Is Rental Income Passive or Self-Employment in Nature?

The treatment of rental income/losses are often a grey area when quantifying income replacement benefits (IRB).  Should it be excluded as passive income or included as self-employment income?  It has historically been our position that this determination should be made case-by-case based on the claimant’s day-to-day involvement with the rental properties.

In the recent Licence Appeal Tribunal (LAT) decision, Martin v The Personal Insurance Company (21-010949/AABS), Adjudicator Griffith found that the applicant was self-employed, and the losses associated with one of his four development/rental properties should be included as part of his IRB calculation.

At the time of the accident, the applicant was self-employed operating Martin Contracting and Martin Enterprises. Martin Contracting was described as the applicant’s excavating and snow plowing business, while Martin Enterprises owned rental and development properties. The applicant owned several properties: Rosedale, Main Street East, Wyld Street and Duke Street. The applicant had reported rental losses for tax purposes prior to the accident.

The applicant submits that his rental income should be treated as investment income and argues that if his rental losses are included, it “deflates” his IRB. The applicant submits that the income and losses from Martin Enterprises should only be factored into the IRB calculation if it relates to his self-employment. Further, the applicant argues that the services being provided at each rental property should be considered to determine whether it constitutes self-employment or passive rental income. The applicant indicates that he did not habitually engage in the rental properties, it was not his principal business, and the properties were purchased as an investment for his retirement and therefore, do not relate to his self-employment.

The respondent submits that the applicant was not a passive investor in real estate but rather, was working as a landlord and manager, and the ultimate purpose of the applicant’s work was profit. The respondent argues that the applicant purchased vacant land to build a duplex and he was the general contractor and therefore, this income should be treated as business income.

Adjudicator Griffith considered the applicant’s duties performed at each of the four properties individually and concluded that the Rosedale, Main Street East and Duke Street properties were all passive rental income. Specifically, Adjudicator Griffith found that the applicant, apart from collecting rent and paying the expenses, did very little in terms of maintaining these properties each month.

With respect to the Wyld Street property, Adjudicator Griffith found the applicant’s involvement to be related to his self-employment. Specifically, the applicant purchased vacant land and was building a new duplex on the property at the time of the accident. The applicant spent 80 to 90 hours digging the foundation, installing the weeping tile and outsourcing some of the foundational work. The applicant registered a business to carry out real estate development and obtained a Master Business Licence on July 21, 2017, which describes the nature of his business activity as rental housing and rental development. Adjudicator Griffith concluded, “I find the development of the Wyld property was commercial/business in nature rather than a capital investment and the applicant was therefore self-employed with Martin Enterprises as it related to the Wyld property. The applicant was the owner of the property and acted as the general contractor with the sole purpose of building a duplex. There is nothing passive about his involvement in this venture.”

Accordingly, it was found that the applicant was entitled to an IRB less any applicable deductions in relation to the Wyld Street property.  Therefore, this decision confirms our longstanding approach to assess these situations case-by-case based on the claimant’s day-to-day involvement with the rental properties.

Read the decision in full detail here: Martin v The Personal Insurance Company (21-010949/AABS)