Summary
The Henderson-Briehl arbitration decision became the guide for calculating pre-accident income for an individual who had both employment income and self-employment losses under the Old SABS (O. Reg. 403/96). However, the New SABS (O. Reg. 34/10) appears to revert back to the methodology which was regularly used prior to that decision. As such, from September 1, 2010, self-employment losses can offset employment income in calculating an insured’s pre-accident income.
Calculating Pre-Accident Income with Self-Employment Losses
The Henderson-Briehl and ING Insurance FSCO decision (A01-001620), outlined that if the insured’s business was operating at a loss prior to the accident, the losses from self-employment could not be used to offset pre-accident employment income.
For example:
Pre-accident (52-weeks):
Losses from self-employment ($5,000)
Employment income $15,000
Pre-accident gross income $15,000
But the New SABS appears to change this accepted approach.
The New SABS has created definitions of self-employed individuals (s 3(1)) and for gross employment income (s 4(1)). In so doing, and based on the changes in the calculation methodology (s 7(2)1i), it appears clear the intent is to look at these income sources in isolation before incorporating them into the calculation.
For additional related blogs, we refer you to upcoming blogs on Employment Status, Gross Employment Income, and Self-Employed Person.
Therefore, based on the wording of the New SABS (s 7(2)), it appears the calculation is performed in a manner similar to the methodology employed prior to the Henderson-Briehl decision.
This means that if an individual has employment income AND has a business which is operating at a loss (often reported as such for tax purposes), the losses from self-employment can be used to reduce the pre-accident employment income when calculating the insured’s pre-accident gross income.
For example:
Pre-accident (52-weeks):
Losses from self-employment ($5,000)
Employment income $15,000
Pre-accident gross income $10,000
This obviously has a negative impact on the resulting IRB for insureds that operate a side business at a loss for the tax advantages, especially in light of subsection 4(5) of the New SABS (s 64.1 of the Old SABS).
What this means for you:
Any calculation that has a self-employment component can very quickly get complex. While not necessarily the case if the calculation is based on the last tax year, and the business has ceased completely after the accident, in all other situations it seems the normal course of action is to retain an accountant. So be sure to keep your eyes open for small hobby businesses an insured may be operating and reporting for tax, as this can impact the IRB payable.
If you encounter this situation and would like additional information, please do not hesitate to contact us at 1-800-380-7908 ext ASK (275) or at answers@adsforensics.com.