Is Interest Income Considered when Calculating an Income Replacement Benefit?

There are a number of ways that someone might earn interest income, be it on an investment, or as a result of late payment from a client. As with any income, interest must be reported for taxes. But, whether interest is included in the calculation of an income replacement benefit (IRB), is entirely dependent on whether the income was earned as a result of employment activities.

For the difference between employed and self-employed, please see our blog post on employment status.

Background

Subsection 4 (1) of the Statutory Accident Benefits Schedule (SABS), defines gross employment income as “salary, wages, and other remuneration from employment.” We note, of significance, is the connection between the income and employment.

For employed individuals, excluding self-employed, there are limited situations in which interest income is received as a result of their employment.  More often than not, interest income will be received as a result of investments, such as money held in a bank account, or other financial holdings. These do not have a connection with the individual’s employment, and as such, would not be considered gross employment income.

It is for self-employed individuals that interest income becomes a little more complex. As a general rule, if a self-employed person’s business generates or receives interest income as a result of business activities, this income would be revenue and included in the insured’s calculation of income from self-employment. An example of this would be interest received from clients as a result of a late invoice payment.

What does the legislation say?

There is limited decision on this topic at FSCO. However, an interesting case revolving around interest and other types of investment income is Ann Segal and Zurich Insurance Company (FSCO 3068). In this matter, the issue was whether the insured’s investment activities constituted a business, and as such, whether the investment income – including interest – could be considered.

Ann Segal argued her husband’s investment income was income from self-employment in trading in securities. Specifically, her husband was operating an investment business. Zurich argued Mr. Segal’s investment activities did not constitute a business, and as such, could not be included as income for the purposes of calculating an IRB.

In this case, the argument was denied because the insured did not appear to be operating a business. As such, any interest income was not included in the calculation of the insured’s income. Key criteria that would be considered in determining whether investment activities are from self-employment were provided in this decision. But the main point is whether the insured “was involved in an adventure or concern in the nature of trade.”

So what does this all mean?

Ultimately, if the interest income comes from the course of self-employment, then it would likely be considered income and included in the IRB calculation. Other sources of interest income, which are unrelated to employment or self-employment activities are not considered income for IRB purposes.

Interest income should not be confused with interest owing by the insurer, which is when the insurer is overdue on payments pursuant to s.51 of the new SABS (s.46 of the old SABS). This is covered in another blog, found here.

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