Jose Escobar Uribe v. Wawanesa Mutual Insurance Company, 2010 ONFSCDRS 17

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2010 ONFSCDRS 17

Appeal P09-00021

Appellant

and

Respondent

BEFORE:

David Evans

Nicolas Canizares for Mr. Uribe

Ian D. Kirby for Wawanesa Mutual Insurance Company

October 8, 2009

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

Paragraph 1 of the arbitrator’s order dated April 29, 2009 is rescinded and replaced with:
Income earned by Mr. Uribe from June 2006 to October 2006 may be included in the calculation of any income replacement benefit under the Statutory Accident Benefits Schedule – Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
If the parties are unable to agree on the expenses of this appeal, an expense hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.

February 5, 2010

David Evans Director’s Delegate

Date

I. NATURE OF THE APPEAL

Mr. Jose Escobar Uribe appeals the arbitrator’s order that income he earned from June to October 2006 is not to be included in the calculation of his income replacement benefit (IRB).

II. BACKGROUND

Mr. Uribe was injured in a motor vehicle accident on December 11, 2006. He claimed IRBs under the SABS–1996.¹ The calculation of IRBs depends on pre-accident income.

It was agreed that, at the time of the accident, Mr. Uribe was receiving employment insurance benefits. However, he claimed that from June to October 2006 he worked as a pipe fitter for a numbered company that installed fire sprinkler systems. Two weeks after the accident, that company’s proprietor completed an Employer’s Confirmation of Income showing Mr. Uribe’s income of about $20,000 in the 52 weeks before the accident. Wawanesa started paying IRBs on that basis but required an agreement to repay benefits.

The amount Mr. Uribe actually earned from the numbered company, as well as his entitlement to further IRBs – Wawanesa terminated weekly income replacement benefits on May 2, 2007 – remains in issue.

Mr. Uribe testified that he was not able to obtain a T-4 slip from that company, so he did not include income earned there when he filed his 2006 tax return in 2007. He claimed he did this on the advice of a tax preparation service. He subsequently saw an accountant and re-filed, this time including the disputed income. The Canada Customs and Revenue Agency (“CCRA”) issued a 2006 Notice of Reassessment for an additional $327 in income tax.

Subsection 64.1(1) of the SABS-1996 applies to a person like Mr. Uribe who is “required to report the amount of his or her income” under the Income Tax Act (Canada) (or similar legislation) and was involved in an accident after April 14, 2004. In that case, the person’s pre-accident income “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.” This subsection required that any income earned from the numbered company but not reported to the CCRA would be excluded from the determination of Mr. Uribe’s pre-accident income.

Subsection 64.1(2) provides a saving provision, in that notwithstanding a determination under s. 64.1(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)….”

The issue is whether subsection (2) applies to the re-filing.

Mr. Uribe appeals the arbitrator’s finding that subsection (2) only “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.” It was on this basis that the arbitrator excluded the income earned from June to October 2006 in the calculation of the IRB.

III. ANALYSIS

Section 64.1 of the SABS-1996 was an amendment added as part of Ontario Regulation 458/03. As noted above, it applies to accidents that occur after April 14, 2004. For accidents occurring prior to April 15, 2004, adjudicators could and did take into account unreported income in the calculation of IRBs.²

I will now cite the section (omitting the references to other legislation for the sake of clarity):

64.1 (1) If, under the Income Tax Act (Canada) ..., 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....

(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)....

In describing these subsections, the arbitrator said that, when read separately, they “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 arbitrator narrowed the meaning of subsection (2) by referring only to a reassessment by the CCRA. He has not taken into account the alternative provided, namely “any change in the amount of the person’s income reported … in accordance with the Income Tax Act (Canada)....” This alternative does provide a saving provision for Mr. Uribe, as “reported” can only refer to an action by the person.

Section 64.1 uses two important verbs, namely “report” and “determine,” and applies those to different players: the “person ... required to report the amount of his or her income ... under the Income Tax Act (Canada),” the insurer or arbitrator that determined pre-accident income “for the purposes of this Regulation” (the SABS), and the body (presumably the CCRA) that “determined [income] in accordance with the Income Tax Act (Canada).” Thus, income is reported by the person and is determined by others either for the purposes of the SABS or in accordance with the Act. Subsection (1) applies to a person who is required to report the amount of his or her income under the Act. If the person has failed to report any income contrary to the Act, that income is not included in the determination of the income. I see no reason why the term “reported” should have a different meaning in the saving provision set out in subsection (2).

Since subsection (2) deals with a change in income reported by the person, I find that the arbitrator erred when he stated that “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.” For the reasons noted, subsection (2) deals exactly with that scenario. It follows that the arbitrator also erred when he stated that if “an applicant can file an amended return to remedy his non-disclosure of income, subsection (1) has no meaning.” It has a meaning, namely that as long as income is not reported to the CCRA it will not be reflected in the IRB.

I will not examine in depth the rest of the arbitrator’s decision, since it mostly dealt with his attempt to “interpret the section so that subsections (1) and (2) have a reasonable meaning.” I have found they have a reasonable meaning without any further interpretation required. However, I will make one or two comments.

The arbitrator noted that “the calculation of income replacement benefits is not simple where the applicant has not declared his income to CCRA” and that “the purpose of section 64.1 is to avoid these complex and more expensive inquiries.” However, the calculation of an IRB can be complicated whether or not the income was declared, since an insurer is not bound by whatever was “reported or determined in accordance with the Income Tax Act.” In this case, for instance, the ongoing dispute about any income earned at the numbered company has nothing to do with the failure to report that income to the CCRA.

The arbitrator stated that it “is not contemplated by the no-fault accident benefits scheme” that there be “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.”

However, the CCRA reserves to itself the right to reassess, as noted by the arbitrator, so an insurer could be faced with an amended income several years after the fact even if the arbitrator’s conclusion was correct. In addition, the additional income sought to be included in the calculation is likely to be known to the insurer, as happened in this case, and as already noted, the insurer is not bound to rely on any return in any event.

Wawanesa submits that “if the Applicant/Appellant’s interpretation of section 64.1 of the Schedule is to prevail, then at any point after an accident, after an applicant is otherwise obliged to report their income and indeed, after the commencement of the dispute resolution process, an applicant can file an amended return, ‘come clean’ and declare income previously hidden, thereby rendering section 64.1 meaningless.” On the contrary, by encouraging an applicant to report previously hidden income, the section has a meaning and fulfills a purpose. Wawanesa’s interpretation actually discourages an applicant from “coming clean.”

I note that in this case there was also a reassessment by the CCRA, so there was “a change in the amount of the person’s income ... determined in accordance with the Income Tax Act (Canada).” I am not persuaded that subsection (2) should be read down to the extent that only changes in income determined by the CCRA at its own volition are contemplated. I agree with the arbitrator that “[w]here 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.” However, I fail to see in s. 64.1 the requirement that an applicant is forever bound by that initial declaration and cannot make a further declaration to the CCRA.

There are still consequences for an applicant who fails to initially report income. Benefits – if they were paid – were paid at the lower rate excluding that income. I also agree with Mr. Uribe’s submission that interest would not be owed on the higher IRB. Under s. 46 of the SABS, interest is payable on overdue amounts, but the benefit is only overdue “if the insurer fails to pay the benefit within the time required….” Since the income was excluded from the calculation of the IRB, a higher IRB was never required to be paid.

Finally, this interpretation accords with the Financial Services Commission of Ontario Bulletin No. A-01/04, which states under the heading Disclosing Unreported Income that “[i]ncome that is not reported for income tax purposes will not be included in calculating income replacement benefits. The income replacement benefit can be adjusted to reflect any income that may be subsequently reported for income tax purposes.”

Accordingly, the appeal is allowed, and Mr. Uribe’s income from the numbered company earned from June to October 2006 may be included in the calculation of his IRB. However, the ultimate determination of the amount of the IRB (as well as entitlement to further IRBs) remains to be decided by the hearing arbitrator.

IV. EXPENSES

If the parties are unable to agree about expenses of this appeal, an expense hearing may be arranged in accordance with Rule 79 of the Dispute Resolution Practice Code.

February 5, 2010

David Evans Director’s Delegate

Date

Footnotes

The Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
Canadian General Insurance Company and Mills, (OIC P-005599, October 8, 1996); Clipperton and Zurich Insurance Company, (FSCO P01-00008, August 24, 2001).