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| Jennifer Lynch |
“If you pay cash, I won’t have to charge you tax.” How often do you hear this whether you purchase products or service? The main reason businesses say this is to avoid paying taxes. Unfortunately, this practice amongst self-employed taxpayers is too common. The Canadian federal government is missing out on up to $23.4 billion a year in uncollected taxes.
Personal injury claims are a common type of legal dispute that arise when an individual is injured due to the negligence or fault of another person or entity. In these cases, the injured person seeks compensation for their damages, which may include medical expenses, lost wages, pain and suffering, along with other related costs.
There is often dispute about unreported cash income in personal injury claims, especially tort claims. Canada Revenue Agency (CRA) defines the “underground economy” as economic transactions in goods or services that are unreported, resulting in the failure to comply with tax laws administered by the CRA. According to Statistics Canada, in 2021, the estimated GDP at market prices for the underground economy in Canada was $68.5 billion. This amounted to 2.7 per cent of Canada’s total GDP in 2021.
There are two main types of personal injury claims: accident benefits claims (no fault claims) and tort claims. In this article, I will discuss the unreported cash income for tort claims.
For tort claims, the court has awarded compensation to claimants who did not report any of their cash income.
In Fiorino v. O'Neil [2001] B.C.J. No. 2298, the male stripper was collecting cash income for his service. His income loss was assessed through the testimony of other exotic dancers. One way of proving unreported income is by calling on others in the same business to testify about what their earnings are.
In Moini v. Liang [2016] B.C.J. No. 808, the taxi driver claimed that he was earning $60,000 to $70,000 in cash. However, the court didn’t rely on the number he provided. Justice Douglas W. Thompson relied on statistical evidence that the average earnings of a taxi driver was $25,000 per year, and awarded income losses based on that number.
Forensic accountants are often retained by lawyers to quantify income loss reports for cases involving unreported cash income. Documents such as invoices, bank statements, receipts and financial documents are often required in the preparation of an income loss report.
In conclusion, disputes in personal injury claims involving unreported cash income are quite common. According to the case law, the court has awarded claimants who had unreported cash income based on different approaches and assessments. A forensic accounting report provides more clarity and helps the parties settle the claims.
Jennifer Lynch is the founder and principal forensic accountant of Lynch & Associates, Forensic Accountants, practising in the areas of personal injury and wrongful death claims, matrimonial disputes and fraud examinations. She obtained her master of business administration degree through the Schulich School of Business. She holds a chartered professional accountant designation, a certified management accountant designation, a certified fraud examiner designation, a certified forensic investigator designation and a chartered business valuator designation. She is also a qualified expert witness. You can reach her on LinkedIn.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the author’s firm, its clients, Law360 Canada, LexisNexis Canada, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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