stone realized his residual earning capacity by earning $4,294 per year, I am not persuaded that his collateral benefits should be included in calculating his net residual earning capacity. The stronger argument is that any additional income tax payable due to having two sources of income should be taken into account under section 75, dealing with the deduction for collateral benefits. However, this issue does not arise here and I make no ruling on it.

Director's Delegate Draper cited the Ontario Court of Appeal's decision in Bapoo v. Co-Operators General Insurance Company (1997), 1997 CanLII 6320 (ON CA), 36 O.R. (3d) 616, as potentially helpful to the analysis. In that case, the Court addressed the issue of whether an insurer was entitled to deduct from the weekly income benefits owing to an insured the gross or net weekly disability benefits payable by the insured's group disability insurer. In determining that Co-Operators could deduct only the net payments, Kitely J. for the Court held that "'received' means to take into one's possession." She concluded: "Fairness dictates that the net disability income should be deducted. That is all Bapoo receives."

At the hearing, Mr. Lacroix's accountant, Mr. I. Wollach, testified that, in his opinion, since Mr. Lacroix has to pay tax on both sources of income (LTD and pension), Jevco should only deduct that which Mr. Lacroix receives. Mr. Wollach said that, in determining the proper deductions under section 75, Mr. Lacroix's total tax position ought to be considered. Mr. Lacroix submitted that any deductions should be based on his actual tax returns.

Jevco's accountant, Mr. D. Edwards, testified that, while there is definitely some merit in Mr. Lacroix's position, in order to determine the proper tax treatment of his LTD benefits, one should only consider his receipt of LTD benefits, not every source of income on his tax returns. Mr. Edwards stated that, based on the decision in Stone, the focus should only be on the amounts used in Mr. Lacroix's IRB calculation. Jevco submitted that Bapoo was not relevant to the case at hand since it only dealt with the issue of deductions, not the tax treatment of benefits.

In my view, neither Stone nor Bapoo speaks directly to the question of the proper tax treatment of Mr. Lacroix's LTD benefits. However, to the extent that either is instructive, I find the guiding principle to be that any deduction of collateral benefits ought to take into account the monies actually received by an insured. In this context, fairness would dictate that, in determining the amount of LTD benefits to be deducted by Jevco, the tax Mr. Lacroix pays on his LTD benefits ought to be calculated on the basis of his total post-accident income, not simply on his LTD benefits. In my view, this is the most sensible approach since it more accurately reflects Mr. Lacroix's actual income and tax position. This approach is also consistent with the wording of section 75(1)1 of the Schedule which provides that an insurer may deduct "net payments for loss of income that have been received by the insured person...." (emphasis added).

Taxation of Employer Pension Contributions

Pursuant to section 81(1) of the Schedule, the calculation of an insured's net weekly income from employment is based, in part, on the income tax payable on the insured's gross annual income from employment. Mr. Lacroix submitted that, while the pension contributions made by his employer (General Motors) formed part of his gross annual income, they are not taxable. Mr. Wollach maintained that section 81(1) refers to tax that is payable in the year the contribution was made, not to the tax payable on the pension the insured would receive in the future. In support of this approach, Mr. Wollach cited a CCH income tax publication entitled, "Preparing Your Income Tax Returns," which states, in part, that the "benefits an employee derives from his employer's contributions to or under a registered pension fund or plan...are not taxable benefits." Mr. Lacroix submitted that pension contributions should not be considered taxable retroactively since the manner and extent to which an insured receives pension benefits may vary depending on his or her circumstances at the time of retirement.

Mr. Edwards noted that a Revenue Canada Bulletin No. IT-470R (Consolidated) on the treatment of employees fringe benefits for income tax purposes does not mention employer pension contributions. He, therefore, submitted that Mr. Wollach was not necessarily right to suggest that these contributions are non-taxable. Mr. Edwards agreed that, based on the CCH publication, an employee would not have to report the employer's pension contributions in his or her annual tax returns, but stated that the employee would have to include them in his or her income when the pension was received. He noted a document from General Motors on retirement benefits which stated that an employee's pension benefits are subject to income tax and that the "pension benefit you receive is to be reported on your tax return in the 'Pension Income' area of the 'Calculation of Total Income' section." Mr. Edwards maintained that, even though tax is only payable when the pension is received, since the value of the employer's pension contributions is included in an insured's gross annual income for the purpose of calculating statutory accident benefits, the pension contributions should be treated as though they are taxable now. Jevco, therefore, submitted that it would be inconsistent to exclude the future tax payable on pension benefits while including the current value of an employer's pension contributions.

I find that the pension contributions General Motors makes on Mr. Lacroix's behalf are not taxable for the purposes of calculating Mr. Lacroix's net weekly income from employment under the Schedule. As reflected in my initial decision (for example, the determination of the amount of the employer's pension contribution to be included in the calculation of Mr. Lacroix's gross annual income), I find that the focus under section 81(1) ought to be the insured's income at the time of the accident. In this regard, I note that section 81(1) indicates that a person's net weekly income from employment is calculated, in part, by deducting from the person's gross annual income from employment the income tax "payable" by them on that income. Neither document cited by Mr. Edwards suggests a different approach: the Revenue Canada Bulletin is silent on the tax treatment of employer pension contributions, and the General Motors document simply confirms that pension benefits are taxable when they are, in fact, received. I find helpful the CCH Canadian Limited tax publication cited by Mr. Wollach, which suggests that the benefit Mr. Lacroix derived from his employer's pension contributions would not be taxable in the year of the accident.

Since, as pointed out by Mr. Lacroix, an insured's future pension benefits may vary depending on his or her circumstances, and, therefore, since the tax payable may also vary, I do not accept Jevco's general proposition that the value of an employer's pension contributions cannot be included in an insured's gross annual income without also including the tax the insured might pay when the pension benefits are, in fact, received. As noted in my initial decision, the value to Mr. Lacroix of General Motors pension contributions could be quantified. The proper tax treatment of Mr. Lacroix's pension benefits can only be determined in the year in which they are received. In my view, therefore, whatever tax Mr. Lacroix might pay (if any) on his pension benefits cannot and should not be included in the calculation of his gross annual income for the purposes of his statutory accident benefits.

Deductibility of post-accident employee benefits

Pursuant to section 75(1)1 of the Schedule, Jevco is entitled to deduct from Mr. Lacroix's loss of earning capacity benefits "net payments for loss of income that have been received by the insured person as a result of the accident under the laws of any jurisdiction or under any income continuation plan."

Mr. Lacroix submitted that the payments he received after the accident in respect of extended health care and other benefits (i.e. legal plan, bursary scholarship programme) are earned income, as opposed to collateral benefits. He maintained that they are not payments for loss of income received as a result of the accident, and are, therefore, not deductible under section 75(1)1. Mr. Lacroix emphasized that these benefits were received before the accident and continued after the accident under his collective agreement on the basis that he was still considered an employee of General Motors.

Jevco submitted that, under the collective agreement, since Mr. Lacroix received LTD benefits, his health care coverages continued, and that these should, therefore, be treated as deductible collateral benefits. While Mr. Edwards acknowledged that Mr. Lacroix's LTD benefits came from Clarica Life Insurance Company, and his health care benefits came from General Motors, Mr. Edwards maintained that Mr. Lacroix's receipt of health care benefits was likely related to his accident and, therefore, deductible pursuant to section 75(1)1 of the Schedule. Jevco submitted that, given my initial determination that Mr. Lacroix's residual earning capacity was zero, he cannot now argue that his receipt of health care and other benefits constitutes non-deductible employment income; otherwise, Mr. Lacroix would receive double recovery.

I find that the noted employee benefits are not payments for loss of income as a result of the accident. Mr. Lacroix received these benefits both before and after the accident. While some of the health care benefits Mr. Lacroix has received since the accident may be related to the accident, I see no basis for the conclusion that they are for the loss of income or are payable, as a general matter, as a result of the accident. I accept Mr. Lacroix's undisputed position that these benefits are payable under the collective agreement by virtue of his previous and continuing status as an employee of General Motors. While Mr. Lacroix's continued health care coverage may, in some measure, be related to his receipt of LTD benefits, I find that the primary reason for his receipt of these benefits, as well as the legal plan and bursary programme, is his pre- and post-accident status as an employee of General Motors. Finally, section 75(1)1 of the Schedule only permits the deduction of certain benefits, regardless of the extent of a person's residual earning capacity. Given the clear language of the provision, the issue is the nature of the benefits received, not the degree to which the insured can earn income following an accident. I, therefore, do not find it relevant that this may result in a person receiving full loss of earning capacity benefits, as well as the value of certain employment benefits. I conclude that Mr. Lacroix's post-accident employee benefits are not deductible from his loss of earning capacity benefits.

EXPENSES:

The parties resolved the issue of expenses at the hearing.

June 16, 2004

Eban Bayefsky Arbitrator

Date

Neutral Citation: 2004 ONFSCDRS 95

FSCO A00-000163

FINANCIAL SERVICES COMMISSION OF ONTARIO

BETWEEN:

ROBERT LACROIX

Applicant

and

JEVCO 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:

1. Jevco shall pay Mr. Lacroix interest on his loss of earning capacity benefits as of June 10, 1996.

2. In determining the amount of long-term disability benefits deductible by Jevco, the tax Mr. Lacroix pays on his LTD benefits shall be calculated on the basis of his total post-accident income.

3. The pension contributions General Motors makes on Mr. Lacroix's behalf are not taxable for the purposes of calculating Mr. Lacroix's net weekly income from employment.

4. Mr. Lacroix's post-accident employee benefits are not a deductible collateral benefit.

June 16, 2004

Eban Bayefsky Arbitrator

Date

Footnotes

1. 1The 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. O.R. 776/93 was extensively modified by O.R. 781/94; accordingly, where necessary, "1994 Schedule "refers to the original O.R. 776/93, and "1995 Schedule "refers to O.R. 776/93 as amended.
2. 2Glinka and Dufferin Mutual Insurance Company (FSCO P01-00002, July 17, 2003); Langdon and Pafco Insurance Company Limited (P02-00017, July 17, 2003); Khaledi and Allstate Insurance Company of Canada (FSCO P01-00046, July 17, 2003); and Amoa-Williams and Allstate Insurance Company of Canada (FSCO P01-00052, July 17, 2003).