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Claiming Undeclared Income

As already discussed, injuries suffered in an accident may lead to various types of damages, pecuniary or non-pecuniary (see “Pecuniary Damages vs Non-Pecuniary Damages”). The law of tort allows the injured party to claim indemnity for all types. When a plaintiff engages litigation to obtain compensation, he or she bears the burden to prove his or her loss. Although sworn testimony may be sufficient without documentary support (Wallace v. Thibodeau, 2008 NBCA 78 para 25), some reliefs are so specific that memory alone may be an unreliable witness. In the absence of dependable evidence, a plaintiff may receive nominal damages at best.

The law of tort is not retributory or punitive, it is compensatory: Andrews v. Grand Toy & Alberta, [1978] 2 SCR 229; Ratych v. Bloomer, [1990] 1 SCR 940 pp 963-964; Hall v. Hébert, [1993] 2 SCR 159; Cunningham v. Wheeler; Cooper v. Miller; Shanks v. McNee, [1994] 1 SCR 359 pp 368-369, 385 & 396-397. It seeks to put the plaintiff in the situation he or she would have been but for the accident. In our modern and distracting societies, a moment’s inattention may be sufficient to cause serious and deadly injuries. People do not deserve the stigma of criminal intent for accidental mishaps.

Despite being compensatory instead of retributory, some courts still have issues with finding a fair indemnity in cases where a plaintiff forms a claim with less than clean hands. One such dilemma is when an injured party alleges to have lost the ability to earn an income that used to be obtained on the black market, i.e. under the table, not declared to taxing authorities. One can anticipate the natural aversion that a judge may have in allowing compensation to a drug dealer from the loss of his or her illegal activities. The issue may not be so obvious however where the activity is legal but the revenue is simply not reported to the governments.

In New Brunswick, when dealing with unreported income, the courts have struggled with the notion of compensating the victim of a tortious act. While the reluctance has been filed under the category of unreliable evidence in some cases, in others it is associated with the ‘clean hands’ doctrine.

As far as the Court of Appeal is concerned, it appeared to fall under the second category. In Frenette v. Audet (1988), 89 NBR (2d) 306 paras 13-15, the plaintiff claimed a loss for income associated with his butcher activities not reported on his tax returns. The unanimous bench stated:

[13]  Cependant, la situation est différente lorsque je considère les conclusions du juge de procès quant aux revenus pour la coupe de viande. L’intimé a témoigné à l’effet qu’il recevait une compensation pour la coupe de viande domestique et de venaison, compensation que le juge a évaluée à 5 500$. Il a témoigné que ces revenus, n’ont pas été déclarés à l’impôt.

[14]  Selon moi en accordant ce montant le juge a fait erreur en droit. La loi qui s’applique a été citée dans Major v. The Canadian Pacific Ry. Co. (1922), 64 SCR 367, où le juge Idington reprend les mots de Lord Mansfield dans la cause de Holman v. Johnson, [1775] 1 Cowp. 341, et je cite:

The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant but because they will not lend their aid to such a plaintiff.

Je me rallie à l’opinion de Lord Denning telle qu’exprimée dans la cause Napier v. National Business Agency, Ltd., [1951] 2 All ER 264, à la p. 266 et je cite:

In these days of high income tax there is a great temptation for employers and servants to describe remuneration as being in part salary and in part expenses. This is done in the hope of evading tax on the part described as expenses, and the temptation must be resisted. In order that an expense allowance should be valid, it must be a genuine estimate of the expenses to be incurred. The insertion of a fictitious figure for expenses in order to defraud the revenue is illegal. It vitiates the whole remuneration and disentitles the servant from recovering any part of it. He cannot recover either the part described as expenses or even the part described as salary. I think that the decision of the judge was quite right. It will have a very salutary effect if it stops people putting in fictitious figures for expenses.

[15]  Ce serait aller à l’encontre des principes de l’intérêt public que de permettre à l’intimé d’utiliser le système judiciaire en vue de recouvrir des revenus perdus à la suite d’un accident mais qui auparavant n’avaient jamais été reconnus formellement en les déclarant dans un rapport d’impôt.

This position has been followed in many cases: Lorette v. McAllister (1990), 112 NBR (2d) 159 para 27 (QB); Kinsella v. Logan (1995), 163 NBR (2d) 1 paras 66 & 69 (QB); Cormier v. Coachman Insurance Co., 2001 NBQB 145 para 23.

In other cases, although the principle formulated by the Court of Appeal has been followed, it was under express protest. More specifically, in Tozer v. Pitre (1990), 111 NBR (2d) 361 (QB), Justice Creaghan openly questioned the validity of the Court of Appeal’s decision. There was no doubt that the plaintiff had earned undeclared income as a bush pilot, trapper and guide (para 2). Speaking of the public policy consideration preventing reliance on unreported income, the trial judge simply stated (para 6):

[6]   With respect, I am not convinced this is the law in other Canadian jurisdictions, and it does beg the question as to how it can be necessarily assumed that the income lost as a result of the accident would not have been declared, but it is the law in this jurisdiction and I am bound by it.

In yet other cases, the presiding justices have distinguished or discarded and refused to follow the dictum of the New Brunswick Court of Appeal. Frenette, supra, was distinguished where an employee was earning undeclared income under a scheme devised by the employer: Sivret v. Kenny (1993), 142 NBR (2d) 161 para 65 (QB). It was also distinguished in a case where the undeclared income was below the basic personal exemption: Guignard v. Hall, 2013 NBQB 7 paras 140-147(QB), upheld at 2016 NBCA 38. Justice Rideout simply refused to apply Frenette, supra, in Arseneau v. O’Brien, 2017 NBQB 187. Relying mostly on more recent and superseding authority from the Supreme Court of Canada, namely Hall v. Hébert, supra, the motion judge excluded the maxim of ex turpi causa as an excuse to prevent reliance on undeclared income to assess the damages caused to the plaintiff.

In light of all those cases, it seems reasonable to conclude at this stage that unreported revenues are no longer a bar to claims for lost income. However, that does not resolve all the difficulties surrounding undocumented earnings. As recognized in Cormier v. Coachman Insurance Co., supra, there must still be sufficient evidence to support the claim.

This paper is offered for the purpose of discussion only. It does not constitute legal advice and its distribution does not create a solicitor-client relationship. Please consult a lawyer if you require legal advice.