What happens when you make a claim for lost wages as a result of a car accident, but you haven’t declared your past earnings for income tax?

Can an injured Plaintiff succeed in a claim for past and future wage loss, where part or all of the claimant’s past earnings were not declared for income tax purposes? This issue often arises where a claimant has some declared income but sustains additional wage loss from undeclared sources.

In the past, New Brunswick (NB) Courts have refused to award lost wages in circumstances where the claimant failed to declare earnings for income tax purposes.  It was determined that failure to declare such income was an immoral and illegal act, and awarding income loss damages would be assisting the claimant in an illegal act and was against public policy.  The legal principle of ex turpi causa (a plaintiff is unable to pursue a legal remedy if it arises in connection with his own illegal act) was applied to deny such claims.  This has long been the position in New Brunswick, based on a 1988 New Brunswick Court of Appeal decision.

The situation is different in other jurisdictions, where failure to report earnings for income tax purposes is not an absolute bar to such a claim.  However, in many cases, it will still be difficult to prove the loss of income without the corroborating evidence of income tax returns.

In a recent New Brunswick case (Arseneau v O’Brien 2017 NBQB 187), the motion court reconsidered the law as it applies in New Brunswick, concluding that this was not an absolute bar to such a claim, in light of the Supreme Court of Canada decision in Hall v. Hebert [1993] 2 SCR 159 (SCC).  This case held that the ex turpi causa defence no longer applied to tort claims but did still apply to breach of contract claims.  The SCC felt that an outright absolute defence in situations where the claimant may have been involved in an illegal activity was too harsh.  The rationale was that a tort claimant was pursuing compensation for a loss, and not attempting to profit from an illegal act.

The court in Arseneau concluded that the SCC decision in Hall took precedence over the earlier NB Appeal Court decision and that the ex turpi causa defence did not apply to deny damages for personal injury with respect to undeclared income.  Unfortunately, there was no analysis of the actual claim and whether sufficient evidence was available to prove the loss of income.  Whether the Arseneau decision will be appealed is unknown.

What difficulties will claimants face in claiming income loss damages based on undeclared income?

There are a wide variety of cases dealing with this subject from other jurisdictions – the bottom line is that without an income tax return to use as corroborative proof of income loss, there may be an adverse inference drawn as to the reliability of other evidence put forward to support such a claim.  It must be remembered that the responsibility for proof of income loss is on the claimant.

Numerous courts have noted that a finding of dishonesty in filing tax returns will most likely impact findings of credibility for a claimant attempting to persuade a court as to true income levels.  In other words, while not impossible to prove income loss because of previously undeclared income, it is difficult to discharge the burden of proof in such circumstances.  Often, there is no supporting documentation for undeclared income to use for proof of loss.  Without supporting documentation the claimant must rely on his or her own credibility to prove the loss.  Unless a valid reason for not reporting income is put forward, courts generally do not accept a claimant’s unsubstantiated claim of income loss.

Anyone in this position is advised to file an amended tax return claiming the undeclared income and paying tax on that amount.  If that is done, no adverse inference can be drawn.  The Canada Revenue Agency also has a “Voluntary Disclosure Program” which allows a taxpayer to correct inaccurate tax returns and avoid penalties or prosecution.  In any case involving permanent disability and significant future wage loss, taking some short-term pain with Revenue Canada will most likely result in long-term gain with a Court.

For more information on personal injury matters please contact David S.R. Parker.