Treatment of income loss relating to business interests

The present article deals with the potential treatment by the Courts of claims by plaintiffs alleging a loss of income relating to the plaintiff’s ownership interest as a shareholder in a closely held incorporated business¹. In such scenarios, the plaintiff is often not only a major shareholder but also an employee and a main contributor to the operation of the family business. As will be outlined below, while the Courts will endeavor to compensate individuals whose income is derived from dividends or corporate profits, they have generally adopted a restrictive approach and have imposed a significant burden of proof on such plaintiffs.

Recovery generally

In the context of claims by individuals relating to their ownership share in family businesses, it is well established law that the Courts are willing to make damage awards to compensate for salary as well as business losses (eg. loss or reduction of dividends). However, the actual quantification of such losses (i.e. other than for wages or salary) often proves difficult and expensive, and the jurisprudence shows that the methodology applied by the Courts will vary depending on the circumstances of the case². In all such examples, however, the Courts will require the plaintiff to demonstrate: 1) a variation in the earnings pattern of the company while the plaintiff was injured³, and 2) that the plaintiff’s injury actually caused such loss⁴. The latter requirement is seen as the most onerous, as it requires a close examination of the role the plaintiff played in the company and the elimination of any external causal factors, such as a general downturn in the industry (locally or globally), unrelated staffing or production difficulties, or the emergence of new competitors.

In general, the standard of proof required of a plaintiff who claims business losses is “stringent”, and courts have generally adopted a “restrictive” approach to such damages⁵. Plaintiffs are required to provide “an extremely careful and detailed presentation of evidence in the form of financial data”, ideally consisting of audited financial statements and other expert evidence⁶.

Total versus proportionate recovery of business losses

If a business loss is established, and the court is satisfied that the individual plaintiff is entitled to recover, the next question for a court will be whether the plaintiff can recover the total value of the loss, or whether recovery will be limited to a proportionate share based on his or her ownership interest in the business⁷. Canadian courts have followed both approaches, and which is chosen in a given case will depend on the particular factual circumstances.

Recovery for total value of business losses

Courts may allow full recovery of business losses by a personal plaintiff even if he or she was not the sole or controlling shareholder. This is typically done in cases involving closely-held family corporations, particularly those held by two spouses, and cases where the corporation is essentially the “alter ego” of the plaintiff.

One of the most frequently cited examples is Everett v King, [1981] B.C.J. No. 1888 (QL) (SC), aff’d [1983] B.C.J. No. 2171 (QL) (CA) (“Everett”). The plaintiff, Michael Everett, suffered a severe whiplash injury in a car accident. He ran a small family business through a limited company, in which he and his wife were equal shareholders. Before the accident, Mr. Everett was described as being “very clearly” the “driving force behind the business”. After the accident, Mr. Everett was unable to work for approximately seven weeks. As a result, there was a “dramatic drop in earnings” for that year. A chartered accountant quantified the loss of income as $17,340, which all of the parties accepted.  By the following year, the company was again functioning well.

The key issue at trial was whether the losses were recoverable by Mr. Everett in his personal capacity, or whether the claim was properly one of the company. In his decision, the trial judge noted several previous cases in which plaintiffs who owned almost all of the shares in a “one man company” and who were effectively in an “alter ego” relationship with the corporation were allowed to recover. The trial judge concluded that the corporation was merely a vehicle by which Mr. Everett carried on his business and he should not be penalized because he chose that method of operating rather than a sole proprietorship, noting that there was “ample authority for the proposition that a personal plaintiff is entitled to recover a business loss suffered by a company of which he is the controlling shareholder” (para. 8). Similar results have been reached in a number of other cases⁸.

Proportionate recovery of business losses

Although Everett remains good law, total recovery is not appropriate in all circumstances. Depending on the nature of the relationship between the individual plaintiff and the corporation, it may be more appropriate that the plaintiff recover only his or her proportionate share of any business losses. Note, however, that while the jurisprudence contains some examples of recovery by “minority” shareholders, in most such cases, the plaintiffs still held a substantial number (i.e. close to 50%) of the total shares.

The most frequently cited case is Engel v. Salyn, [1993] 1 S.C.R. 306, [1993] S.C.J. No. 4 (QL) (“Engel”). The plaintiff suffered a back injury in a motor vehicle accident. Two months later, she and her husband purchased a bakery. Because of her injuries, the plaintiff was unable to work for three months, and two replacement workers were hired to carry out twelve hours of replacement labour per day. After the accident, she was only able to work an average of five hours per day. The plaintiff claimed special damages, including the cost of replacement labour.

At trial, the plaintiff’s expert, an economist, testified that the plaintiff’s losses could be calculated by determining the after-tax labour cost of replacement staff, grossed up by 10 percent to account for employee benefits, and then divided by two to reflect the fact that the appellant owned 50 percent of the family business. It was his view that the bakery’s income fell by the extra cost of replacement staff.  The trial judge and the defendants accepted this methodology, but the Court of Appeal disagreed and ordered a new trial. The Supreme Court, however, accepted the expert’s methodology as reasonable and restored the trial decision, holding that the proper method of calculating the pecuniary losses of self-employed persons would depend on the particular circumstances of the case. It described the trial judge’s approach as reasonable, and perhaps even somewhat conservative. It further noted that the plaintiff had put forth no evidence with respect to loss of profits except the loss attributable to the cost of replacement labour, and nothing in the evidence suggested that the expert’s approach was inappropriate.

Proportionate recovery of businesses losses by individual plaintiffs has also been allowed in cases involving non-family shareholders. In Nevison v. Hayward, [1989] B.C.J. 1430 (QL) (SC), 1989 CarswellBC 1461 (WL), the plaintiff and his partner owned equal shares in an excavation company.  The plaintiff was an active participant in the day to day activities of the business until a botched vasectomy left him severely disabled and unable to operate heavy machinery for several weeks. He claimed against the doctor on behalf of himself and his company, claiming loss of profits resulting from his inability to discharge his duties as an employee.

The trial judge noted that courts had thus far allowed individual plaintiffs to recover any loss arising from a reduction in profits or income sustained by a corporate entity only in cases where the plaintiff was either a sole, a controlling, or at least an equal shareholder in what was otherwise a closely held family company (i.e. alter ego cases). He went on to note, however, that in his view, the plaintiff was entitled to be compensated for “any proven loss which he suffered as a consequence of loss of profit accruing to the corporate plaintiff by reason of the negligence of the defendant” (para. 53). The trial judge then turned to a consideration of the financial evidence. With respect to the company’s claim, he held that there was no reliable evidence of the value to it of the loss of the plaintiff’s services. The corporation’s claim was dismissed.

One of the most recent appellate decisions to consider this issue is A&L Plumbing & Heating Ltd. and Lee Pollon v. Ridge Tool Company, 2008 SKQB 77, aff’d 2010 SKCA 45, in which the Court approved of both Everett and Engel, but found the Engel approach (proportionate recovery) appropriate in the circumstances of that particular case, noting that proportionate recovery is the “normal” rule, where the co-owners of a corporation are “not members of the plaintiff’s household” (para. 31).

Dividend payments

The issue of earnings in the form of dividend payments from a family business has received relatively little attention in the jurisprudence. One of the few reported cases is Fobel v. Dean, [1991] S.J. No. 374 (QL) (C.A.), 83 D.L.R. (4th) 385 (“Fobel”), in which a plaintiff received both dividends and salary.  The plaintiff, Mrs. Fobel, worked in the family bakery receiving a salary of approximately $20,000 per year, as well as dividends as a co-owner. While working at the bakery, she was involved in two car accidents which, combined, greatly reduced her capacity to work. However, no new staff were hired, as the existing staff and Mr. Fobel took on many of Mrs. Fobel’s previous duties. She claimed for loss of pre-trial earnings, amongst other heads of damages.

The trial judge noted that prior to the accident, Mrs. Fobel received two kinds of income: a salary, for working as a foreman/payroll bookkeeper, and dividends, which represented a return on investment. From the date of the first accident, she had a reduced ability to work, but continued to receive the same salary, and so that loss was not proven. There was also no evidence that her income from dividends had diminished since the accident, and no evidence that the business had lost profits or opportunities to make money due to her injuries.

That, however, did not end the matter. Vancise J.A. noted that to determine the loss of an employee-shareholder, it was necessary to examine the relationship between the shareholder and the company from the perspective of the three individual elements that made up the “income or total compensation”: labour, management, and capital. To determine loss with respect to labour or management, one would look to the amount of salary actually paid, or to how comparable work would be compensated in the industry. With respect to return of investment of capital, he noted that “a number of models [had] been developed for assessing loss of earnings and earning capacity based on loss of profitability of the business or a shareholder’s loss [or] gain due to fluctuations in the value of his shares”. In Mrs. Fobel’s case, however, it was not necessary to take the dividends into account.  While it was ordinarily proper to consider lost return on investment (such as Mrs. Fobel’s dividend payments) if it was proved that the injury had caused a loss of corporate profit, on the facts before the Court, no loss of corporate profit had been proven.

Mrs. Fobel’s claims for loss of pre-trial earnings (salary) and corporate dividends was dismissed.

Conclusions and takeaways

• Count the shares: Business losses are recoverable by individual shareholders/employees personally, but the general rule is that only a controlling shareholder (i.e. at least 50%) may recover.
• But beware the “minority” shareholder: The cases show that a minority shareholder who holds a substantial portion of the shares, typically 40% or more, may also be able to recover their business losses in a personal capacity. It is not at all clear, however, whether a court would be willing to extend the general rule that a sole or controlling shareholder may recover in his or her personal capacity to minority shareholders owning less than 40% of the shares of a business. Assess the situation by applying considerations from the jurisprudence, for example: the number of employees working for the business, whether the plaintiff is a “driving force” of the business, and whether the business operates as the plaintiff’s “alter ego”.
• Check the numbers: In order to recover, a plaintiff faces a very high evidentiary burden and must demonstrate: 1) that the company actually suffered a financial loss, and 2) that this loss was caused by the injuries sustained in the accident. Consider: What does a review of historical corporate financial statements disclose? Are there upward or downward trends that correlate to the accident/injury? A plaintiff must provide substantial (financial and expert) evidence proving some change in the company’s pattern of performance after an accident and must eliminate any external causative factors.
• Review dividend payments: Make note of any trends in corporate dividend payments. If a plaintiff is claiming for loss of earnings in relation to dividend payments, one would expect such payments to mirror corporate profits in some way. A lack of consistency in dividend payments could cause the plaintiff difficulty when attempting to establish a negative trend in the company’s pattern of performance linked to his or her injury.
• Remember the two approaches: The applicable approach will depend on the facts, specifically on the nature of the relationship between the individual plaintiff and the corporation. One approach allows for the full recovery of business losses by a plaintiff personally even if he or she was not the sole or controlling shareholder. This approach is typically used in cases involving closely-held family businesses, particularly those held by two spouses. The other approach allows for proportionate recovery of business losses by a plaintiff personally. The latter approach restricts the plaintiff to recovering only his or her proportionate share of lost profits/dividends, based on ownership share.
• Jumping the evidentiary hurdles:  While business losses are, in theory, recoverable in a personal capacity, courts have taken a restrictive approach to this kind of claim, and it is clear that the burden on plaintiffs is onerous. It is both difficult and expensive to prove this kind of claim, and plaintiffs will typically be required to adduce detailed financial evidence and expert opinion evidence (of, for example, accountants, economists, or industry specialists).

1. Note that this paper does not include a consideration of the doctrine of per quod servitium amisit, which has been abolished by statute in some provinces. For a consideration of the state of the doctrine in Canada, see Christine M. Smith, “Per Quod or Not Per Quod? That is the Question”, RMC (March, 2013) online: http://www.rmc-agr.com/per-quod-or-not-per-quod-that-is-the-question/.
2.  Ken Cooper-Stephenson, Personal Injury Damages in Canada, 2nd ed (Toronto: Thomson Carswell Limited, 1996) at 159 (“Cooper-Stephenson”).
3.   B.G. Hansen and D.J. Mullan, “Private Corporations in Canada: Principles of Recovery for the Tortious Disablement of Shareholder/Employees”, in Lewis Klar, Studies in Canadian Tort Law (Toronto: Butterworths, 1977) (“Hansen and Mullan), at p. 255, suggest that “comparative figures of net earnings over a five-year period with percentage increases or decreases compared with the years when the plaintiff is injured should be sufficient, provided that there are no extraneous factors which may have affected the increase in the year in question.”
4.  B.G. Hansen and D.J. Mullan, “Private Corporations in Canada: Principles of Recovery for the Tortious Disablement of Shareholder/Employees”, in Lewis Klar, Studies in Canadian Tort Law (Toronto: Butterworths, 1977) (“Hansen and Mullan), at p. 255, suggest that “comparative figures of net earnings over a five-year period with percentage increases or decreases compared with the years when the plaintiff is injured should be sufficient, provided that there are no extraneous factors which may have affected the increase in the year in question.”
5. Cooper-Stephenson at 159.   
6. Hansen and Mullan at 255.
7. David L. Blaikie and Samantha Orr, Halsbury’s Laws of Canada – Damages, HAD-73 Self-employment. 
8. See Duce v. Rourke, [1951] A.J. No. 12 (QL) (SC), 1 W.W.R. (N.S.) 305 (Sup. Ct.); Kummen v. Alfonso, 1952 CarswellMan 80, [1953] 1 D.L.R. 637 (C.A.); Korenicky v. Arrow Leasing Ltd., [1972] 3 O.R. 281-286, 1972 CanLII 348 (ON SC); Hall v. Miller (1989), 64 D.L.R. (4th) 369, [1989] B.C.J. No. 2188 (QL) (C.A.); Van Passen v. Birch, 1995 ABCA 423, [1996] 2 WWR 609 and Ashcroft v. Curtin [1971] 3 All E.R. 1208.