A substantial number of Ontarians do not declare their entire income. The underground economy amounted to $51.6 billion in Canada in 2016 and $19.7 billion in Ontario for the same year.[1] Certain industries like residential construction or the food trade are disproportionately represented among the underground economy.[2] Individuals who do not declare their entire income range from a salaried waiter who might not declare tips to a contractor who provides a sizable number of cash transactions. Additionally, some individuals who do not declare their income may not be doing anything illegal. Take the example of a 16-year-old who made less than the basic personal amount on a summer job.
With the number of people not declaring their entire income so high, personal injury lawyers should strongly consider the possibility that some of their clients may have unreported income. This can have significant effects on the compensation they may receive.
Employed or self-employed individuals who are injured in motor vehicle accidents and meet specific criteria contained in O Reg 34/10: Statutory Accident Benefits Schedule – Effective September 1, 2010 (SABS) are entitled to income replacement benefits of 70% of their income up to $400/week. [3] Additionally, not-at-fault injured parties can launch civil actions against negligent drivers.
Section 4(5) of SABS states that if the injured party is a person from Canada or another jurisdiction that taxes income, a person’s income is calculated “without reference to any income the person has failed to report contrary to that Act or legislation.”[4]
With respect to loss of income or loss of earning capacity awards, unreported income is treated differently. In the 1992 case of Iannone v Hoogengrad, the plaintiff’s calculation for the “quantum of the past wage loss” was based on evidence of the plaintiff’s “income earned but not reported on his income tax return.”[5] The defendant argued that including undeclared income allowed the plaintiff to recover on grounds that should be barred by public policy.[6]
Rejecting this argument, the Court of Appeal for British Columbia stated that this argument confused the concept of a “right to recover on a cause of action and the burden of proof upon a plaintiff whose right of recovery is not barred by a principle like ex turpi causa.”[7] Courts have continued to apply this principle.[8] The Court did note that the plaintiff would face the difficult burden of proving this unreported income.[9] When one does not report certain income, they are bringing their credibility into question.[10]
Practically, it is much harder to prove one earned income if a tax record does not mention it. Counsel will still want to get a total amount that includes the unreported portion of their income. In these scenarios, a forensic accountant is an invaluable resource. A forensic accountant knows where to look for unreported income and knows how to find reliable evidence of such income.
Case law bears this reality. Claimants who did not declare their entire income, have suffered when they did not retain a forensic accountant. In Mary K Shadd v Liberty Mutual Insurance Company, 2001 ONFSCDRS 177, the Commission stated that a plaintiff was not precluded from using unreported income as a basis for her pre-accident earning capacity, but she tendered the evidence of a rehabilitation expert not a forensic accountant.[11] Subsequently, she was not awarded her claimed $50,000.[12]
[1] “The Underground economy in Canada, 2016” (date modified 10 October 2018), online: The Daily (Statistics Canada) < https://www150.statcan.gc.ca/n1/daily-quotidien/181012/dq181012a-eng.htm>.
[2] “Residential construction remained the top contributor to underground activity in 2018” (date modified 23 October 2020), online: The Daily (Statistics Canada) https://www150.statcan.gc.ca/n1/daily-quotidien/201023/dq201023a-eng.htm
[3] O Reg 34/10, s 7.
[4] Ibid, s 4(5)
[5] Iannone v Hoogengrad, 66 BCLR (2d) 106 (C.A.), 1992 CanLII 1630 (BC CA) [Hoogengrad].
[6] Ibid.
[7] Ibid.
[8] See for example Monga v Smith, 2021 BCSC 1430 at paras 229-235.
[9] Hoogengrad, above note 5.
[10] See Kan v McGill, 2021 BCSC 843 at paras 31-33.
[11] Mary K Shadd v Liberty Mutual Insurance Company, 2001 ONFSCDRS 177.
[12] Mary K Shadd v Liberty Mutual Insurance Company, 2001 ONFSCDRS 177
