6

realize it’s an issue—even thoughthe impact can be immense for the insured. The issue: is there, or is there not,

a 52-week pre-accident period for aself-employed insured?

Back to BasicsTo provide some background,under Ontario Regulation 403/96(Old SABS), insureds who wereself-employed at the time of anaccident could elect their pre-acci-dent income to be based on the52-week period prior to the acci-dent or on the last fiscal year com-pleted before the accident, pur-suant to s.8(2). Depending uponthe selected period, al l incomeearned in that per iod, bothemployment and self-employmentincome, would be included.Under the New SABS, an insured’s

However, one section in particularrelating to income replacement ben-efits (IRB) seems to be perplexing formost, including the experts.As accountants working for

both defence and plaintiff firms,we see this issue on a daily basis.Accountants throughout the indus-try, even ones working for thesame insurer, don’t seem to haveany consistent way of treating thisissue. Plaintiff accounting firmspush one option almost exclusively,while defence accounting firms areless consistent. Yet if you speak tothose in the know, they don’t

A Closer Look: The One Factor That Can Change an IRBfrom Nil to the Policy Limit–And YouLikely Don’t Know It’s An Issue

By Cherilyn Carson, CPA, CGA, CIP and Rhonda Macedo, CPA, CMA, ADS Forensics Inc.

Cherilyn Carson Rhonda Macedo

Four years later and still the expertsdon’t seem to have a definitiveanswer. The amendments to theStatutory Accident Benefits Schedule(Ontario Regulation 34/10) (New SABS)came into play in September 2010.Many of us are familiar with the various changes resulting from therevised legislation.

7

nate as his or her gross annualemployment income the amountof his or her gross employmentincome during the last fiscal yearof the business that ended on orbefore the day of the accident.

It seems very clear that this sec-tion is referring to gross employmentincome, and not self-employmentincome. As the entire s.4(2) would

appear to relate to the calculation ofgross annual employment income,any accounting firms relying on thisto support their selection of desig-nating a 52-week pre-accident peri-od to calculate self-employmentincome would appear to be incor-rect. But does that actually meanthey are wrong?To answer this, we need to look at

s.4(3) and some other factors.

pre-accident income from employ-ment and self-employment are cal-culated separately before beingadded together (s.7(2)(1)(i) of theNew SABS). Specifically,

70 per cent of the amount, if any,by which the sum of the insuredperson’s gross weekly employ-ment income and weekly incomefrom self-employment exceeds theamount of the insured person’sweekly loss from self-employ-ment…

Digging deeper, we see the “grossannual employment income” is cal-culated pursuant to s.4(2) of theNew SABS, while a “self-employedperson’s weekly income or loss fromself-employment” is calculated pur-suant to s.4(3). (A whole other arti-cle could be written on the fact thatdifferent pre-accident periods can beselected for employment and self-employment income, which is amarked difference from previousSABS legislation. Stay tuned!)This is where much of the confu-

sion seems to exist. For example, weoften see defence accounting firmsjustify the calculation of a 52-weekpre-accident income from self-employment by referring to s.4(2)3,which states:

If the person described in sub-paragraph 2 i was self-employedfor at least one year before theaccident, the person may desig-

As the entire s.4(2) would appear to relate to the calculation of gross annual employment income, any accounting firms relying on this to support theirselection of designating a 52-week pre-accident period to calculate self-employment income

would appear to be incorrect. But does that actuallymean they are wrong?

WP January 2015

9

Calculating Income from Self-EmploymentSubsection 4(3) appears to be theonly section within the New SABSthat outlines the period for which aninsured’s pre-accident income fromself-employment can be calculated.It states:

A self-employed person’s weeklyincome or loss from self-employ-ment at the time of the accident isthe amount that would be 1/52 ofthe amount of the person’sincome or loss from the businessfor the last completed taxationyear…

A strict interpretation of thiswould appear to suggest thatinsureds who were self-employedat the time of the accident, regard-less of whether they were alsoemployed, can select only the lastcompleted taxation year uponwhich to base their income fromself-employment. Meaning that aninsured’s pre-accident income fromself-employment cannot be basedon the 52-week period before theaccident.The question this raises is, what

pre-accident period, if any, is avail-able to insureds to calculate their“weekly income or loss from self-employment” if they were self-employed at the time of the accidentand commenced their self-employ-ment in the 52 weeks before theaccident, such that their businesshad not completed a last taxationyear? Here we need to look at the rest

of the SABS.

The ConflictsBefore we go any further, let’s con-sider an example to show the magni-tude of this issue. In this example,we have an insured who wasinvolved in a motor vehicle accident

WP January 2015

on December 1, 2014. The self-employed insured had begun operat-ing the business on February 1,2014. During the ten-month pre-accident period—and the only peri-od during which the business wasoperating—the insured earned$30,000 after business expenses.The insured has not worked sincethe accident. Assuming no post-acci-dent income sources, the insured’sIRB would be either $400 per week(the assumed policy limit) or nil,based on whether the preparer ofthe IRB calculation relied on the 52weeks prior to the accident or not.Clearly this is an issue, especially forinsurers, if their accountants are notusing a consistent approach.So are those accounting firms that

prepare a 52-week calculation incor-rect? We have seen that a strictinterpretation of the New SABSwould suggest they are. But thereare conflicts.

Conflict #1: New SABS. The NewSABS states that insureds are eligi-ble for an IRB if they were self-employed at the time of the acci-dent, pursuant to s.5(1)(2) of theNew SABS. However, for insuredswhose self-employment had com-menced in the year of the accident,and had not completed a last taxa-tion year prior to the accident, thereis no period upon which to calcu-late their IRBs under the strict inter-pretation of s.4(3).

Conflict #2: FSCO. The Applicationfor Accident Benefits (OCF-1) andEmployer’s Confirmation Form (OCF-2) both offer insureds who are self-employed at the time of the accidentto elect their pre-accident income becalculated based on the 52 weeksbefore the accident. We further notethat while the OCF-2 was not modi-fied subsequent to the New SABSrelease, the OCF-1 has been updated

twice since the New SABS wereintroduced, and the 52-week optionremains available.

Conflict #3: The Insurance Bureauof Canada (IBC). A national industryassociation representing 90 per centof Canada’s property and casualtyinsurers, and that works to increasepublic understanding of insurance,released a document entitledAccident Benefits Coverage inOntario in September 2011. Thisdocument was released to help indi-viduals involved in motor vehicleaccidents to better understand theaccident benefits available, asdefined by the New SABS. In theirdiscussion of an insured’s IRB whowas self-employed at the time of theaccident, they state the following:

The amount you will receive willbe calculated on the informationyou included on your applicationform. In general, benefits are cal-culated as follows:If you are self-employed at thetime of the collision, the incomereplacement benefit is based onincome earned:• in the last 52 weeks; or• in the last fiscal year completedbefore the collision.

So from the SABS to FSCO to theIBC, there appears to be a messagethat conflicts with the strict wordingof the s.4(3) of the New SABS. In Mutual Insurance Company v.

Axa Insurance (Canada) [2012,ONCA 592],

The purposive approach to statu-tory interpretation requires thecourt to take the following threesteps:(1) it must examine the words ofthe provision in their ordinary andgrammatical sense; (2) it must consider the entire con-text that the provision is located

13

WP January 2015

within (Bell Expressview, at para.27); and (3) it must consider whether theproposed interpretation producesa just and reasonable result(Bapoo v. Co-Operators GeneralInsurance Co. (1997) 36 O.R. (3d)616 (C.A.), at para. 8).

So, again, we have to ask, is therea 52-week calculation for self-employed individuals who were intheir first year of business, and if so,would that then extend to all self-employed individuals?

Is There A Conclusion?We would love to say yes, here isthe definitive answer, now go forthand apply it. Unfortunately, thatisn’t the case. From an insurer’s per-spective, and based on our experi-ence in reviewing IRB reports fromvarious accounting firms both forplaintiff and defence counsel, wefind that accounting firms and insur-ers are not in unison when interpret-ing this section in the New SABS. Infact, they often don’t even appearto be aware of the significance ofthis issue, or that it even exists.To date, there are no decisions

which deal with this issue under theNew SABS. So until direction is pro-vided, it looks as though each partyis going to have to decide for them-selves how this issue will be treated.Which side will you take?

Cherilyn Carson, CPA, CGA, CIP andRhonda Macedo, CPA, CMA arewith ADS Forensics Inc. Forensic Accountants.

For more resources, go to:adsblog.me

WP