I run a business and am able to write off many quasi-personal expenses for tax purposes. I also write off work done by my kids as contractor expenses even though I didn’t actually pay them. Clearly my earning capacity is higher than my taxes indicate. If I can no longer run my business after injury, will those past deductions be considered in assessing my capacity to earn income?
In last week’s personal injury trial decision of Ackermann v. Pandher (2017 BCSC 880) – which I previously summarized here – the court faced a unique analysis for the income loss assessment. Mr. Ackermann and his eldest son operated a tiling installation business. The evidence was that he and his son divided the profits equally, and received more business income than they declared for tax purposes. In addition to the usual deductions for business expenses, they reduced their salaries for subcontractor expenses “paid” to the younger sons in the family. The younger sons would assist part-time outside of their school hours. The tax records indicated that these sons were “paid” $16-30,000.00 annually over the 5 years leading up to the MVC, but in reality they were not paid – they benefited from the money generated by the business and shared by the family.
Mr. Ackermann’s lawyers argued that his pre-MVC income would have increased due to business growth absent the MVC, and that his pre-MVC income substantially higher than the income declared in his taxes. They pointed to the significant expenses he was able to write off (some of them not solely business expenses) and pointed to the “wages” attributed to his younger sons, which were actually funds that should be included in his income. Because Mr. Ackermann was no longer able to work in the business, he was no longer able to write off expenses (the quasi-personal expenses continued after he withdrew form the business). The defence lawyers argued that much of the expenses were properly business expenses, and did not have a personal benefit to Mr. Ackermann – i.e. they were not expenses that continued after his business work ended. They also pointed out that the younger sons went off to university before the MVC and so the income generated by their work would no longer have been paid to Mr. Ackermann regardless of the MVC, and he would have needed to hire subcontractors to replace their work.
Mr. Justice Schultes rejected arguments that Mr. Ackermann’s counsel made regarding business growth, because the business activity indicated to him that the success of a tile setting company was “highly dependent on the skill of the tile setter, and not readily expandable through use of crews” (para 145). In awarding $205,000.00 in income loss to the date of trial, he summarized the law and found that compensation should be somewhere between the statistics and the actual earnings of the business (adding back in half of the younger sons’ earnings). He accepted Mr. Ackermann’s calculation of the loss – which added back in some of the expense deductions – and fell between his annual pre-MVC earnings and the higher average identified by the economist:
 The generally accepted approach to assessment of claims for a loss of earning capacity is first to set the parameters of the claim by referring to statistical evidence with respect to the class of individuals to which the plaintiff belongs, and then to adjust the resulting preliminary measure of damages to take into account contingencies that are particular to the plaintiff: Smith v. Fremlin, 2014 BCCA 253 at para. 23.
 The importance of an accurate understanding of Mr. Ackermann’s actual pre-accident earnings is obvious. If they are as low as his reported income, as the defendants contend, then there is a good reason to adjust the average earnings of a person in his position significantly downward in order to avoid over-compensating him.
 In resolving this issue it is important to note first that the credibility of Andreas’ core assertion — that the business deducted significant amounts as subcontractor expenses for Peter and Matthias that he and his father actually received themselves — was not challenged. Nor were the specific yearly amounts that Andreas said they had attributed to his brothers.
 The argument that other expenses, which Andreas agreed they incurred, would have reduced their claimed earnings stumbles on the fact that in the statements of business income for Ackermann Installations, those expenses were all deducted before reaching the figure that Mr. Ackermann claimed as his business income.
 As to the effect in future years of the departure of Peter and Matthias from the business, no link was established in the evidence between their participation and the ability of the business to take on a particular number of jobs or earn a particular amount of income. For example, as Mr. Ackermann’s counsel pointed out in his reply submissions, there was no increase in income during the year that Peter was working full-time. Andreas was clear that he needed to hire the subcontractor following the accident to replace his father’s skill and labour. There was no suggestion that the operation of the business depended on replacing Peter and Matthias’ contributions once they completed their schooling. The evidence suggests instead that this was seen by all concerned as a collective family endeavour, which they were expected to contribute to while they were available but which did not depend on their involvement for its ongoing capacity.
 As a result, I think it is reasonable to add half of the amounts that Andreas said were deducted for Peter and Matthias each year to Mr. Ackermann’s share of the business income to arrive at his actual income.
 All in all, I think that the figure proposed by Mr. Ackermann’s counsel — the mid-point between average tile setter earnings and the actual earnings as I have found them — fairly reflects the rate increases that the business would certainly have commanded in the years since the accident (and which Andreas now enjoys in his own business) without indulging in speculation about business growth. Accordingly I will award $205,000 under this heading. The deductions required by the Insurance (Vehicle) Act were already included in the average and actual earnings that Mr. Benning calculated, so no further deduction from this award needs to be made.