Employment Expenses Must be Considered when Calculating an Income Replacement Benefit

There are many factors that can affect income for an insured. Employment expenses are one piece of this puzzle.

If an employee, in the course of employment, is required to pay certain expenses as a means to earn income, they could have employment expenses. These expenses may be reported on a person’s income tax return, although the allowable amount of expenses will vary depending on how the individual earns income.

These employment expenses are different from business expenses which would be claimed by someone who is self-employed.

For more information on employment status, head over to our blog on that very topic. To learn more about the difference between employed and self-employed, we’ve handily covered that topic in another blog post.

What bearing do these expenses have on an Income Replacement Benefit (IRB)?

Expenses an employee incurs in performing their job, and which are deductible for tax purposes pursuant to the Income Tax Act, would also be deducted in the calculation of an insured’s income for IRBs.

Two separate cases confirm this: Dhir and (Lloyd’s) Non-Marine Underwriters and Sitnikov and Markel Insurance. In Dhir, which relates to SABS-94 (O. Reg. 776/93), the arbitrator noted the intention of an IRB is to provide the insured with a benefit that approximates after-tax income. By not deducting employment expenses, the IRB would grossly exceed after-tax income. “If gross income from employment for self-employed persons is treated as net of expenses, then gross income from employment for commissioned employees who are entitled to deduct employment expenses should be determined in the same fashion,” the arbitrator wrote. He found that determining gross income from employment by deducting employment expenses, is consistent with the overall intention of the scheme, producing an IRB that approximates an insured’s after-tax income.

Sitnikov, which relates to SABS-96, supported this decision.

There does not appear to be any changes in the new legislation (O. Reg. 34/10) that would alter the findings in these two decisions. As of the time of this writing, there are no decisions under the new legislation on this matter.

What questions to ask?

There are certain questions you need to ask your insured to determine whether employment expenses might factor in:

  • How did they earn income?  There are different expense allowances depending upon whether an individual is salaried, a commission employee, or employed in transportation, forestry, a tradesperson, or an artist.
  • Did they claim employment expenses for tax purposes? This would be found on line 229 of their personal income tax return.
  • If the insured has continued to work after the accident, are they still incurring expenses? If an insured were no longer working after the accident, then, generally, their employment expenses would stop, as well.

It is important to note that employed persons who are claiming employment expenses are obligated by Canada Revenue Agency (CRA) to keep detailed records.

What documentation should you request?

  • The insured’s tax return from the previous year. Provided their situation hasn’t changed, this would highlight details of employment expenses incurred and reported by the insured. Based on this, appropriate expenses can be estimated for the four- or 52-week periods.
  • Documentation that will confirm variable expenses, such as advertising or supplies. (ie. receipts, invoices, etc.). If there is significant fluctuation in the expenses, or where the expenses represent a large percentage of the insured’s income, documentation will assist in accurately allocating the expenses to the correct time period.
  • CRA required forms. The insured will have been required by CRA to fill out and/or submit certain forms, including:

              – Form TL2 — Submitted by transportation employees for meal and lodging expenses

              – Form T777 — Used to calculate allowable employment expenses

              – Form T2200 — Completed by the employer

There can be many intricacies with this calculation issue. If you have questions on a specific matter, don’t hesitate to contact an ADS accountant.

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