Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2012 ONFSCDRS 72

Appeal P10-00003

OFFICE OF THE DIRECTOR OF ARBITRATIONS

LJILJANA GARIC Appellant

and

MARKEL INSURANCE COMPANY OF CANADA Respondent

BEFORE: David Evans

REPRESENTATIVES: Allen Wynperle for Mrs. Ljiljana Garic J. Claude Blouin for Markel Insurance Company of Canada

HEARING DATE: February 23, 2011

APPEAL ORDER

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

The appeal of the arbitration order dated December 29, 2009, is dismissed, and the decision is confirmed.
If the parties are unable to agree on the legal expenses of this appeal, pursuant to Rule 79.2 of the Dispute Resolution Practice Code (Fourth Edition, Updated - August 2011), an expense hearing shall be requested, as set out below, within sixty days of the date of this decision.

May 9, 2012

David Evans Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Mrs. Ljiljana Garic appeals Arbitrator Robert Bujold’s allocation to her of half the post-accident net income from the family business, Garic Haulage.

II. BACKGROUND

The Arbitrator, in his decision dated December 29, 2009, was asked to determine the weekly income replacement benefit (IRB) payable to Mrs. Garic pursuant to the SABS–1996¹ for the period July 12, 2006 to December 31, 2007, with his decision to provide guidance for any future IRBs that may be payable in this case. Ultimately, he provided an algorithm for the IRB calculation without setting out a specific figure.

The dispute focused on the allocation of post-accident income from Garic Haulage, a partnership between Mrs. Garic and her husband Pero.

Mrs. Garic was injured in an accident of July 11, 2006. Prior to the accident, the spouses each drove a truck for their family business. They shared its income, expenses, and profit equally. Garic Haulage would issue an invoice to its customer, and the customer would issue a cheque payable to it. Either of the Garics would deposit the cheque to the Garic Haulage joint account, over which both had signing authority, and out of which they paid business expenses. The balance of the money was paid by cheque for deposit into their joint personal bank account to pay family bills. These arrangements did not materially change after the accident.

Mrs. Garic did not return to driving for the business, but did assume post-accident administrative business duties such as signing and depositing cheques. Garic Haulage hired a replacement worker who took over most of her former driving duties. The Arbitrator found that this enabled Garic Haulage to continue to operate at or near pre-accident levels, stating that “Although [Mrs. Garic’s] active participation was diminished, the replacement worker largely made up for this shortfall and allowed the business to continue to operate much as it had before the accident.” He also accepted that Mr. Garic performed additional work of about two hours a day after the accident, but was not prepared to speculate about its value.

IRBs are subject to deduction for post-accident net income that, in the case of self-employed insureds, is reduced by the salary paid to a replacement worker. Subsection 6(2) of the SABS allows for the deduction from an IRB of “80 per cent of the net income received by the insured person in respect of any employment subsequent to the accident,” but s. 6(4)(b) then allows a self-employed insured like Mrs. Garic to reduce post-accident net income by deducting from it reasonable “salary expenses that were paid to replace the person’s active participation in the business.” The net result is that the salary paid reduces the amount of the IRB deduction.

Regarding the allocation of the post-accident net income, the Garics accepted the advice of their bookkeeper to allocate only 5 per cent of post-accident income for tax purposes to Mrs. Garic, according to her contribution to the business, rather than the previous 50/50 split. They submitted that the allocation for the IRB deduction should also be a 5/95 split. By way of contrast, Markel’s accountant continued the pre-accident 50/50 split. The differing calculations resulted in an IRB of either about $350 a week or nil, respectively.

The Arbitrator considered the relevant case law, and agreed with Markel’s position that its 50/50 split of post-accident income was not only consistent with the pre-accident allocation, but represented the reality of Mrs. Garic’s financial situation. He found that the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), did not require a 5/95 split because he found that Mrs. Garic continued to be an equal partner in Garic Haulage and continued to receive income in the same manner as she had prior to the accident. Since he found that the replacement worker made up for the reduction in Mrs. Garic’s participation, he did not accept

the 5% allocation in Mrs. Garic’s tax returns as representing a fair and realistic assessment of her true financial situation for the purpose of determining her IRB entitlement pursuant to the Schedule. As in [James and Allstate Insurance Company of Canada, (OIC A-015580, May 17, 1996)], I find that Mrs. Garic’s approach would “unjustifiably inflate” her benefit and result in over-compensation. Having regard to all of the circumstances, I am led to the conclusion that, in order to fairly reflect her true financial situation, 50% of Garic Haulage’s post-accident net income should be allocated to Mrs. Garic.

The Arbitrator also found that the deduction for the cost of the replacement worker should come entirely from Mrs. Garic’s half of the income as, pursuant to s. 6(4)(b), these salary expenses were paid to replace her active participation in the business.

The Arbitrator did not make a determination of the actual amount of the IRBs, except for a limited purpose for a limited period. By way of background, there was a dispute about production of documents in 2008. Markel had been paying IRBs of $183.84 per week for over a year on the basis of financial documentation that only permitted a calculation for the very short post-accident period from July 12 to August 31, 2006. The Arbitrator found that Markel acted reasonably in suspending IRBs pursuant to s. 33 of the SABS until it got further documentation in order to assess the IRB amount. However, Markel did not reinstate IRBs once it received the documentation, so Mrs. Garic claimed a special award. The Arbitrator agreed, finding that, “even if subsequent calculations determine that Mrs. Garic is not entitled to any IRBs in 2008, it would have no bearing on the fact that, at the time, IRBs were payable at $183.84 per week.” Accordingly, he found that Markel owed IRB payments at $183.84 per week from June 6, 2008 to August 22, 2008, regardless of any other deductions or any set-off for alleged overpayment, and ordered a special award of $750.00.

III. ANALYSIS

The Arbitrator’s conclusions were founded on existing case law, and he made largely factual findings that are not subject to review. The Arbitrator started with the James case, cited above, from which he accepted the proposition that while tax returns may be prima facie evidence of post-accident income, the presumption is rebuttable and the analysis must go beyond mere form. He also relied on Iankilevitch and CGU Insurance Company of Canada, (FSCO P03‑00013, August 31, 2004) for the proposition that an IRB should fairly and realistically reflect an insured’s income situation, avoiding both over- and under-compensation, and Bonitatibus and Wellington Insurance Company, (OIC A-000082 (no.2), April 8, 1993) for the proposition that an accounting approach that artificially inflates the amount of a benefit will be rejected.

Mrs. Garic submits that her post-accident income should be based only on her active participation in the business. However, that is not the scheme in the SABS. As noted above, the salary paid to replace a self-employed insured’s active participation in a business is deducted from post-accident income. It follows that post-accident income must necessarily be based on both the insured’s active participation and that of the replacement worker. Otherwise, there would be no need for the deduction if the income generated by the replacement worker were not included in post-accident income. The Arbitrator specifically found the replacement worker largely made up for the shortfall caused by Mrs. Garic’s reduced participation in the business. Accordingly, Mrs. Garic’s post-accident income should not be determined solely on the level of her active participation in the business.

Mrs. Garic submits that s. 6(2) requires that post-accident income must have been received and must have been in respect of employment. However, the Arbitrator carefully set out how Mrs. Garic continued to share in the profits of Garic Haulage as before. He also found that Mrs. Garic contributed to the business through banking and administrative tasks and continued to be a partner in Garic Haulage with her husband. As noted above, Mrs. Garic’s pre-accident employment included these kinds of business-related activities and not just driving the truck. Accordingly, the Arbitrator had a basis for finding that this post-accident income was both received by Mrs. Garic and was in respect of employment.

This is not to say that income derived strictly from capital or as an investment would necessarily be considered post-accident employment income for the purposes of the SABS. Thus, while s. 62(1) of the SABS, entitled “Income from Self-Employment,” requires that a self-employed “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),” it specifically excludes capital gains or losses from being taken into account. This aspect of the income of a self-employed person was considered in Biliouras and Allstate Insurance Company of Canada, (FSCO P98-00002, October 13, 1998), which discussed the difference between carrying on a business under the Income Tax Act and self-employment under the SABS. The Director’s Delegate stated that, in his opinion,

the [Statutory Accident Benefits Schedule — Accidents after December 31, 1993 and before November 1, 1996] does not adopt the broad, income tax definition of “business” as synonymous with “self-employment.” The test for self-employment is in section 5, requiring that the insured person “is engaged in employment” for salary, wages, or other remuneration or profit. In my view, this wording is more akin to “carry on business” and should be given its ordinary meaning. This makes sense in a system that, at least in a general sense, deals with interruptions in activity due to accident-related injuries.²

In that vein, the evidence of Mr. Garic might have reduced Mrs. Garic’s proportion to less than 50%. He testified that he had to carry out additional duties due to the replacement worker. Therefore, both Mrs. Garic’s active participation and that of the replacement worker might have totaled less than 50% of the business activity, reducing the proportion of post-accident income attributable to her. However, the Arbitrator was not satisfied that the evidence allowed him to set a value for Mr. Garic’s additional duties, and he was not prepared to speculate.

Mrs. Garic submits that the Arbitrator erred in finding that the Income Tax Act did not require approximately a 5/95 split. I have already noted that s. 62(1) of the SABS relies on the Income Tax Act to determine income from self-employment. In turn, Mrs. Garic submits that s. 103(1.1) of the Income Tax Act requires a change from the 50/50 split. This provision deals with non-arm’s length partners like spouses, and prohibits a share of their partnership income, loss or other amount that is “not reasonable in the circumstances having regard to capital invested in and work performed for the partnership by the members thereof or such other factors as may be relevant,” in which case “that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances [emphases added].” However, the Arbitrator found that the post-accident income generated by the replacement worker was indeed a relevant factor to make it reasonable in the circumstances to allocate that income to Mrs. Garic. Therefore, s. 103(1.1) did not mandate a 5% allocation of post-accident income to Mrs. Garic.

This is a reasonable finding, and it accords with what I said before about deducting the cost of the replacement worker from post-accident income and the difference, discussed in Biliouras, between a business under the Income Tax Act and self-employment under the SABS. Nothing in Income Tax Bulletin IT-231R2, provided to me on appeal, changes that analysis.

The appeal is therefore dismissed, and the decision is confirmed.

IV. EXPENSES

If the parties are unable to agree on the legal expenses of this appeal, pursuant to Rule 79.2 of the Dispute Resolution Practice Code, Fourth Edition (Updated August 2011), an expense hearing shall be requested within sixty days of this decision. The request shall be accompanied by a Bill of Costs describing the expenses claimed, the services received and the costs, as well as written submissions regarding entitlement to or the quantum of these expenses, or both, as are in dispute.