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Return to First Part of Chapter
11. Common Income Situations
(a) Motor Vehicle Accident (MVA) Settlements and Awards IMPORTANT NOTE:
Situations involving MVA settlements or court awards are complex and demand the attention of a competent lawyer. Recipients attempting to manage such cases as these on their own do so at great risk. . Overview
One of the most common situations of complex income chargeability is that of motor vehicle accident (MVA) awards and settlements.
The problems arise due to the multi-faceted nature of most MVA settlements or awards. Different types of 'damages' receive different treatments as exempt assets (see Ch.8 "Asset Rules") and as exempt income [see s.8(c) above]. Primarily, (1) damages for pain and suffering and related special damages (expenses), (2) FLA damages for loss of guidance, care and companionship, and (3) similar WCB and WSIB payments for "non-economic loss" - are exempt as income and assets.
MVA court awards usually contain elements of wage replacement, special damages(expenses), pain and suffering compensation - as well as "dependent claims" under the Family Law Act (FLA) for loss of guidance and care-giving efforts. As well, "pecuniary loss" (ie. earnings loss) is now dealt with under the Statutory Accident Benefits Schedule (SABS) system - which is usually handled outside of the court system. Also, lawyers and insurance companies often negotiate (or courts order) "structured settlements" which provide for blended periodic payments which blur the line between "income" and "assets" for ODSP chargeability purposes.
In "lump sum" settlements the problem can get even more unwieldy as - while they notionally include all of these types of compensation - they do not always differentiate the dollar amounts for each type.
Interest on lump sum retroactive MVA entitlements is discussed in (d) below.
. Case Law
The case of Re Gates and COMSOC 19 OR (3d) 158 (Div Ct); [1998] OJ #5050 (QL)(Ont CA) considered whether weekly no-fault auto insurance SABS (Statutory Accident Benefits Schedule) benefits for an unemployed person were exempt as damages for pain and suffering. The Divisional Court, approved by the Court of Appeal, held that such payments where in the nature of loss of normal activities of life and therefore akin to wage replacement, which was not exempt. The case necessarily endorses the proposition that true wage replacement SABS are also not exempt from income chargeability.
In London (City) v Gibbons 69 OR (2d) 389 (Dist Ct, 1989) the court refused to allow an action by the Director against the recipient based on an "Agreement to Reimburse and Assignment" (see Ch.8 "Applications and Procedures") after a lump sum MVA settlement. The law of the time conditioned the Director's right to be reimbursed on the receipt of monies for "maintenance". The court (to me unconvincingly) distinguished the nature of the settlement as being one of "compensation" in the sense of a capital sum rather than "maintenance" which it equated with an income stream. On this reasoning the court refused to honour the Agreement to Reimburse and Assignment. It is worth noting regarding Gibbons that the present wording of the Regulation [s.15] (which was changed in response to Gibbons which governs Agreements to Reimburse and Assignments now directly maps the concept of 'chargeable income': "(i)f money ... that, if received, would be or would have been included as income for the purpose of calculating the income assistance payable...". That said, the Gibbons case may be pointed to as general authority for the principle that most MVA court settlement (as opposed to SABS amounts) are compensation for loss rather than "maintenance". While the term "maintenance" is no longer used for purpose of reimbursement in Ontario social assistance law it is nonetheless the essential nature of ODSP income support. The case may find life yet again in some future fact situation.
A thorough and reasonable review how to treat the various elements of an MVA award and miscellaneous litigation amounts as regard to exemption as income was undertaken in the case of Re Gratton and London (City) 18 OR (3d) 354 (OCJGD, 1994) (appeal to Div Ct dismissed). In Gratton the total settlement was itemized as $35,700 of which $26,000 was general damages, some $4,300 was awarded for legal costs and $5,400 for disbursements. The plaintiff paid his solicitor roughly $8,600 towards his actual bill. In applying the (then) $25,000 income and asset exemption the court started from the principle that it was the "net" recovery that was to be considered for these purposes. Thus it immediately reduced the award by the amount of actual legal costs and disbursements down to $21,7000. As this remaining amount was all notionally for general (ie. pain and suffering) damages no portion of the settlement was recoverable by the Director, it all being exempt under the $25,000 rule, discussed above.
An enterprising plaintiff in Lesperance v Stoney Creek Dairy Ltd [1994] OJ #373 (QL) (OCJGD) tried to recover from the negligent driver the "lost" FBA (Family Benefits Act) allowance that they would 'otherwise' have been entitled to had they not been disentitled by reason of an MVA "general damages" (ie. pain and suffering") payment in the amount of $98,000 (well over the $25,000 exemption). The plaintiff argued that they would have to use their 'pain and suffering' damages for personal support (ie. food and rent) and this would be unfair. The court dismissed the claim on formalistic "causation" reasoning (ie. the MV accident didn't "cause" the loss - the payment did, and the payment was not negligent) - rather than to address the fundamental double-compensation policy issues underpinning the case.
. Handling Undifferentiated Settlements
Not all MVA settlements (as opposed to court awards) lend themselves to itemization as in Gratton above, as the solicitors at that point do not always have the foresight to break-down the lump sum for collateral benefit purposes such as arise in the ODSP situation. In those cases ODSP typically approaches the recipient to seek from their lawyer a letter 'estimating' the allocations. If this allocation is reasonable then the Director tends to accept it.
Those anticipating such settlements would be well-advised to make their counsel aware of the issues discussed in this section and to ensure that a reasonable allocation is recorded somewhere - preferrably in the settlement documents themselves.
(b) Spousal (and Child) Support
Note: By ODSP General Regulation s.43(1)35, effective 01 January 2017, child support is now exempt as income. Spousal support is - almost without exception - deductible dollar-for-dollar from ODSP income support.
The normal manner in which support payments occur is as a direct payment to the recipient, with a deduction from the income support cheque showing on the cheque statement. An enterprising family court judge whose decision was reviewed in Giles v Villeneuve [1998] OJ #4492 (QL) (OCJGD) attempted by court order to override the deductibility of a support payment, but was corrected by the General Division, which noted that the deductibility was a matter of statute law.
. Case Law
An early case on this issue was Director (ODSP) v Favrod [2006] OJ #653 (QL) where a disabled ODSP adult recipient lived with her mother who was not receiving social assistance. The separated father made payments to the mother originally styled as "child support", which the Director wanted to deduct. However the Tribunal held - later supported by the court - that the "support" was in fact income to the mother (who was not in the benefit unit) to assist her as a care-giver with the extraordinary duties which she faced, not income to the recipient - thus avoiding deduction of the income from the recipient's income support.
Then in 2011 the Court of Appeal decided the case of Ontario (Disability Support Program) v. Ansell (Ont CA, 2011), which expanded and articulated the Favrod principle extensively. In this case Laskin JA (speaking for the court) considered whether child support payments made to the co-resident mother of a 21 year old recipient (an independent adult in her own one-person benefit unit) by her father counted as chargeable income for purposes of ODSP financial eligibility. The key phrasing from the definition of income under consideration was “paid to or on behalf of or for the benefit of every member of the benefit unit" [ODSP Reg 37(1)]. As in Favrod the court accepted as a fact that the therapeutic needs of the recipient required significant and ongoing commitment by the mother in terms of support, attendences and expense.
In holding that child support payments made to a person outside of the benefit unit were not automatically to be counted as income to the 'child' (read 'offspring') recipient, the court applied a range of reasoning, including the following (except as noted, these principles are also applicable to welfare cases):- that the 'purposes' of the ODSP program [Act, s.1(b)] made support of the recipient a shared duty between government, the community, family and the individual themselves, so that deducting the contribution of family against that of government defeated this purpose [SS Note: this is not applicable in welfare cases because the statutory 'purposes' do not include any contribution by family];
- the right of the 21-year old recipient to co-reside with the mother but still receive ODSP as a one-person benefit unit reflected a legislative intent to separate her income from that of her mother for eligibility purpose;
- the recipient had no legal standing to enforce the child support order;
- that the support order did not specify how the money was to be spent;
- that the recipient had no right of accounting from the mother as to how the money was spent;
- that the recipient had no control over how the money was spent [this is akin to the Henson principal applied to assets: see the ODSP Guide at Ch.7; OW Ch.7];
- that the money was taxed in the mother's hands;
- that the child support ends with the mother's death.
Lastly, the Court of Appeal also held that automatic deduction ('charging') of child support paid to the single parent of the recipient was discriminatory under the Human Rights Code's protected category of 'family status'. This is because monies spent by a co-resident parental couple that had an incidental benefit to the recipient (still a one-person benefit unit), such as home improvements, would not be deducted from the recipient while those paid in the form of child support to a single parent would, under the Director's argument, be deductible [paras 46-47]:[46] A separated custodial parent of a disabled adult attending school usually depends in part on the payment of child support to financially maintain the household. If the Director’s position is upheld, however, even though the custodial parent uses the child support to repair the same roof, buy the same new computer or replace the same television set, those expenses would in effect become the disabled adult’s income under s. 37(1) of the Regulation and reduce or eliminate entirely her income support. (c) Business Income Treatment
. Overview
There is a distinction in law between "employment" and "business" income. There are various terms used to describe this distinction: 'employment' versus 'self-employment', contracts "of service" versus contracts "for service". There is a general legal test to distinguish them which examines the degree of control exercised over how the work is performed, who bears the risk of loss, who bears the chance of profit and ownership of tools. It is beyond the scope of this program to otherwise explore this distinction.
The discussion in s.3 "Earnings Income Treatment" (above) notes that - generally - "net income" from a business is treated the same as employment earnings (ie. wages) for purposes of applying income exemptions and determining 'chargeable' income. It also however noted some inconsistencies in this treatment [s.3(b): "Source Deductions"].
Monthly reporting by the recipient is integral to the determination of net income. Further, the Director reserves the right to approve (and thus disapprove) any particular business venture under the duty of the benefit unit to realize all available resources. Their reasoning is that if a member (who is medically-capable of working) is pursuing a 'lost cause' business then they are not satisfying this duty (see Ch.11 "Workfare").
Once the "net" business income is determined then the further reductions for earnings incentives, child-care expenses, and disability-related expenses are applied - in the same manner as if the income were from employment (see s.3 above).
The treatment of a self-employed person's income tax and CPP liability is less clear, and is discussed below.
. Allowable Business Expenses
As to what expenses may be deducted frmo gross business income the legislation provides little assistance. ODSP law only vaguely characterizes business earnings as the [Reg s.38(1)1]: ... net monthly income as determined by the Director from an interest in or operation of a business ...
This phrasing is key to the issue and has survived from the previous General Welfare Assistance Act into the present OW and ODSP legislation. The plain meaning to be given to this passage is that business income to be considered for chargeability IS reduced by business expenses (ie. "net") - BUT that the specific allowable business expense deductions are left to the 'discretion' of the Director. Like any legally-assigned 'discretion', the Director must exercise it reasonably. Any exercise of the discretion which results in an arbitrary and complete denial of business expense deductions would be illegal. As such, the disallowing of business expenses by the Director is broadly open to reasoned argument before the Social Benefits Tribunal.
Note that ODSP allows a $100 per month expense deduction, without the need for substantiating receipts [see Ch.4, s,2(g): Benefits, Listed Benefits, Employment-Related Benefits].
However the 'rules' set out in the Policy Directive are not always so generous. The treatment of a business owner's personal liability for income tax, CPP and EI contributions, plainly deductible from chargeable earnings income in the employment context - is quite ambiguous in the business situation (neither is it clearly addressed in Policy Directive 5.4). This silence may be intentional as the express deductibility of these items set out in the regulation [s.38(1)1] appears to apply only to monthly deductions from "from wages, salaries, casual earnings or amounts paid under a training program" - all of which are employment situations.
In my opinion however there is no valid legal reason to exclude similar Income Tax, CPP and EI premium deductibility from business income in the determination of "net income". The above-cited provision [Reg s.38(1)1] can be read consistently with such an interpretation if it is understood as applying specifically to the more common employment context where monthly "source deductions" are so much the rule. The more general phrase "net monthly income ... from an interest in or operation of a business" is quite able to capture within it the deductibility of these other federal obligations.
Further, there is no valid policy reason to allow them in the employment context but exclude them in the business context. While these items might not be deducted for income tax purposes that is only to ensure that the business owner pays tax on their true "profit". The policy purposes of social assistance are to provide a recipient's benefit unit with enough money to live.
Further, the Director's logistical difficulties of 'pre-estimating' next year's tax liability on a monthly basis - for purposes of deduction - are not sufficient reason to treat employees and businesses unequally in this regard.
. Case Law
The following cases have been largely superceded by the express statutory provisions referred to above: "net monthly income [Reg s.38(1)1], but are still useful for the manner in which they treat the issue generally.
In Lemay v Ottawa-Carleton [1997] OJ #3816 (QL)(Div Ct) the court considered this same key (above-quoted) phrase and issue in the context of the old General Welfare Assistance Act. The court reviewed the other income deductions allowed in the legislation such as the work incentive deductions (then called "STEP") and held that the correct starting figure for business income was the GROSS amount - before expense deductions.
Later however in Moon v Director (ODSP) [2002] OJ #2045 (QL)(Div Ct) the court was faced with a similar issue as to whether earnings from newspaper delivery constituted employment or business income (although it assumed that treatment as a business WOULD permit business expense deductions). While the case involved an ODSP recipient the key statutory wording was the same as discussed above. The court criticized the Tribunal for examining this issue from an employment law perspective and using an employment law questionnaire set out in their policies, stating: This legislation is social benefit legislation which should be interpreted broadly with its purposes in mind. As a general proposition, we accept the appellant's submission that it is desirable to encourage persons who receive the benefits provided by this legislation to supplement their benefit income by earning what they can. Where such a person is able to engage in some gainful activity and operates a modest business by entering into a contract for services, the legislation should be applied in such a way as to encourage him or her. Expenses incurred in operating such a modest business should be deducted in calculating entitlement to benefits. Oddly, the Moon case - while based on essentially the same wording considered in LeMay did not consider, but simply assumed that if the recipient was categorized as engaged in a business then he would be entitled to have his earnings reduced by business expenses. In so doing the court implicitly adopted the 'plain meaning' of Reg s.49(1)1 which I outlined above. There is no reference in the Moon case to the earlier LeMay case. It appears that LeMay is an anomaly.Case Note:
In the ODSP case of Jennings v. Minister of Social Services of Ontario (Div Ct, 2015) the court held (as it rarely does) that the SBT's misapprehension of evidence was so substantial that it constituted a 'question of law' (thus triggering the court's appeal jurisdiction). The legal error was twofold in that the Tribunal considered real estate assets and income of a partnership (in which the appellant had an interest) to be his personal financial resources which were chargeable against him for ODSP purposes, and also that it failed to consider financial disclosure provided by the appellant to Ontario Works during the unified intake process (the applicant's initial financial information was taken by OW) as being effective disclosure to ODSP:The Tribunal found that Mr Jennings’ position that “there was no need for him to inform the Director separately when he had already informed Ontario Works borders on the ridiculous.”[61] It was not ridiculous. It was correct, at least until the time at which there was a change of circumstances, upon sale of the property in July 2011. The court also held that it was only on the sale of the partnership interest (and the receipt of sale proceeds) by the appellant that such funds could be chargeable against him, since prior to that time the partnership interest was not available to him as a liquid asset. The court cited Reg 28(1)17 as exempting (from asset chargeability) real estate interests as long as "the person with the interest in the real property is making reasonable efforts to sell his or her interest."
The court took the unusual step of ordering that re-assessment of the appellant's eligibility in light of it's findings be conducted by an ODSP worker who had no earlier involvement with the file, and that - should a new SBT appeal arise from the circumstances - that it not be put before the same member who issued the Order under appeal.
(d) Interest on Retroactive Lump Sum Payments
. Overview
Situations where a recipient receives a retroactive lump sum payment - such as an MVA settlement or STD/LTD back-payments - often involve the payment of accrued interest on the delayed payment (retroactive government entitlements usually do NOT include interest).
The issue can arise in such situations as to whether the interest should be treated in the same way as the principal amount for income and asset purposes (as different types of monies are treated quite differently), or whether it is 'general' - and chargeable - income. While in my experience it is usual for any interest amounts to be allocated proportionally with the elements of the principal payment, and thus subject to the same income and asset treatment, the issue did arise directly in the case of Mule v Director, ODSP - considered below. The case is essential reading for anyone involved in such a conflict.
. Case Note: Mule and Director, ODSP (Div Ct, 2007)
In Mule v Director, ODSP (Div Ct, 2007) the court was faced with the (relatively) straightforward issue of whether:
... prejudgment interest on damages for pain and suffering form(s) part of the "damages or compensation for pain and suffering" received by an injured person?
Note:
"Prejudgment interest" (as distinct from "post-judgment interest", which is self-explanatory) is a concept used in civil litigation (lawsuits). It operates to give a successful plaintiff interest on damage awards (which are always made later) for the period between the filing of the lawsuit and the issuance of judgment. Under the Courts of Justice Act, s.128, [and Rules of Civil Procedure R53.10], the rate for pain and suffering (called "non-precuniary loss") is five percent. This point is relevant to the case.
The significance of whether prejudgment interest formed part of the pain and suffering award is that an amount [$100,000 at April 2008] of such damages (when assessed collectively with some other income types) may be exempt from both income and asset chargeability. However, IF interest accruing on such amounts - necessarily paid in a lump sum (usually) years later was NOT included within the exemption - overpayments and even retroactive ineligibility would result.
Despite resourceful reasoning by the SBT member below, the court ultimately held - at least in the case of pain and suffering awards - that prejudgment interest was to be grouped with the main lump sum and thus within the exemption. While generally sympathetic in its reasoning to the conclusion that interest was an 'indivisible part' of ANY retroactive lump sum award, the court located its decision on the safer grounds that the special interest rate treatment (see the Note above) accorded pain and suffering damages especially justified such treatment. |
