How are loans considered in an Income Replacement Benefit (IRB) calculation?

Generally, loans received by an insured, regardless of the source, are not considered income for IRB purposes. But, as with most situations, and because this would be a really short topic otherwise, it’s not quite so cut and dry.

Traditionally, this issue is more prevalent after an accident than before, but the same principles apply. Whether it is a self-employed individual who cannot work post-accident and is taking loans from their business to survive, or an employee who is receiving loans from his employer, family, or friends, you need to understand whether the receipt of money is related to employment or self-employment activities.

Background:

Subsection 4(1) of the SABS defines gross employment income as “salary, wages and other remuneration from employment…”

Subsection 3(1) of the SABS defines self-employment as a “trade, occupation, profession or other type of business…” It would appear then that income from self-employment would be as a result of providing services as a business to customers in return for money or other payment type.

When calculating an IRB, only income is considered, be it gross employment income, income from self-employment, or even other income replacement assistance.

True loans would not be included in an IRB calculation because they are not income or other income replacement assistance, as defined in the SABS. This is further supported by the very nature of loans, in that they are repayable. So to determine whether the income received as “loans” by an insured should be considered in an IRB calculation, we need to address whether the “loan” is actually income.

Let’s look at an example.

Tran v. TD (FSCO A05-001715)

Mr. Tran and his brother were shareholders in a limited company. He was seriously injured in the motor vehicle accident and was unable to return to his pre-accident duties. Although he did attend at the business, he was mainly involved in non-business activities. An attempt by him to resume working in the business was not successful.

Mr. Tran entered into an agreement with the business, whereby he received a loan of $6,000 per month. The Arbitrator agreed these amounts represented a loan rather than payments of income. The Arbitrator’s decision was based on the fact that Mr. Tran was unable to engage in employment (i.e. work) and that, according to subsection 2(5) (Old SABS), the definition of employment meant one who was engaged in employment. Therefore, although Mr. Tran was a business owner, and receiving funds from his business, because he was not engaged, the payments he received were considered loan proceeds.

The decision clarifies that under the Old SABS there must have been some sort of ability to function in a commercial setting in order to be “engaged” in employment.

Judy Zirger and Commercial Union (FSCO A97-001386) identifies that “Each case must be determined on its own merits.” In this case, the question focused on whether or not the arrangement was indeed to enter into a loan agreement, and less so on the level of engagement of the insured. This decision relates to Ontario Regulation 776/93.

The New SABS

Ontario Regulation 34/10, which came into force September 1st, 2010, no longer includes a definition of employment, and therefore, the “engagement” condition may no longer be necessary for an insured to be considered employed. In fact, post-accident income from employment is deducted as “received,” which is given the dictionary definition: to take into one’s hands.

In all likelihood, the money would still be considered a loan, and not deductible, for the same reasons as in the Tran decision. This would especially be true if the insured was required to repay the funds. But the possibility exists that with the change in wording of the new SABS, the receipt of funds from an employer, even a loan, which may be deemed to be “as a result of being employed,” could be considered received and thereby deductible.

There are, to date, no decisions on this under the new SABS.

We note the rationale in excluding loans paid to a business owner from the business, would be similar to our rationale for excluding dividends received from an insured’s own business, in that it isn’t as a result of work performed. For more information on dividends, we refer you to our post.

Employees

For an employee, the first step is to determine whether the money is a benefit from the employer. If the employee is expected to repay the money, then it is a loan and should not be included as income. There may be an argument that the saved interest on an interest-free loan should be considered income, as this would be a benefit received as a result of being employed. There are, however, no decisions to date to validate or negate this point.

Much like the rationale outlined above in the Tran decision, if the insured is working at the time the loans are received, then it is necessary to investigate whether the loans actually represent payment for services provided by the employee, and as such, would be considered income for IRB purposes. If they are income received after the accident, they would be deductible pursuant to s.7(3) of the SABS.

So what does this all mean?

There is one important question to ask: Is the insured working in exchange for the “loans?”

If so, then you have to question whether the funds are actually a “loan,” or are really income, which would be considered in calculating an IRB. If the insured is not working, and the intent is that the monies will be repaid, they money is likely a loan, and would not be deductible as it is not income for SABS purposes.

For more information on the differences between the pre-September 2010 and post-September 2010 SABS, please see our blog post on that topic.

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