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Unreported income in a personal injury claim

Unreported income is a reality

“If you pay cash, I won’t have to charge you the tax”.  I bought a used walker for my mother a few weeks back.  All I had was plastic.  The price was $90.00, so I paid the extra $10.80 for a total of $100.80.

Of course, the business owner wasn’t trying to be generous.  A cash sale wouldn’t have been recorded in his records nor reported to the Canada Revenue Agency.

Yes, it’s illegal.  It happens all the time, though.  Avoiding tax by paying cash is a broadly accepted practice.

Absolutely, it is a form of cheating, but it has become (or always has been) socially acceptable to cheat the tax man.  I would like for that to change, with everyone paying their fair share of tax, but I participate in the cash society just like everyone else.  I would have saved the $10.80 if I had been carrying cash.

I wonder how long it would take for government debt to be paid off if we did away with cash?  Before we knew it, tax rates would be going down instead of up.

Some deal in cash more than others.  The service industry is particularly cash intensive.  Restaurants and spas pay their servers and spa practitioners a pittance, a large portion of their income being in tips, much of which is unreported cash.

For many, a majority of earned income is unreported.  Some report zero income.

Are you still entitled to compensation for lost income?

Put yourself in the shoes of one of those workers who reports only a portion of your income to the Canada Revenue Agency.  You are sitting at a complete stop at a traffic light and some bonehead crashes their car into the back of yours.  You have injuries that disable you from working for a period of time.

If only a portion of your pre-crash income was reported on your tax returns, is it only that portion that you are entitled to recover from ICBC (the offending driver’s liability insurance company) as lost income?

No.  You are entitled to full and fair compensation for all of your income loss, whether or not that income found its way onto your income tax returns.  In the words of Mr. Justice Gibbs of the British Columbia Court of Appeal in the 1992 case of Iannone v. Hoogenraad (http://www.courts.gov.bc.ca/jdb-txt/ca/92/01/c92-0182.htm): “It is not, in my opinion, open to the defendant to avoid compensating for that loss (the income loss) on the ground that unreported income was taken into account in computing it.”.

How do you prove the loss of income…that you had not been reporting?

The problem is proving it!  How do you go back and piece together the cash you earned before the crash when you have avoided keeping any record of that cash so as to avoid the tax man?

It can be a challenge, but it can certainly be done.  On that point, Justice Gibbs put it this way: “This plaintiff, like others in similar circumstances, had the burden of leading evidence of past accident wages losses.  That will be a difficult burden to discharge where there is no corroborating evidence such as income tax returns, but it is not an impossible burden to discharge.”

One way of proving unreported income is by calling on others in same business to testify about what their earnings are.  This was the approach taken in the 2001 case of Fiorino v. O’Neil (http://www.courts.gov.bc.ca/jdb-txt/sc/01/15/2001bcsc1548.htm).  The income loss of the male stripper in that case was assessed through the testimony of other exotic dancers.

In the court decision of Moini v. Liang (http://www.courts.gov.bc.ca/jdb-txt/sc/16/07/2016BCSC0702.htm), delivered April 20, 2016, a taxi driver had covered his tracks with the owner of the taxi (who was paid based on the driver’s earnings) as well as with the Canada Revenue Agency such that “…there was no evidence to satisfactorily corroborate Mr. Moini’s bald statements that before the subject motor vehicle accidents he was working long hours and earning $60,000 to $70,000 per year driving taxi.”  Mr. Justice Thompson relied on statistical evidence that the average earnings of a taxi driver was $25,000.00 per year, and awarded income losses on that basis.

Yes, it is unfair that Mr. Moini might have been left under-compensated for his losses, but Mr. Moini has no-one to blame but himself, because his failure to prove his high pre-crash income resulted from his effective efforts to cheat the taxi owner and the tax man.

There are many other ways to prove unreported income, a challenge that I have faced time and time again in my practice because of the pervasiveness of unreported income.

Tax implications of pursuing this loss

By proving your unreported income in a personal injury case, are you handing your head over to the tax man on a silver platter?  You certainly face a risk of having to pay back taxes on the unreported income you are working hard to prove was earned, but by voluntarily “coming clean” you are likely to avoid more serious consequences.

Be honest and forthright

Pursuing a personal injury claim requires the utmost of honesty and forthrightness.  Past indiscretions, like unreported income, will largely be forgiven as long as you come to the “fair compensation table” with squeaky clean honesty.

Yes, you are entitled to fair, financial compensation for lost income, even if your income earning history (forming the foundation of those losses) had not been reported to the tax man.  Your ability to prove those losses, though, will be a whole lot more challenging if cheating the tax man erased any reliable way to prove those previous earnings.

Published April 22, 2016 in the Kelowna Capital News

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