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Bonuses and Commissions – Calculating Gross Income for IRBs

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Summary: Allocate it to the date or period in which it was earned, not when it was received.

It has been our experience that these sources of income are often a source of error in the gross income calculation for income replacement benefits…both in the pre and post-accident periods.

How do I allocate this income?

Employees can receive bonuses (and commissions) in addition to their regular wages, and most often they are received after the period in which they were earned.  In general, this income should be included in the calculation of gross income as discussed in section 4 of the SABS.  However, which period to include the income in usually requires some consideration.

One key fact to remember is that bonuses and commissions can relate to a single sale/event or an individual’s or company’s performance over a period of time.  It is important that you understand the facts before proceeding.

For example: Mr. X’s employment contract states that he will receive a bonus of $5,000 if he exceeds his 2009 sales quota.  On January 7, 2010 he was involved in an accident.  On February 15, 2010 he received his bonus.

Sales in 2009                                         $190,000
2009 sales quota                                   $150,000
Amount by which quota exceeded      $40,000

Resulting bonus                                    $5,000

The key facts are that this income was received in 2010, but was earned for the insured’s performance in all of 2009.  Because it was received in 2010, after the accident, we often see this payment included as post-accident income.  However, as all the work required of Mr. X to earn the bonus was performed in 2009, it is more appropriate that the income be included in the pre-accident period.

The bonus reflects the insured’s performance over the entire year in 2009.  As such, the bonus should be prorated to the pre-accident periods that fall within the year.  This would include a portion of both the 4 and 52-weeks prior to the accident.

In every situation it is important to consider why the insured was receiving a bonus, and then to allocate the income accordingly.  Remember that the effect of reallocating a bonus can impact both the pre and post-accident periods.

As a further example, what would be the impact if Mr. X didn’t meet his quota in 2009, but instead met it in 2008?  Let’s assume he received the payment on February 15, 2009.

Sales in 2008                                                $190,000
2008 sales quota                                          $150,000
Amount by which quota exceeded             $40,000

Resulting bonus                                           $5,000

In this case, Mr. X’s bonus would likely have been included by his employer on the OCF-2 as earned income in the 52-weeks prior to the accident, as it was received on February 15, 2009.  However, as it relates to work that Mr. X performed in 2008, it should be reallocated to 2008, which is not in the 52-weeks prior to the accident.  As such, this income would be completely removed from the pre-accident period.

Key Decisions:

Sajkowski and Jevco – FSCO A-009213 – reallocation of bonus

Gaudreault and Pilot – FSCO P-007144 – reallocation of real estate commissions

What are you to do?

When considering how to include a bonus or commission payment in the calculation of an insured’s pre- accident income, always obtain as much information as possible regarding:

  • the date the payment(s) was received;
  • the reasons why a bonus was paid;
  • the period in which the payment was earned; and
  • whether the income was reported on the OCF-2 and requires reallocation.

If you are dealing with a real estate agent, I recommend you refer to our blog on this topic.

If you have any specific questions, we would be pleased to talk with you directly or by email at