Individuals advancing claims for loss of income due to bodily injury may have historically underreported their income to the taxation authorities. A 2011 Statistics Canada study estimated the size of Canada’s “underground economy” at up to $36 billion. Other research (as well as our own professional observations) has shown that such underreporting is more prevalent among certain types of taxpayers than others. For example, a 2002 study in the journal Canadian Public Policy found that among self-employed individuals in the construction industry, approximately 31.5% of income goes unreported.
How does this failure to properly report to the taxation authorities impact on claims for loss of income?
What does the case law say?
In Ontario, the Statutory Accident Benefits Schedule (SABS) legislation specifically bars injured motorists from advancing claims for income replacement benefits based on unreported income.
With respect to claims in tort, however, Canadian courts have adopted two distinct approaches to the issue. The New Brunswick Court of Appeal, in Frenette v. Audet, refused the plaintiff’s attempt to introduce evidence that his actual historical income levels had exceeded those listed on his tax returns for reasons of public policy.
Most other jurisdictions, however, have rejected Frenette. In the leading case from British Columbia (Iannone v Hoogenraad, 1992 CanLII 1630 (BC CA)), the Court of Appeal dealt with both evidentiary and public policy arguments. The Court ruled that while in the absence of filed tax returns it would be difficult to credibly establish the plaintiff’s past levels of earnings, it was not necessarily impossible, so long as sufficient other forms of evidence were introduced (see below). With respect to the public policy argument raised in Frenette, the Court ruled that the rule of ex turpi causa was relevant only as to the determination of whether or not a claim arising out of illegal activities should be allowed to proceed in the first place, and could not be applied to exclude the plaintiff from advancing evidence in an otherwise valid claim. Similar decisions have been reached in other jurisdictions.
What can Counsel do to substantiate the losses?
The basic dilemma for plaintiffs’ counsel, as recently expressed by the Supreme Court of British Columbia (Legault v. Brock Shopping Centre Ltd. 2010 BCSC 687), is that the plaintiff “must ask the court to accept as a fact that he was dishonest on an annual basis in filing many false returns, and then he must persuade the court that his evidence at trial should be accepted, notwithstanding the undermining of his personal credibility.”
A review of some of the recent case law is useful in determining methods that can (and cannot) be used to substantiate and quantify unreported income.
1. Other Documents/Evidence
Even in the absence of accurately filed income tax returns, it may be possible to corroborate a level of historical earnings through other types of documentary evidence. Pay stubs, bank statements, sales invoices and other business records can be used to recreate the plaintiff’s income level with reasonable accuracy.
However, these documents must be pieced together into a meaningful, coherent “story”. In one recent case (Stein v. Kline, 2012 BCSC 573), the plaintiff claimed a loss of income from his part-time employment as a casual laborer for his brother. The plaintiff provided annotated calendars of the jobs he performed both before and following his accident; however, no calculations or other information were presented to estimate how many jobs the plaintiff was unable to fill as a result of his injuries. In addition, no records were provided showing the hourly wage the plaintiff was paid. As a result, the plaintiff did not recover on this element of his claim.
2. Statistical Data
In another recent case involving a self-employed artisan (Campbell v. Swetland, 2012 BCSC 423 (CanLII)), no financial data from the years immediately prior to the accident was provided in support of the income loss claim. As the Court noted, “There are no T-4’s. There are no invoices. There are no receipts. There are no books or ledgers. The Plaintiff has retained a business card, fliers and even a floor-plan for a craft show, but there are no sales records.”
In spite of this dearth of documentation, the Court accepted the evidence of the plaintiff’s expert, who calculated her earning capacity based on available statistical data relating to average wages for individuals with the same education and occupation.
3. Provide a reason for non-reporting
Finally, plaintiffs who have historically failed to report income to the taxation authorities will likely suffer from a lack of credibility; such a perception may impact on the plaintiff’s believability in other non-financial areas as well, such as in their description of their symptoms. If a potentially valid reason for failing to report can be provided, this may be helpful in rebuilding the plaintiff’s credibility before the Court (See Brintson v. Morris, 1991 CanLII 4380 (NS SC).
By Ephraim Stulberg. Published in the September 7, 2012 issue of Lawyers Weekly.