Law Times

Law Times • November 9, 2009 Auto insurance reform: just a temporary solution? Y ou might call it a form of good cop, bad cop. You know the scenario. Someone starts off telling you all the aw- ful things that are about to happen, and then suddenly someone else walks in and tells you it's only half as bad as you thought. You're so happy, you'll go along with anything because it seems like good news. That's pretty much what last week's announcement by On- tario Finance Minister Dwight Duncan looks like. A couple of weeks ago, it was all doom and gloom writ large in newspaper headlines warning of 10- to 15-per-cent hikes in auto in- surance premiums. Ten days or so later, Duncan tables 41 changes to the way insurance is sold in Ontario to offer con- sumers cheaper options and to streamline the legislation gov- erning how companies operate. It was nice spin. What the announcement doesn't get into is the root of all this. For that, we'd have to go back to the spring when the Fi- nancial Services Commission of Ontario tabled its five-year review to Duncan's office that made 39 recommendations to reform auto insurance. Leading the charge for that re- form was the insurance industry itself. With some 60 to 80 cents of each dollar going to processing claims rather than to the accident victim and with grumblings in the industry that Ontario's rules have created a climate ripe with fraud, this was not a happy group of campers. Garnering the biggest head- lines from those recommenda- tions was a suggestion to reduce accident benefits to $25,000 from $100,000 based on insur- ance industry demands. The Ontario Bar Association, the Ontario Trial Lawyers Asso- ciation, and many other groups strongly opposed the idea. In their words, it would have meant an offloading of costs onto the public health-care system be- cause, they noted, when your $25,000 rehabilitation fund runs out, guess who picks up the tab? On the other hand, the in- dustry said, if you don't do some- thing, we're going to have to jack up premiums because, between the economy, the market, and the skyrocketing costs of accident benefits, we're bleeding money. Duncan wrestled with this is- sue all summer. The compromise is a $50,000 cap and other lim- its to bring Ontario in line with other provinces. Duncan has tabled a long shopping list that also includes resetting the definition of cata- strophic impairment to include single-limb amputees and in- troducing a new threshold for catastrophic brain injuries. At the same time, the plans will standard- ize the way strains and sprains are treated to better reflect the medi- cal community's consensus. Inside Queen's Park By Ian Harvey Insurance companies will no longer play gatekeeper to medi- cal care and act as an Ameri- can-style health maintenance organization. Instead, health- care groups, other stakeholders, and the insurance industry will jointly develop standards for the delivery of third-party medical examinations as well as qualifi- cations of assessors. The changes will also stop foot-dragging by insurance com- panies in serious claims; push processing of claims online while the government looks at harmo- nizing reports required under s. 289, 289.1, and 417.1 of the Insurance Act; and introduce an option to reduce the tort deduct- ibles to $20,000 (for not-at-fault accident victims) and $10,000 (for family members under the Family Law Act). Whew. And there's more. It'll take a while for all the players to digest everything, but so far the insurance industry seems happy enough. Many others, however, find it a hard pill to swallow. The Ontario Trial Lawyers As- sociation says the changes fall short in securing fairness and access to justice "for innocent accident vic- tims" but agrees the elimination of deductibles in fatal accidents is a "step in the right direction." "We need to find a longer- term solution to cure what ails auto insurance," says OTLA president Judith Hull. It's a sentiment echoed by Richard Halpern, a partner at Thomson Rogers and chairman of the OBA's working group on auto insurance reform. "Consumers will get less cov- erage. You can have the same coverage you have now but you'll pay more," he says. "The truth is that the insurance industry has been bailed out of a downturn in their fiscal cycle, and that shouldn't be what motivates insurance reform because we'll be back in the same boat two, three, four years from now." While he's encouraged that the government's "heart is in the right place" and that discussions will continue with interested par- ties around further reforms, the changes are still only a temporary solution. It's how quickly those other steps progress, then, that will determine the success or failure of these reforms. Otherwise, as Halpern points out, we're just going to be back here facing the same crisis again in three years. LT Ian Harvey has been a journalist for 32 years writing about a diverse range of issues including legal and political affairs. His e-mail address is ianharvey@rogers.com. COMMENT Year's end means it's time to start thinking about taxes A s we head towards the end of 2009, people should begin thinking about their financial and tax matters for the year. We must make some decisions by year's end; others can wait until early in 2010. The following are a few employee-related tax-plan- ning issues: EMPLOYEE LOANS If you have or have had a low-interest loan, other than an exempt loan, from your em- ployer during the year, you will be taxed on an imputed value for interest as an employ- ment benefit. The Canada Revenue Agency calculates the value of the benefit according to a prescribed rate of interest less any amount the employee ac- tually pays during the year and up to Jan. 30, 2010. Nevertheless, an interest-free loan from one's employer may still be cheaper than a market loan at commercial rates. The employer will report the difference be- tween prescribed and actual interest rates on the employee's T4 slip. CRA bases the interest on the average treasury bill rate during the first month of the preceding quarter. Ensure that you pay any interest due by the deadline to minimize the value of the taxable benefit. As an example, Jane obtained a non-exempt $40,000 interest-free loan from her employer on Jan. 1, 2009, that's repayable within 36 months. Assuming that the prescribed rate is four per cent throughout the year, Jane's em- ployment benefit for the year is $1,600. If the loan carried interest at two per cent, the employment benefit would be only $800 provided that Jane paid her employer the $800 by Jan. 30, 2010. The Income Tax Act deems an employee ow- ing tax on an imputed interest benefit to have paid an equivalent amount pursuant to a legal obligation. This means that any portion of the imputed interest that is attributable to earn- ing income, such as the purchase of shares, is deductible as an interest expense. Employees should ensure that they retain the requisite pa- per trail to validate the use of their employer loans for at least four years. Where employees obtain a loan by virtue of shareholdings rather than employment, the full amount of the loan is taxable as income even if the individual pays interest at the prescribed rate. This rule does not apply if the shareholder repays it by the lender's following year-end. CAPITAL ASSETS Employees can claim tax depreciation on de- preciable capital assets such as automobiles, air- craft, and musical instruments. In most cases, taxpayers can claim only half of the capital cost allowance in the year they purchase the asset. To claim it, the asset must be available for use in the year. Hence, it's best to purchase such as- sets before the year-end to obtain the maximum allowance with the shortest holding period. SHIFT INCOME If possible, employees should shift as much in- come as possible into 2010. This will defer the tax payable on the income until April 30, 2011. Ask your employer not to pay your year-end bonus until January 2010. If you are extremely lucky, you may also benefit from federal rate re- ductions in the future. Given our expected defi- cits, however, don't count on tax rate reductions other than in election years. AUTOMOBILE BENEFITS An employee pays tax on the imputed value of benefits from a company car that is available for personal use. The benefit takes two forms: a www.lawtimesnews.com fixed standby charge and a variable amount for operating expenses. The standby charge is for simply having the Financial By Vern Krishna Matters car available for use, regardless of actual usage. It's equal to two per cent per month of the orig- inal cost of the automobile, or two thirds of the lease cost plus GST, less any amounts paid to the employer by the calendar year-end. There is a reduced standby benefit if the employee drives less than 20,000 kilometres in the year and per- sonal use is less than 50 per cent of total use. For example, if an automobile cost $30,000 in 2005, the value of the benefit for the full year in 2009 is $7,200. Hence, employees should consider whether they are better off purchasing the automobile at its fair market value to reduce the taxable amounts in future years. If your employer also pays your operating expens- es for personal use of the au- tomobile, you pay tax on an additional benefit. The benefit is reduced by any amount you repay your employer by Feb. 14, 2010. GIFTS As a rule, gifts do not constitute income for tax purposes. A gift is a disposition without any expectation of reward or return. As an admin- istrative concession, the CRA allows employers to make two non-cash gifts a year to employees without tax consequences. This exemption ap- plies only to gifts worth less than $500 per year. Where the gift exceeds $500, the employee pays tax on its fair market value. Similarly, employees don't owe tax on the value of social events if the cost doesn't exceed $100 per person. STOCK OPTIONS Stock options raise special problems of timing and valuation. The basic stock option rule is simple enough: option benefits are taxable as employment income when the employee exer- cises the option to acquire shares. The benefit is equal to the difference between the cost of the option to the employee and the value of the shares at the time of purchase. Value means fair value. In the case of public- ly traded securities, stock market prices are usu- ally indicative of fair value. Since listed stock prices inherently reflect the value of minority shareholdings, there is no need to further dis- count their value for minority interests. The valuation of shares of private corporations is a more difficult matter. One values them accord- ing to estimated future earnings and the adjusted net value of assets. One must then adjust the pro rata value of the corporation to reflect a discount for minority interests and lack of liquidity. Employees who acquire shares under stock option plans should sell sufficient shares to pay the applicable tax in the year they acquire them. There can be serious problems if the employee holds on to all the shares and they drop in val- ue or, worse still, they become worthless. Talk to former employees at Nortel Networks. The employee remains liable for the full amount of the taxable employment benefit. The problem is even worse if the employee can't offset capital losses against capital gains. We should plan for our taxes throughout the year. Nevertheless, given our tendency to procrastinate, we often leave planning to the end of the year. So, as 2009 wraps up and the Canada geese fly south, we should tidy up our planning as soon as we can to minimize our bill for the year. LT Vern Krishna, QC, FCGA, is tax counsel with Borden Ladner Gervais LLP and executive direc- tor of the CGA Tax Research Centre, University of Ottawa. He can be reached at vkrishna@blg canada.com. PAGE 7

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