Financial Services Commission of Ontario Commission des services financiers de l’Ontario

Neutral Citation: 2009 ONFSCDRS 52

FSCO A08-000880

BETWEEN:

JOSE ESCOBAR URIBE Applicant

and

WAWANESA MUTUAL INSURANCE COMPANY Insurer

Before: William J. Renahan

Heard: March 25, 2009, at the offices of the Financial Services Commission of Ontario in Toronto.

Appearances: Nicolas Canizares for Mr. Uribe Ian D. Kirby for Wawanesa Mutual Insurance Company

Issues:

The Applicant, Jose Escobar Uribe, was injured in a motor vehicle accident on December 11, 2006. He applied for and received statutory accident benefits from Wawanesa Mutual Insurance Company, payable under the Schedule.¹ Wawanesa terminated weekly income replacement benefits on May 2, 2007. The parties were unable to resolve their disputes through mediation, and Mr. Uribe 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:

Is income earned by Mr. Uribe from June 2006 to October 2006 included in the calculation of any income replacement benefit having regard to section 46.1 of the Schedule?

Result:

Income earned by Mr. Uribe from June 2006 to October 2006 is not included in the calculation of any income replacement benefit.

EVIDENCE AND ANALYSIS:

The accident occurred on December 11, 2006. The issue is whether Mr. Uribe’s income replacement benefit is calculated on the basis of $9,654 total income which he reported on his original 2006 income tax return or on $29,887 total income which he reported in 2008 in an amended income tax return.

The parties agreed that at the time of the accident on December 11, 2006 Mr. Uribe was receiving employment insurance benefits. In his original 2006 income tax return he reported the employment insurance benefits and $1,971 in earnings from a company name Aquarius Mechanical. He did not report any other income. After the accident, in about March 2008, Mr. Uribe filed an amended return for the 2006 taxation year in which he included about $20,000 in income from a numbered company.

Mr. Uribe testified and added the following details. He testified that the numbered company was in the business of installing fire sprinkler systems and that he was a pipe fitter. He was laid off and did not receive a T-4 slip for earnings at the numbered company for 2006 or a Record of Earnings for claiming Employment Insurance benefits. Despite several calls to and visits with his former employer he could not obtain these documents. He testified that a person at the Employment Insurance office obtained a copy of his Record of Employment from the employer. The document is date stamped received by the Employment Insurance office on November 14, 2006 and shows income of about $20,000 from June 5, 2006 to October 27, 2006.

As was his habit at income tax filing time, Mr. Uribe saw an employee at a tax return preparation business called “Econotax”, to prepare his 2006 income tax return. Although Mr. Uribe knew how much he earned at the numbered company, the employee told Mr. Uribe that he could not include the income from the numbered company in his income tax return without a T-4 slip from that company. Mr. Uribe received a tax refund of $773 for the 2006 taxation year.

Two weeks after the accident, the proprietor of the numbered company completed an Employer’s Confirmation of Income which showed Mr. Uribe’s income of about $20,000 in the 52 weeks before the accident.

Wawanesa prepared an “Agreement to Repay Benefits,” which Mr. Uribe signed. The document noted that Wawanesa was unable to contact the employer for verification of documents and as a result asked Mr. Uribe to agree to repay any overpayment which might arise.

A dispute arose with respect to benefits, including the amount of the income replacement, and Mr. Uribe applied for mediation with the assistance of a paralegal. Mr. Uribe left the paralegal and retained his current counsel who advised Mr. Uribe to see a new accountant. The new accountant prepared an amended income tax return for 2006 which showed Mr. Uribe’s $20,000 income from the numbered company. The Canada Customs and Revenue Agency (“CCRA”) issued a Notice of Reassessment for 2006 which resulted in Mr. Uribe having to pay a further $327 in income tax.

The applicable provisions from the Schedule are as follows:

64.1 (1) If, under the Income Tax Act (Canada) or legislation of another jurisdiction that imposes a tax calculated by reference to income, a person is required to report the amount of his or her income, the person’s income before an accident that occurs after April 14, 2004 shall be determined for the purposes of this Regulation without reference to any income the person has failed to report contrary to that Act or legislation. O. Reg. 458/03, s. 11.

(2) Where the amount of a person’s income before an accident is determined for the purposes of this Regulation in accordance with subsection (1), the amount of the income may be adjusted to reflect any change in the amount of the person’s income reported or determined in accordance with the Income Tax Act (Canada) or legislation of another jurisdiction that imposes a tax calculated by reference to income. O. Reg. 458/03, s. 11.

The subsections, when read separately, are clear. Under subsection (1) the person’s income replacement benefit is calculated without reference to unreported income. Under subsection (2) the amount of income used to calculate the person’s income replacement benefit may be adjusted where the person is reassessed by CCRA.

However, the application of the two subsections to the situation where the person does not report income to CCRA and subsequently files an amended return in which he reports the income and is reassessed is not clear. If I determine that an applicant can file an amended return to remedy his non-disclosure of income, subsection (1) has no meaning.

The question is whether I can interpret the section so that subsections (1) and (2) have a reasonable meaning.

Both counsel made submissions concerning whether the intention of the legislators was to prohibit claimants from benefiting from their failure to declare their income. Mr. Canizares referred me to the only case which comments on section 64.1. Ramsay J. wrote:

The legislature’s action through its delegate, the Lieutenant-Governor-in-council, who enacted s. 64.1 of the Accident Benefits Schedule to the Insurance Act, is strong evidence of a public policy against compensating accident victims for income on which they wrongfully paid no tax. ²

I am not aware of any decisions at this Commission where the arbitrator has excluded undeclared income in the calculation of income replacement benefits on the grounds that it is against public policy.

In Dray v. Royal Insurance Company of Canada, OIC A-000025, January 31, 1992, Arbitrator Naylor dealt with interpreting unclear provisions of the Schedule. The issue concerned the deductibility of collateral benefits paid under an income continuation plan. The specific issue was whether the insurer was entitled to deduct the gross amount of the benefit or the net amount where the provision did not specify gross or net. The deduction was simply “any payments for loss of income.”

Arbitrator Naylor found that if the gross amount of a taxable payment was deducted, an applicant with taxable collateral benefits was worse off than an applicant who had no other disability coverage, or was covered by a plan with non-taxable benefits. She wrote that this did not seem fair.

In considering the purpose of the accident benefit scheme she wrote:

The no-fault benefits scheme established by the legislation is intended to place no-fault benefits in the hands of accident victims, regardless of fault, quickly and efficiently. It is particularly important that income replacement benefits be paid quickly in order to minimise the interruption of earnings resulting from the accident. The scheme’s administrative workability is essential to its ability to deliver benefits speedily and efficiently.

The no-fault system must also be fair, equitable and reasonably predictable in its treatment of insureds, covered by a multiple of insurance plans.

It would be administratively difficult for insurers to try to work out the net value of payments involving taxable benefits, because the calculation is based on social and economic factors particular to the individual. Of course, it is possible to make certain concessions to administrative simplicity. But unless some such general rules to account for the net amount of deductible benefits are set out, the administration of no-fault benefits would be rendered considerably more complex. This would likely result in inconsistent and unfair treatment of insureds. These administrative considerations persuade me that this legislative scheme does not contemplate that insurers be required to determine the net value of payments based upon the individual circumstances of insureds.

I believe the same considerations apply to this case. In many cases, the calculation of income replacement benefits is not simple where the applicant has not declared his income to CCRA. It may involve a self-employed person, a person working in a cash business or a family business or a person who has another reason for not declaring all his income. The inquiry may involve numerous requests for documents which the applicant cannot provide, the opinions of accountants retained by each party, the examination of available financial, accounting and banking records and the credibility of the applicant, the employer and family members.

In the instant case, Wawanesa wanted more information from the individual who completed the Confirmation of Employment and that individual refused to provide the information. The employer also refused to issue a T-4 slip, refused to cooperate with Mr. Uribe and refused to provide a Record of Employment until requested by Employment Insurance. The amount of income Mr. Uribe earned from this employer is an issue.

I believe the purpose of section 64.1 is to avoid these complex and more expensive inquiries. The calculation of income replacement benefits is based on a crude formula. It is not a refined inquiry into a claimant’s actual loss of income. Where a person has a legal obligation to declare his entire income, it is not unfair, on its face, that the person be bound by that declaration. The calculation of the amount of any income replacement benefit based on that declaration is generally fair, equitable and reasonably predictable. To find otherwise, would lead to an inquiry into the circumstances surrounding the filing of the original return and the amended return without any criteria or directions in the legislation as to when an insurer is entitled to rely on the original return and when an amended return overrides the original return. It turns the inquiry into something which is not contemplated by the no-fault accident benefits scheme.

Subsection (2) deals with reassessments by taxing authorities such as CCRA. Subsection (2) must deal with any reassessment other than those due to the insured’s failure to fully disclose his income in his original return. Subsection (2) would cover such cases where CCRA reassesses on the basis of disallowing deductions.

EXPENSES:

Entitlement to and amount of expenses of this preliminary issue hearing are in the discretion of the hearing arbitrator.

April 29, 2009

William J. Renahan Arbitrator

Date