Income Replacement Benefits Payable for Owners of a Corporation

Quite often, our Insurance Claims & Loss Litigation team is requested to calculate income replacement benefits (IRBs) in circumstances where the claimant is an owner of an incorporated business, is paid wages from the business and prepares a T4 to report employment income for personal income tax purposes.

In situations like this, it is our approach that as an owner of the business, they are not considered to be an arm’s length employee. This is because the amount the person is paid often does not represent the amount that an arm’s length employee would be paid for performing the same duties.  Further, the amount of wages paid to the owners of a business during a period may not be representative of the actual business earnings derived from their business activity during the period.

Therefore, in order to calculate the IRBs owing to a business owner, it is necessary to determine the income/(loss) of the business after adding back all amounts paid to the business’ owners.  The income/(loss) is then allocated to the business’ owners on the basis of their relative contribution to operating the business.

The resulting calculation is based on the actual earnings derived by the claimant’s self-employment activity and ensures that their IRBs realistically reflect their actual income situation. Thus, avoiding both over-compensation – where the employment amounts paid to a business’ owners exceed the business’ actual earnings during the period – or under-compensation – where the employment amounts paid to a business’ owners are less than the business’ actual earnings during the period.

The recent Licence Appeal Tribunal (LAT) decision, Nura v Allstate Insurance Company of Canada (21-000889/AABS), confirms our above approach.

In this claim, the applicant both worked at, and was a 50% shareholder of a Montana’s Smokehouse.  Given this, the respondent requested documentation supporting the income of the applicant’s business, however, the applicant asserted that this information was not necessary for the purpose of calculating their IRBs.

The adjudicator agreed with our above approach stating, “As the applicant was confirmed to be not only an employee, but also a co-owner of Montana’s, the applicant was considered to be a self-employed business owner.  As such, the respondent asserts that in order to calculate IRBs it is necessary to determine the income/loss of the business by adding back all of the amounts paid to the business owners. The income/loss would then be allocated to the business’ owners on the basis of their relative contribution to the business.”

“The respondent’s cited caselaw includes the Tribunal decision A.P and Economical Mutual Insurance Company 2019 CanLII 101433 (ON LAT), which I find to be persuasive on the issue.  In this decision, similar documentation was requested for a self-employed hairstylist in order to calculate IRB quantum, namely, corporate income tax returns, documentation of the salon’s monthly revenues, labour costs, average costs and the insured’s pre and post-accident duties.  The adjudicator held that by not providing this documentation, the insured had fallen short of providing documentation required to calculate IRBs under the Schedule as a self-employed person.  I similarly find that the financial information requested by the respondent was reasonably necessary to calculate the quantum of IRB.”

Read the decision in full detail here: Nura v Allstate Insurance Company of Canada (21-000889/AABS),