Kim (Danny) Thanh Tran v. TD Home and Auto Insurance Company, 2008 ONFSCDRS 6

Financial Services Commission des

Commission services financiers

of Ontario de l’Ontario

Neutral Citation: 2008 ONFSCDRS 6

FSCO A05-001715

BETWEEN:

KIM (DANNY) THANH TRAN

Applicant

and

TD HOME AND AUTO INSURANCE COMPANY

Insurer

Before: Arbitrator Denise Ashby

Heard: October 23 and October 25, 2007

Appearances: Alan L. Rachlin for Mr. Tran

Donald Harvey for TD Home and Auto Insurance Company

Issues:

The Applicant, Kim (Danny) Thanh Tran, was injured in a motor vehicle accident on October 31, 2002. He applied for and received statutory accident benefits from TD Home and Auto Insurance Company (“TD Home”), payable under the Schedule.¹ TD Home denied some benefits and terminated certain others, including income replacement benefits. The parties were unable to resolve their disputes through mediation, and Mr. Tran applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The preliminary issue is:

Shall TD Home deduct 80 per cent of the post-accident payments made by Bi View Building Service Ltd. to Mr. Tran, from his income replacement benefits pursuant to subsection 6(2) of the Schedule?

Result:

TD Home shall not deduct 80 per cent of the post-accident payments made by Bi View Building Service Ltd. to Mr. Tran, from his income replacement benefits pursuant to subsection 6(2) of the Schedule.

EVIDENCE:

On October 31, 2002, Mr. Tran was at the side of the road changing a tire, when he was struck by a motor vehicle. He lost consciousness and has very little memory of the event. Mr. Tran was transported to hospital by ambulance. As a result of the accident, Mr. Tran suffered a complex injury to his right hand which included an amputation of the tip of his thumb and reconstructive procedures. Since the accident Mr. Tran has been diagnosed with post traumatic stress disorder, depression, anxiety phobia, cognitive impairment, chronic pain and sleep disorder.²

Mr. Tran immigrated to Canada from Vietnam in 1979. He attended high school in Canada receiving his diploma. Following graduation, Mr. Tran obtained work as a cleaner. In or about 1989, he used his experience in this industry to start his own residential and industrial cleaning company, Bi View Building Service Ltd. (Bi View). The company was a success under his leadership and his younger brother, Jimmy Tran, joined him as a partner.³

Danny Tran and Jimmy Tran testified at the preliminary issue hearing. Both gave their evidence in a forthright and honest manner. As well, the report of Roberta Saunders, O.T., was filed on consent of the parties. TD Home restricted its adoption of the report to the purposes of this preliminary issue hearing. The report identifies deficits in Danny Tran’s recall and mood. Therefore, where Danny Tran’s evidence conflicts with that of his brother Jimmy, I prefer the evidence of Jimmy Tran. As well, the parties filed the following Agreed Statement of Facts:

Mr. Tran continues to meet the post 104 week test for entitlement to IRBs.
He was self-employed at the time of the accident, as defined in the SABS, and continues to claim losses from self-employment pursuant to section 6(5) of the SABS. Pre-accident he and his brother operated a limited company, Bi View Building Services Ltd, which provided contract cleaning services. Since the accident Mr. Tran’s brother has continued to operate Bi View.
He entered a loan agreement with Bi View, dated November 15, 2002, the terms of which are set out in the agreement attached hereto as Schedule A.
Funds have been paid to Mr. Tran by Bi View since the accident as set out in schedule B attached hereto. In addition, his shareholder account has been charged with interest on the loans as set out in Schedule B.
Mr. Tran continues to own 50% of the shares of Bi View and is President and a Director of the company.
Surveillance indicates that Mr. Tran attends at the offices of Bi View on an irregular basis, has visited suppliers with a company employee and has a key with which he has locked the office at the end of the day.
Mr. Tran’s brother says that when Mr. Tran attends the business his memory and concentration are impaired by pain such that he cannot productively contribute to the business.

I adopt the Agreed Statement of Facts as set out above as facts in this proceeding.

On November 15, 2002, Mr. Tran entered into an agreement with Bi View which provided that the company would advance a monthly payment of $6,000.00 to Mr. Tran at an annual rate of interest of 6%. The payments would be paid “as long as required.”⁴ TD Home submits that the payments were effectively salary paid to Mr. Tran in the guise of a loan.

Both brothers testified that following the accident Danny had responsibility for a cleaning contract Bi View had with a public agency in Kitchener/Waterloo. This agreement was assigned to Danny in an attempt to reintegrate him into the business. The experiment was a failure and the contract was lost. Jimmy Tran testified that following this experience Danny has had no responsibility for their company’s contracts. However, there is no dispute that Danny Tran attends at Bi View’s offices and uses some of the company’s equipment. The dispute relates to the conclusions to be drawn in respect of his participation in the business.

The brothers testified that Danny spends time at the company’s offices where he plays computer games and talks with staff and family. They agreed that Danny Tran has telephone access. However, Jimmy Tran testified that the receptionist will usually direct Danny’s calls to him. On occasion, Danny will accompany a company employee to suppliers. As well, he will sometimes visit customers who have been friends for over 20 years. Jimmy Tran characterized the trips to suppliers and visits with customers as social and not related to the conducting of business. Danny and Jimmy Tran testified that Danny Tran has regular use of a vehicle which is registered in his niece’s name. Jimmy Tran testified that although the vehicle is registered in his niece’s name it is financed by the company.

Jimmy testified that since the accident Danny has not been removed as president, continues to be a director and maintains cheque-signing authority. Jimmy also testified that Danny’s doctor advised that Danny be involved in the business to help deal with his depression. In this regard, Jimmy has supported his brother’s attendance at the company offices.

Both brothers testified that following the accident the loan agreement was entered into between Danny and the company with the expectation that Danny would repay the loan out of the insurance claims he asserted. In the intervening years there has been no change in the expectation of repayment. The payments continue to be made to Danny and the interest is applied to those amounts.

Jimmy Tran’s testimony and the documentary evidence establish that Bi View has continued to grow and prosper since the motor vehicle accident.⁵ The interest provisions have been applied to all funds paid to Danny Tran pursuant to the agreement.⁶

The evidence of both brothers satisfies me that the post-accident attempt to have Danny resume his participation in the business was a failure. As well, I accept Jimmy’s evidence that Danny’s doctor had recommended that he be involved in the business to assist in combating his depression. Therefore, I find that Danny Tran’s visits to the offices of Bi View, trips to suppliers and visits with customers were not for the purpose of conducting business but were social in nature. I find that Jimmy Tran is the directing mind of Bi View. Danny Tran’s involvement with the company is rehabilitative. Although he remains the company’s titular head, he has no viable role in its day to day business or ongoing governance.

I accept and find that both Danny Tran and Jimmy Tran expect that the funds advanced to Danny will be repaid to Bi View with interest. Therefore, I find that the funds paid to Danny Tran by Bi View constitute a loan.

Having made a factual finding that the funds paid to Mr. Tran are loans, I will now consider whether the funds are employment income pursuant to subsection 6(2) by operation of the relevant provisions of the Income Tax Act (Canada) pursuant to section 62 of the Schedule.

ANALYSIS:

TD Home submits that the loans are income pursuant to subsection 6(2) of the Schedule, on the basis that subsection 62(1) of the Schedule requires the application of the Income Tax Act (Canada). Subsection 15(2) of the Income Tax Act (Canada) provides that a loan which is not repaid within the time period provided for in subsection 15(2.6) is considered income in the hands of the shareholder. Therefore, TD Home should be permitted to deduct 80 per cent of Bi View’s loans to Mr. Tran pursuant to subsection 6(2) of the Schedule.

The parties agree that Mr. Tran has not repaid any of the funds advanced or the accrued interest.

Mr. Tran submits that the provisions of 15(2) of the Income Tax Act (Canada) are not relevant to the determination of his post-accident income pursuant to the Schedule. He argues that a purposive interpretation of both the provisions of the Schedule and the Income Tax Act (Canada) leads to the conclusion that the payments from Bi View to Mr. Tran are not employment income.

Subsection 6(2) of the Schedule provides:

The insurer may deduct from the amount of the income replacement benefit payable to an insured person 80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident.

Subsection 62(1) of the Schedule provides:

For the purpose of this Regulation, a person’s income from self-employment shall be determined in the same manner as the person’s profit from the business in which the person was self-employed would be determined under the Income Tax Act (Canada) and the Income Tax Act (Ontario), but without taking into account,

(a) expenses that are eligible for capital cost allowance or an allowance on eligible capital property;

(b) capital gains or losses; or

The relevant provisions of the Income Tax Act (Canada) are as follows.

Subsection 15(2) provides:

Where a person (other than a corporation resident in Canada) or a partnership (other than a partnership each member of which is a corporation resident in Canada) is

(a) a shareholder of a particular corporation,

(b) connected with a shareholder of a particular corporation, or

and the person or partnership has in a taxation year received a loan from or has become indebted to the particular corporation, any other corporation related to the particular corporation or a partnership of which the particular corporation or a corporation related to the particular corporation is a member, the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership.

Subsection 15(2.6) provides:

Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments.

Subsection 20(1) provides:

Notwithstanding paragraphs 18(1)(a), 18(1)(b) and 18(1)(h), in computing a taxpayer’s income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto

Subsection 20(1)(j) provides:

Such part of any loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing the taxpayer’s income for a preceding taxation year (except to the extent that the amount of the loan or indebtedness was deductible from the taxpayer’s income for the purpose of computing the taxpayer’s taxable income for that preceding taxation year), if it is established by subsequent events or otherwise that the repayment was not made as part of a series of loans or other transactions and repayments.

To determine whether TD Home may rely on subsection 6(2) it is necessary to consider the definition of employment set out in subsection 2(5) of the Schedule as follows:

For the purpose of this Regulation, a person is employed if, for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment, or is the holder of an office, and “employment” has a corresponding meaning.

The definition of employment requires that Mr. Tran be “engaged” in his pre-accident employment. However, the parties are agreed and I, having read the report filed and heard the oral evidence, concur that Mr. Tran is entitled to a weekly income replacement benefit pursuant to the disability test set out in subsection 5(2). It provides that “the insurer is not required to pay an income replacement benefit:

(b) for any period longer than 104 weeks of disability, unless, as a result of the accident the insured person is suffering a complete inability to engage in any employment for which he or she is reasonably suited by education, training or experience.

Although “engage” is undefined within the Schedule, its meaning clearly relates to active participation in a job, trade, profession or business. Entitlement to post 104-week income replacement benefits requires that an insured person be essentially unable to function in a commercial setting.

Subsection 6(2) of the Schedule permits an insurer to deduct: “80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident.” However, Mr. Tran by meeting the test in subsection 5(2)(b) is incapable of engaging in employment during the period relevant to these proceedings. Engaging in post-accident employment is a condition precedent to an insurer’s reliance on the provisions of subsection 6(2). Therefore, TD Home cannot deduct, from Mr. Tran’s income replacement benefits, 80 per cent of the loan payments made to him by Bi View.

If I have erred and Mr. Tran’s attendances at the offices of Bi View constitute “engaging” in employment, would the loans constitute “income” in the hands of Mr. Tran such that TD Home could rely on subsection 6(2)?

The parties agree that the application of the foregoing provisions of the Income Tax Act (Canada) to the Schedule has not been previously considered.

TD Home relied on Oliveira and Wellington Insurance Co. as support for the principle that the legislation must be interpreted on its plain meaning. In Oliveira, the Director’s Delegate declined to accept Mr. Oliveira’s argument on the basis that it:

ignores the plain meaning of the words used in section 83. That section clearly provides for the calculation of income in the same manner that income from a business is calculated under the income tax laws. Mr. Oliviera’s proposed methodology does not appear to be consistent with the manner in which income from a business is calculated for income tax purposes.⁷

TD Home also relied on Interpretation Bulletin IT-119R4 dated August 7, 1998 which was published by the Department of National Revenue, which states:

Shareholders are generally taxable on amounts received from a corporation. The purpose of subsection 15(2) is to include in a shareholder’s income amounts received from a corporation in the guise of loans or other indebtedness, with specific exceptions provided in the law.

Mr. Tran submits that as a shareholder benefit is not a consideration in the determination of the profit of the business as required by section 62 of the Schedule, therefore 80 per cent of the benefit cannot be deducted pursuant to subsection 6(2).

As well, subsection 15(2) of the Income Tax Act (Canada) has complementary provisions in subsections 20(1) and 20(1)(j) which permit the shareholder to deduct repayments of the loan from income in subsequent years. Therefore, if the provisions of subsection 15(2) are applicable to calculating Mr. Tran’s income, then he must also have the benefit of the balancing provisions of subsection 20.

Mr. Tran further submits that the inclusion of a shareholder benefit for the purpose of calculating income pursuant to subsections 6(2) and 62(1) of the Schedule would require a specific provision as found in subsections 62(1), 6(4) and 6(6) of the Schedule. Each contains limitations on the application of provisions of the relevant Income Tax Act in the calculation of profit or loss of the pre-accident business pursuant to the Schedule.

Mr. Tran contends that to find that a shareholder benefit equates with post-accident income would subvert the purpose of the Schedule and would be contrary to the principle enunciated by Justice Laskin in Bapoo v. Cooperators, [1997] Carswell Ont 5101(C.A.) that: “The modern approach to statutory interpretation calls on courts to interpret a legislative provision in its total context. The court’s interpretation should comply with the legislative text, promote the legislative purpose and produce a reasonable and just meaning.”

Subsections 15(2) and 20(1)(j) of the Income Tax Act (Canada) set out the manner in which a shareholder benefit, in the form of a loan from a corporation or partnership, shall be dealt with when determining the income of the shareholder upon whom the benefit was conferred. Sub-section 62(1) of the Schedule requires that the income of a self-employed person be determined in the same manner as profit is calculated pursuant to the Income Tax Acts of Canada and Ontario with certain exclusions. I find that a shareholder benefit, in the form of a loan, is not employment income calculated in the same manner as Bi View’s profit as required by subsection 62(1) of the Schedule. Therefore, TD Home shall not deduct 80 per cent of the loans made to Mr. Tran by Bi View from his income replacement benefit as post-accident income pursuant to subsection 6(2) of the Schedule.

Conclusion:

For the foregoing reasons, I find that the loan payments made by Bi View to Mr. Tran are not income from post-accident employment as required by subsection 6(2) of the Schedule. I further find that a shareholder benefit, in the form of a loan from the pre-accident business, is not income calculated pursuant to the requirements of subsection 62(1) of the Schedule.

Therefore, TD Home is precluded from deducting 80 per cent of the post-accident payments made to Mr. Tran by Bi View from Mr. Tran’s income replacement benefit.

EXPENSES:

The parties made no submissions with respect to expenses. I encourage them to resolve the issue, failing which they may request an expense hearing before me in accordance with the Dispute Resolution Practice Code.

January 16, 2008

Denise Ashby

Arbitrator

Date