What can a real-life case teach us about non-arms length employees, IRBs, and deductibility?

The applicant’s accountant testified that the payments could not be considered as other income replacement assistance as the applicant’s mother and her aunt, who was also employed by the restaurant and was responsible for payroll, confirmed that the restaurant did not offer a loss of income or disability insurance plan to its employees and the amounts paid to the applicant were “made as a gift…solely made to the applicant and was not available to any other employees”. The accountant further stated that to consider these payments as other income replacement assistance would require the payments to be either a “[CPP] disability payment or a contract of insurance and since there was no disability contract of insurance for employees and for the applicant and no CPP disability payments it was his opinion that the payments did not fall under that category and therefore were not deductible”.
In this regard, we note that the latter assertion made by the accountant appears to imply a very strict interpretation of s.3(7)(d) of the SABS, which would limit the deduction of payments received as other income replacement assistance to only those received as either CPP disability benefits or through a formal contract of insurance offered by an employer. The latter would require a formal company policy with respect to disability insurance. While it is highly unusual that a business, such as this restaurant, has never paid a single sick day to an employee, the decision is silent in this regard. In addition, it is not clear why the payments the claimant received from the restaurant do not serve as sufficient evidence that a disability income plan did exist. If these payments were indeed a gift from a mother to a daughter, no evidence was presented as to why they were not paid directly from parent to child instead of classified as a payroll expense of the restaurant.
Regardless, the adjudicator opined that the payments received by the applicant during the post-accident period cannot be considered as other income replacement assistance, deductible in the calculation of her IRB, pursuant to s.3(7)(d) and s.7(1)(“A”) of the SABS. 

The adjudicator found that the applicant was not receiving gross employment income as a result of being employed during the post-accident period in dispute as the applicant “has satisfied her onus and provided reliable and cogent evidence against the presumption that the income earned after the accident was employment income” and that “Both parties’ expert witnesses also agree that the payments the applicant received was not employment income”.
Both parties presented several cases in support of their position from the Financial Services Commission of Ontario (FSCO) and the LAT, however each case dealt with the interpretation of s.7(3)(b) and not s.7(3)(a) of the SABS. As such, the adjudicator dismissed them on the basis that the applicant in this case was an employee and not self-employed at the time of the accident. 
While we concur that s.7(3)(a) of the SABS applies in this case, it could be that some of the cases presented are relevant in non- arm’s length situations such as this, where a claimant receives remuneration following an accident even though they did not work following the accident. For example, in the matter of Perth Insurance Company and Salim Surani (Financial Services Commission of Appeal Order P16-00022), the applicant was self- employed as a pharmacist at the time of the accident and owned her business with her spouse. Following the accident, Ms. Surani worked very little, but her pharmacy continued to operate. 
Director’s Delegate Evans held that it would be inconsistent for a company’s profits to be relevant in determining pre-accident income, but irrelevant in determining post-accident income. The decision clarified that s.7 of the SABS, taken as a whole, allows business losses after an accident to be added to a person’s IRB, while business profits after an accident are deducted. Similarly, self- employment income before the accident remains self-employment income after the accident and is not re-characterized as “passive income” simply because little or no active work is performed. 
The Director’s Delegate held that the purpose of an IRB is to “provide compensation for income loss—but subject to statutory limits” and that the cost of the claimant’s lack of active participation in the business post-accident had already been taken into account in calculating their IRB. Failing to then allow the deduction of the post-accident income from the business for the same reason effectively means that the claimant’s lack of active participation will be counted twice in the IRB calculation. Could the same reasoning not be applied in this case, as the applicant received her regular pay post-accident, which she reported for personal income tax purposes as income from employment, and which should therefore be deducted as such for SABS purposes? By virtue of the adjudicator’s finding, the applicant in this case is benefiting from both her employment and from the SABS. 
In addition, although the adjudicator in this case dismissed s.7(3)(b) of the SABS, he referred to the applicant’s gross employment income in question as not being “earned [emphasis added] after the accident”, which is specified in s.7(3)(b) of the SABS, whereas s.(7)(3)(a) of the SABS specifically refers to gross employment income “received [emphasis added] … after the accident.” The adjudicator also apparently did not consider the definition of “gross employment income” in s.4(1) of the SABS, which “means salary, wages and other remuneration from employment [emphasis added] …”.
In this regard, we note that in the matter of Antoinette Nelson and State Farm Mutual Automobile Insurance Company (FSCO Al4 000848), the Arbitrator found that the Employment Insurance (El) maternity benefits that Ms. Nelson was receiving at the time of her motor vehicle accident and which she continued to receive following her motor vehicle accident were deductible as gross employment income in the calculation of her IRB, pursuant to s.7(3)(a) of the SABS. This is because they were received as a result of being employed after the accident and as they meet the definition of “gross employment income” in s.4(1) of the SABS. One could argue the “gross employment income” received by the applicant in this case was “as a result of being employed after the accident” and, as such, is no different from the EI benefits received by Ms. Nelson following her accident.

In making his assessment as to whether the amounts the applicant received for the period during which she did not work are post- accident income deductible pursuant to s.7(3)(a) of the SABS, the adjudicator referenced the Ontario Court of Appeal case of McNamee v. McNamee (2011 ONCA 533), which outlines “the essential elements of a legally valid gift. There must be (1) an intention to make a gift on the part of the donor without consideration or expectation of remuneration, (2) an acceptance of the gift by the donee and (3) a sufficient act of delivery or transfer of the property to complete the transaction.”
In this case, the adjudicator found that the applicant received a gift as all three criteria were met: (1) the applicant’s mother had no expectation of a repayment of the money, as the applicant testified that she was never asked to repay the monies received, (2) the gift was accepted by the applicant in order to help her pay her daily living expenses and (3) the applicant’s mother transferred the money to the applicant by way of payments from her company. It was documented as an expense of the company and received by the applicant.
With that, the adjudicator concluded that the amounts received by the applicant during the period in dispute were received as a gift and, therefore, are not deductible as gross employment income in the calculation of her IRB, pursuant to s.7(3)(a) of the SABS.