Income Replacement Benefits (IRBs) are meant to provide those injured in a motor vehicle accident with guaranteed, limited income (subject to meeting the threshold). For many years defence and plaintiff counsel, accountants/chartered business valuators and insurance adjusters have contested the calculation of IRBs for self-employed individuals.
Due to the wording of the Statutory Accident Benefits Schedule (SABS) s. 4(3) and the Employer’s Confirmation Form (OCF-2), many felt that there were two approaches: the first was to be based on the income of the last 52 weeks before the accident; and the other was to use the last fiscal year before the accident. Whichever of the two approaches yielded the higher amount was the one to be used.
A similar approach is used in determining IRBs for employed individuals, where in s. 4. (2) 1. of the SABS allows us to choose between the last four weeks and the last 52 weeks before an accident. For individuals that were both employed and self-employed (self-employed must be for at least one year before the accident) at the time of the accident, they may also choose their last fiscal year for the calculator of their IRB entitlement.
The recent Licence Appeal Tribunal (LAT) decision K.D. v. Aviva Insurance Company 2020 ONLAT 18- 011646/AABS (KD v. Aviva) from adjudicator Avril A. Farlam, vice-chair, has effectively ended this debate … sort of.
To highlight the difference between these two approaches let’s use a simple example. Let’s say Jill is a self-employed computer technician. She has no income from employment and therefore falls under s. 4(3), not 4(2). Jill is injured in a motor vehicle accident on Dec. 1, 2019. As a sole proprietor her last fiscal statement was from Dec. 31, 2018, which shows that she reported $23,000 in net income during the year. In the 11 months in 2019 prior to her accident, her net income was $30,000.
If we use Jill’s last fiscal year as the basis for determining her entitlement to IRBs, she would be entitled to receive benefits of $309.61; if we use the net income she earned during the 52 weeks prior to the accident, her entitlement would be $400 per week (assuming she earned money evenly throughout the year). In this simple example Jill would have clearly been better off if she were allowed to select income from the last 52 weeks.
Let’s now assume Jill’s situation is slightly different. Suppose she never worked as a self-employed person in 2018 and started her business on Jan. 1, 2019. According to this latest LAT decision Jill would be entitled to $0 in IRBs even though she was self-employed for 11 months at the time of the accident and was clearly earning income, because she had not yet been operating for a fiscal year at the time of the accident.
Now consider another tweak to our example. Suppose Jill earned net income of $40,000 in 2018 and for whatever reason was only able to earn only $3,000 in self-employment income in 2019. Under this scenario Jill would be entitled to $400 a week based on her last fiscal year, 2018 (the maximum amount) or $20,800 per year.
I’ve reached out to a defence counsel for their opinions on the implications of the decision in KD v. Aviva. Samantha A. Iturregui, an insurance defence lawyer who is a partner at Kelly Santini LLP and a deputy judge at the Ottawa small claims court, noted:
“Although the applicant in this matter had earned self-employed income in 2017, the year of the accident, the applicant’s tax return of 2016 declared no income, which meant that he was not entitled to an IRB post-accident.
“The wording of the SABS in my opinion is unambiguous and was applied correctly in this matter. Where the wording of the law is clear and unambiguous it must be followed and the factual situation facing the applicant in this matter met the criteria set out in the SABS.
“Calculating the IRB of a self-employed insured based on the previous year’s income tax return allows the insurer to make a quick and precise calculation. The determination of entitlement and quantification of the amount a self-employed insured is entitled to can be done without the applicant having to file a great deal of financial information. Simply submitting their tax return from the year before the accident will suffice.
“Could this lead to an applicant being entitled to more or less than they would be had the calculation been completed based on the current year’s income? Yes, of course. However, my sense is that the calculation is usually very close to the insured’s loss in the year of the accident.
“The fact scenario in the Dauti v. Aviva [K.D. v. Aviva] case is not one that is commonly seen. It is unusual for an individual who has been self-employed for seven years to make zero dollars in income the year before the accident and then earn almost $40,000 the year of the accident.
“The calculation of the income of a self-employed individual is not always a straightforward exercise. It is certainly more convoluted than calculating the income of an insured who is an employee. When completing this type of calculation for self-employed individuals one must take into account business expenses and other deductions to which self-employed individuals are entitled. The SABS method simplifies what could otherwise become a more complicated calculation.
“In cases where the applicant is also making a tort claim, shortfalls on the quantum of past-income loss paid to the self-employed insured may be recovered from the insurer of the other driver.
“In my opinion, the vice-chair in this matter applied the law as it was written and intended, to the facts that were before her.”
This is part one of a two-part series. Part two will discuss the timing fiscal year-ends may have on the calculation of IRBs for self employed individuals and whether this rule applies to everyone.
Matthew Krofchick is a principal at Krofchick Valuations. He specializes in forensic accounting, economic damage assessments, family law valuations and business valuations for transactional and litigation purposes. Krofchick has lectured and authored on topics including business, pension and income valuations in the context of marital breakdowns, and financial issues surrounding business valuations and damage quantifications.