A close look at the impact that Employment Insurance (“EI”) Benefits, Canada Pension Plan (“CPP”) Disability Benefits, Pension Benefits and Severance Pay have on the calculation of Income Replacement Benefits (“IRBs”) under both the ‘Old’ and ‘New’ (Sept. 1, 2010) SABS.
Over the course of the past year, the forensic accounting professionals at H&A have fielded literally hundreds of questions from our clients regarding the inclusion (or deduction) of various non-salary payments in the calculation of an IRB under the new SABS.
Given this level of interest, I thought it helpful to provide a summary of our interpretation of the new SABS with regards to some of these items. As you will see, we have found that most of these payments are treated the same way under both the old and new SABS, although some exceptions do exist.
1. How do EI benefits received by the claimant impact the calculation of an IRB?
A. For claimants who were receiving EI benefits at the time of the motor vehicle accident (“accident”):
First and foremost, if a claimant was receiving EI benefits at the time of the accident, they are eligible for IRBs. However, under both the old and new SABS, the calculation of their IRB can only be predicated on their income from employment in the 52 week period prior to the accident, not on their income from employment in the 4 week period prior to the accident.
In addition, the claimant’s gross annual income from employment in the 52 week period prior to the accident is comprised of not only the EI benefits they received in respect of this pre-accident period, but also their earnings from employment, including employer-paid benefits, and from self-employment. Any severance pay which the claimant may have received in respect of the 52 week period prior to the accident, between the end of their employment and the commencement of the period for which they received EI benefits, is specifically excluded from the calculation of gross annual income from employment under both the old and new SABS.
B. For claimants who were not receiving EI benefits at the time of the motor vehicle accident, but did receive EI benefits in the 52 week period prior to the accident:
If a claimant was not receiving EI benefits at the time of the accident, but was employed or self-employed for at least 26 weeks during the 52 weeks before the accident, the calculation of their gross annual income from employment includes any EI benefits which they received in the applicable period of analysis, be it the 4 week period, 52 week period or last fiscal year prior to the accident.
C. For claimants continuing to receive EI benefits following the accident:
If the claimant continues to receive EI benefits following the accident, these benefits are not deductible in the calculation of their IRB, under either the old or new SABS. This even includes the situation where a claimant receives EI sick benefits as a consequence of the accident, since EI benefits are never deductible in the calculation of the claimant’s IRB.
Often a claimant does not have details regarding the gross amounts of their EI benefits and the period in respect of which they were received. To help expedite their claim for IRBs, a claimant can obtain these details online by registering for a Service Canada account at www.servicecanada.gc.ca or by calling Service Canada at 1-800-206-7218.
2. How do CPP disability benefits received by the claimant impact the calculation of an IRB?
CPP disability benefits received by a claimant prior to an accident are not included in the determination of their gross annual income from employment, and the ongoing receipt by the claimant of these benefits following an accident is not deductible in the calculation of their IRB, under both the old and new SABS.
CPP disability benefits received by a claimant as a result of an accident are deductible as payments for loss of income in the calculation of an IRB under both the old and new SABS, if the accident was on or after January 1, 2002.
In order to be eligible for CPP disability benefits, the claimant’s disability must be both severe and prolonged. A severe disability is defined as one which prevents them from doing their former job, or any other job, on a regular basis. A disability is prolonged when it is expected to last at least one year or is likely to result in death.
In addition, to be eligible for CPP disability benefits, the claimant generally must satisfy all of the following conditions:
a) they are under 65 years of age;
b) they stopped working because of their medical condition;
c) they earned more than $4,800 in 2011; and
d) when they were working, they either:
a. contributed to the CPP for at least 4 of the last 6 years; or
b. effective March 3, 2008, contributed to the CPP for at least 25 years and made valid contributions to the plan during 3 of the last 6 years.
In order to ascertain whether they satisfy the latter condition, claimants can readily obtain a Statement of Contributions from Service Canada, either through their online service or by contacting Service Canada directly.
The CPP disability benefits are payable beginning four months after the date Service Canada finds the claimant to be disabled. For example, if the claimant has an accident in November and is determined by Service Canada to be disabled as a result of the accident, CPP disability benefits will usually commence on March 1st of the year following.
The CPP disability benefit itself is comprised of a fixed amount that everyone receives ($433.37 per month for 2011), plus an amount based on how much the claimant contributed to the CPP during their working career, to a total maximum combined monthly amount in 2011 of $1,153.37. In addition, the monthly CPP disability, as first determined, is indexed effective January 1st each year. This means that an IRB calculation must be revised each year, effective January 1st, by the indexed amount of the CPP disability benefit. The annual rate of indexation is readily available each December on the Service Canada website.
In both the old and new SABS, CPP disability benefits received by the claimant are deducted in the calculation of their IRB, as are the CPP disability benefits available to the claimant (unless the claimant has applied to receive these benefits and is awaiting the outcome of their application). As a result, if a claimant has not applied for CPP disability benefits, but it is thought that their disability as a result of the accident is both severe and prolonged, and their Statement of Contributions reveals that they satisfy the contribution conditions, it is possible that their IRB should be reduced for CPP disability benefits by at least the minimum monthly amount payable. Further, the maximum monthly CPP disability benefit that may be payable, and therefore deductible, can be determined with reference to the Statement of Contributions.
However, if the claimant has also been receiving short or long-term disability income benefits as a consequence of the accident, which are also deductible in the calculation of their IRB as a payment for loss of income, due consideration must be given to the impact that the claimant’s subsequent retroactive receipt of CPP disability benefits may have on the IRB calculation. It may well be that, by virtue of the policy wording, the short or long-term disability payments are retroactively reduced by the CPP disability benefits subsequently received by the claimant. Accordingly, and subject to issues pertaining to the taxation of both the CPP and the short or long-term disability income benefits, there may be no impact on the calculation of an IRB stemming from the deduction of CPP disability benefits which the claimant has failed to apply for. However, contingent on the magnitude of their pre-accident income, this will not be the case if the claimant’s only source of collateral benefits is the CPP.
3. How do pension benefits received by the claimant impact the calculation of an IRB?
If the claimant retires within the 52 week period prior to their accident, are the pension benefits that they receive included in the determination of their pre or post-accident incomes from employment or deducted as payments for loss of income in the calculation of their IRB?
A. At the time of the accident:
Pursuant to subsection 2(5) of the old SABS, “a person is employed if, for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment”. However, in order to receive a pension, employees must resign from their employment. As a result, retirees are no longer engaged in employment and any pension benefits that they receive in this regard are not income from employment. Similarly, the definition of ‘gross employment income’ in subsection 4(1) of the new SABS “means salary, wages and other remuneration from employment” which, therefore, does not include pension benefits, as they are from retirement, not “from employment”. As such, pension benefits are not included in the calculations of the retiree’s income from employment in either the pre or post-accident periods of analysis.
However, it is important to remember that while claimants who are receiving pension benefits at the time of the accident, and are not otherwise employed or self-employed at the time of the accident, are considered to be unemployed for SABS purposes they are still eligible to receive IRBs if they had been employed for at least 26 weeks during the 52 week period prior to the accident, under both the old and new SABS. The IRBs payable to claimants in such circumstances are predicated on their incomes from employment, including self-employment, and any EI benefits that were earned and received, respectively, prior to their retirement and within the 52 week period prior to the accident.
B. Following the accident:
What if the claimant retires from their employment following the accident and, as a result, receives pension benefits? In this situation, the question is whether or not the pension benefits received may be deducted from the claimant’s IRB as a weekly payment for loss of income under an income continuation benefit plan, particularly if they are being paid to the claimant by virtue of the disability provisions of the pension plan.
This is one area in which the definitions in both the old and new SABS require careful consideration. The new SABS paragraph 3(7)(d) definition of payments for loss of income, like that of the old SABS subsection 2(9), “deem[s] to include” only two items: CPP disability benefits and “periodic payments of insurance”, provided that they meet certain criteria. As neither definition appears to refer to pension benefits, these do not appear to be deductible as payments for loss of income in the calculation of an IRB. But can the two items identified in the brief list contained in these definitions be considered exhaustive?
In the February 10, 2011 Variation Order in the matter of Intact Insurance Company and Joseph Anton Marianayagam (FSCO P09-00028V) (“Marianayagam decision”), the FSCO Director’s Delegate found “that subparagraph 7(1)(1)(i) of the old SABS is not limited to the two examples set out in subsection 2(9) [emphasis added]”. In principle, however, non-indemnity payments (payments of a previously determined amount upon proof of a specified event, such as life insurance and employee retirement benefits, regardless of whether there has been a pecuniary loss) do not result in true overcompensation. On the other hand, indemnity payments (payments for a pecuniary loss) can be clearly identified as duplicating an item of damage, such as a claim for IRBs, and, accordingly, do constitute overcompensation. These are, therefore, generally considered to be payments for loss of income for SABS purposes. On this basis, it would appear that pension benefits paid by virtue of the disability provisions of the pension plan do not constitute deductible payments for loss of income in the calculation of an IRB, as the claimant is ultimately in receipt of their pension benefit, whether in the normal course of retirement or in premature retirement as a result of their departure from the employment due to disability.
4. How does severance pay impact the calculation of an IRB?
The new SABS is not entirely consistent with the old SABS when it comes to the treatment of severance pay. As previously mentioned, section 64 of the old SABS, which provides specifically that “payments of severance pay or termination pay shall not be included in a determination of a person’s income” for IRB purposes, is embodied in the new SABS subsection 4(1) definition of ‘gross employment income’, which “excludes any retiring allowance within the meaning of the Income Tax Act (Canada) and severance pay that may be received”. As a result, we ignore severance or termination pay received by a claimant when we calculate their pre and post-accident incomes from employment for IRB purposes.
Further, subsection 2(8) of the old SABS provides specifically that “payments of severance pay or termination pay are not payments for loss of income”. As a result, we also ignore severance or termination pay received by a claimant in respect of a post-accident period and, therefore, do not deduct them when determining their IRB if their accident was before September 1, 2010.
However, there is no equivalent provision in the new SABS, which raises a question about whether or not severance or termination pay received by a claimant by virtue of losing their job as a result of the accident is deductible as a payment for loss of income under an income continuation benefit plan in the determination of their IRB. We can only assume that the removal of subsection 2(8) of the old SABS in the September 2010 legislation was intentional, since to include this subsection along with our newfound understanding of the phrase “deemed to include”, from the February 2011 Marianayagam decision, would be repetitious if one also assumes that retiring allowances, severance or termination pays constitute payments for loss of income.
If we accept the assumption that these are, in fact, payments for loss of income, the issues then become whether or not severance or termination pay constitutes an indemnity payment and, if so, whether these payments for loss of income are “received by or available to the person as a result of the accident … under any income continuation benefit plan”, as required by the definition of ‘other income replacement assistance’ in subsection 4(1) of the new SABS. Certainly, retiring allowances, severance or termination pays are literally a form of income continuation. Whether they also constitute payments under an “income continuation benefit plan” and are, therefore, deductible in the calculation of an IRB emanating from an accident on or after September 1, 2010 remains to be clarified by the legal community.
As we have seen above, the devil is in the details when it comes to the impact of non-salary payments on the calculation of an IRB. Each of EI benefits, CPP benefits, pension benefits and severance pay has its own set of issues and hurdles, often relating to timing with respect to the claimant’s accident. The good news is that most of these payments are treated identically under the old and new SABS. The bad news is that the jury is still literally out on certain issues in the areas pension benefits and severance pay, to name but a few, as we await legal interpretations of these and other aspects of the new SABS wording.
First published in Without Prejudice magazine, OIAA, Volume 76, Number 3, November, 2011.
A Partner at H&A Forensic Accounting Inc. (www.HAForensics.com), Janet L. Olsen, CA, CFE, is a forensic accounting specialist who has performed thousands of complex financial investigations focusing on accident benefits, financial dependency and tort. Her expertise is also reflected in technical and second opinion reports designed to guarantee the highest standards of quality and accuracy. Tel: 866.233.5577 or e-mail firstname.lastname@example.org
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