The Appeal CommissionThe Workers Compensation Act of Manitoba

The worker in this case had purchased special coverage from the WCB as a self-employed individual, in the amount of $30,000.

This coverage is available to self-employed workers who apply for and purchase a specified amount of coverage. When the WCB accepts a claim from such a worker, it verifies the amount of coverage purchased by having reference to the worker’s income tax returns if the worker sustains a compensable injury and becomes entitled to payment of wage loss benefits.

The worker was injured in an accident on September 26, 2006 (the accident).

The WCB accepted the worker’s claim resulting from the accident and paid the worker wage loss benefits. The issue in this appeal is whether or not those benefits have been correctly calculated.

The legislative authority for payment of wage loss benefits is first set out in The Workers Compensation Act (“the Act”) at subsection 39(1). That section reads as follows:

Wage loss benefits for loss of earning capacity
39(1) Subject to subsections (6) and (7), where an injury to a worker results in a loss of earning capacity after the day of the accident, wage loss benefits must be paid to the worker calculated in accordance with section 40 and equal to 90% of the loss of earning capacity.
From the outset, therefore, the legislation makes it clear that wage loss benefits will equal 90% of the loss of earning capacity.

The Act sets out the method of calculating loss of earning capacity at subsection 40(1) as follows:

Calculation of loss of earning capacity

40(1) The loss of earning capacity of a worker is the difference between

(a) the worker's net average earnings before the accident; and

(b) the net average amount that the board determines the worker is capable of earning after the accident;

which amount shall not be less than zero.

According to the Act, therefore, workers are paid wage loss benefits based on a percentage of their net average earnings. Net average earnings are calculated in a two-step process.

First the WCB determines the worker’s average earnings before the accident. That process is described in Policy 44.80.10.10 Average Earnings. Schedule A to that Policy sets out the process for calculating average earnings of self-employed workers. It provides that for the purpose of calculating average earnings it is necessary to determine what part of gross business income represents business expenses and what part represents the labour portion (personal income). The Schedule applies to persons who file income tax as self-employed.

Next, from those average earnings, the WCB calculates amounts representing probable deductions for income tax payable, Canada Pension Plan contributions, Employment Insurance premiums and other deductions as the Board of Directors may establish by Regulation. Those amounts are deducted from “average earnings” to arrive at the worker’s “net average earnings”.

This calculation of net average earnings is set out at subsection 40(3) of the Act and in WCB Policy 44.80.10.40. Subsection 40(3) reads as follows:

Calculation of net average earnings

40(3) For the purpose of this Act, the net average earnings of a worker are his or her average earnings calculated in accordance with section 45, less the probable deductions for the following:

(a) income tax payable by the worker, calculated by using the worker's income from employment and Employment Insurance benefits as income, and the worker's basic personal tax credits or exemptions, and tax credits or exemptions for a person who is a dependant of the worker, under the Income Tax Act (Canada), as at the date of the accident or an annual review under subsection (2), as deductions;

(b) Canada Pension Plan premiums or Quebec Pension Plan premiums payable by the worker;

(c) Employment Insurance premiums payable by the worker; and

(d) such other deductions as the board may establish by regulation.

Wage loss benefits are not taxable in the hands of the worker.

The Act recognizes that someone who receives non-taxable wage loss benefits for part or all of the year pays less tax than someone who earns taxable income during the entire year.

The Act permits the WCB, therefore, to deem any entitlement to a refund or reduction of the probable income tax, Canada Pension Plan contributions or Employment Insurance premiums payable by the worker, to be earnings that the worker is capable of earning after the injury. The WCB refers to this deemed entitlement as a sheltered income benefit.

This benefit provides a further limit to payable wage loss benefits and is set out at subsection 39(5)(b) of the Act. That section reads in part:

Limit to wage loss benefits payable
39(5) Notwithstanding any other provision of this Act, but subject to subsections (6) and (7), wage loss benefits payable must not exceed 90% of the worker's loss of earning capacity. To give effect to this subsection, the board may

...

(b) deem any entitlement to a refund or reduction of the probable income tax, Canada Pension Plan premiums, Quebec Pension Plan premiums or Employment Insurance premiums payable by the worker to be earnings that the worker is capable of earning after the injury;

…

The WCB calculates the sheltered income benefit amount using a standard formula.

To summarize, pursuant to subsection 39(1) of the Act, where a worker sustains an injury which results in a loss of earning capacity, wage loss benefits are paid to the worker calculated in accordance with the provisions of s.40 of the Act and equal to 90% of the loss of earning capacity.

Loss of earning capacity is defined in subsection 40(1) as being the difference between the worker’s net average earnings before the accident and the net average amount that the Board determines the worker is capable of earning after the accident. The net average amount is calculated by first determining the amount of the worker’s average earnings and then making probable deductions for items such as CPP, income tax and EI benefits are made, to arrive at a net earnings figure, in accordance with subsection 40(3).

Since January 1, 1992, after 90% of the tax deducted “net” figure representing loss of earning capacity has been taken, the sheltering provision is put into effect. The purpose of the sheltering provision which is described at subsection 39(5)(b) of the Act is to reflect the fact that worker’s compensation benefits are not taxable. The sheltering provision slightly decreases, therefore, the 90% net amount.

Analysis

Upon reviewing this matter, the Panel is satisfied that the worker’s wage loss benefits have been correctly calculated in accordance with the above legislative schemes and policies.

The starting point for the calculation in this case is the fact that the worker purchased special coverage of $30,000. The amount was adjusted as per Schedule “A” to Policy 44.80.10.10 in calculating the worker’s average earnings, to determine what part of the worker’s gross business income represented business expenses and what part represented the labour portion.

From that amount, probable deductions for income tax, CPP and EI based on the worker’s marital status, number of dependents, etc. were subtracted to result in a net figure of $25,978.27.

Ninety percent of this net earnings figure resulted in an amount of $23,380.44. Once the tax sheltering effect was taken into account this amount was reduced somewhat further leaving an amount to be divided by 52 weeks of $22,227.92. This provided a weekly benefit of $427.46.

We are satisfied, based on the evidence, that the worker’s wage loss benefits have been calculated in accordance with the appropriate formula and principles.

In his appeal the worker also submitted evidence concerning the revenue of the incorporated company from which he draws an income.

The income of that corporation is not, however, relevant to the payment of wage loss benefits in this case. This is because the worker purchased coverage in the amount of $30,000. This coverage reflects the maximum amount of wage loss benefits to which the worker is entitled and is the only amount which the WCB may consider in calculating wage loss benefits.

For all of the above reasons, the Panel is satisfied that the worker’s wage loss benefits have been correctly calculated.