DISCUSSION PAPER EXECUTIVE SUMMARY 1. TITLE Compensation of Principals Shareholder Dividends 2. ISSUE Current compensation policy provides that dividends paid to principals of limited companies as remuneration for labour may be used to calculate a principal s average earnings to determine temporary and permanent disability benefits. At issue is a review of compensation policy to determine if policy should be revised to exclude the payment of dividends to principals in the calculation of their average earnings for compensation purposes. 3. OVERVIEW Principals of limited companies may receive all or a portion of their remuneration as dividends instead of wages. Currently, dividends paid to active principals are included in an employer s assessable payroll and in the calculation of a principal s average earnings. However, effective January 1, 2015, dividends paid to active principals will no longer be included in an employer s assessable payroll. The attached discussion paper provides an overview of the compensation of principals of limited companies in relation to shareholder dividends. The paper also sets out two policy options for stakeholder review and comment. 4. FEEDBACK Stakeholders are invited to provide feedback on the discussion paper and options, and to make any additional comments that may be relevant to the issue. Stakeholder comments will be accepted until September 5, 2014. Contact information can be found at page 9 of the Discussion Paper. June 2014 Page 1
DISCUSSION PAPER 1. TITLE Compensation of Principals Shareholder Dividends 2. ISSUE At their meeting on December 11, 2013, WorkSafeBC s Board of Directors amended assessment policy to provide that dividends paid to active principals are no longer included in assessable payroll effective January 1, 2015. Current compensation policy provides that dividends paid to principals of limited companies as remuneration for labour may be used to calculate a principal s average earnings to determine temporary and permanent disability benefits. At issue is a review of compensation policy to determine if policy should be revised to exclude the payment of dividends to principals in the calculation of their average earnings for compensation purposes. 3. BACKGROUND 3.1 Law and Policy Currently, shareholder dividends are treated in a similar manner for both compensation and assessment purposes. 3.1.1 Compensation The Workers Compensation Act ( Act ) provides that a worker who suffers personal injury or death that arises out of and in the course of their employment is entitled to compensation. 1 Compensation benefits include health care, temporary and permanent disability awards, vocational rehabilitation services, and survivor benefits in fatal cases. The Act provides that compensation paid to an injured worker is determined based on the worker s average earnings at the time of injury. 2 Compensation policy currently provides that WorkSafeBC may include dividends in average earnings for the purpose of determining the compensation of a principal where the amount received represents payment for the principal s labour. 3 For temporary partial disabilities, temporary total disabilities and permanent partial disabilities, the Act provides that the minimum compensation payable to a worker is a set amount (currently $381.38 per week), unless the worker's 1 2 3 Section 5 of the Act. Section 33(1) of the Act. Policy item #68.90, Principals Composition of Earnings, of the Rehabilitation Services & Claims Manual, Volume II ( RS&CM ). June 2014 Page 2
average earnings are less than that amount, in which case compensation is based on the worker's average earnings. 4 For permanent total disabilities, the Act provides that a worker's compensation is subject to a minimum amount regardless of whether the worker's average earnings are lower than that amount. 5 The Act does not provide a definition of principal. However, assessment policy sets out that a principal is a: Person who has the direct or indirect power or ability to control or influence the operations of a company or similar entity, through ownership of voting securities, by contract, or otherwise. An officer, director or shareholder active in the operation of a company or similar entity is presumed to be a principal of that firm. 6 WorkSafeBC generally treats principals who are active in the operation of a limited company as workers. 7 3.1.2 Assessment The Act provides WorkSafeBC with the authority to assess, levy, and collect assessments from employers in any manner WorkSafeBC considers proper to fund the workers compensation system. 8 Current assessment policy provides that dividends are included in assessable payroll where they are paid to principals as remuneration for activity in a limited company. 9 However, dividends paid to active principals will no longer be included in assessable payroll effective January 1, 2015. 10 There is no requirement under the Act or in policy for assessment amounts and compensation benefits to be equal. In practice, the amount of compensation benefits paid does not directly equate to the assessment premiums collected for any worker. 4. OTHER JURISDICTIONS The Policy, Regulation and Research Division ( PRRD ) reviewed assessment and compensation policy and practice on principals of limited companies in the other Canadian jurisdictions. Of the 11 jurisdictions, five consider active 4 5 6 7 8 9 10 See sections 23, 29 and 30 of the Act. See section 22 of the Act. See Item AP1-1-1, Coverage under the Act Description of Terms, of the Assessment Manual ( AM ). See Item AP1-1-4, Coverage under the Act Employers, of the AM. Sections 38 and 39 of the Act. See Item AP1-38-2, Payroll Categories, of the AM. Resolution 2013/12/11-02. June 2014 Page 3
principals of limited companies to be workers and provide mandatory coverage as in British Columbia. 11 Three jurisdictions do not include dividends for compensation purposes. 12 While the Yukon does not include dividends in assessing earnings, in certain circumstances they will include dividends in calculating compensation. In practice, the Yukon includes dividends in determining compensation if they are paid as a bonus, appear on a paycheque, and are taxed. In Newfoundland and Labrador, dividends are both assessed and included in calculating compensation benefits. This is the current approach in British Columbia. The six remaining jurisdictions do not provide mandatory coverage for principals of limited companies but do establish a framework for optional coverage. 13 Of these, only Ontario permits dividends to be included in the assessment and compensation of principals. 14 5. DISCUSSION Principals may receive all or a portion of their remuneration as dividends instead of wages. Effective January 1, 2015, these dividends will no longer be included in an employer s assessable payroll but will continue to be included in the calculation of a principal s average earnings. This review is to determine whether current compensation policy on shareholder dividends should continue in light of the upcoming change to assessment policy. 5.1 Previous Consultation on Shareholder Dividends The PRRD conducted two rounds of external consultation in 2009 and 2013 following stakeholder requests for changes to the assessment policy on shareholder dividends. Overall, the majority of stakeholders supported removing dividends paid to active principals from assessable payroll. In support of this position, stakeholders provided the following reasons: dividends are often a return on investment and not remuneration for work; wages represent actual work, whereas dividends represent a reward for growing the company and/or sacrifices and risks of owning a business; 11 12 13 14 Saskatchewan, Nova Scotia, New Brunswick, Newfoundland and Labrador, and the Yukon. Saskatchewan, Nova Scotia, and New Brunswick. Alberta, Manitoba, Ontario, Quebec, Prince Edward Island, and the Northwest Territories/Nunavut. In Ontario, executive officers may include dividends to establish earnings when purchasing optional coverage. Average earnings for compensation are calculated using either the amount of coverage purchased, or the actual employment earnings at the time of the injury (including dividend income as reported on Form T5), whichever is less. June 2014 Page 4
including dividends in assessable payroll for active principals in circumstances where dividends are paid pro rata to all shareholders of a class of shares, irrespective of participation level, would be discriminatory and inequitable; dividends are fundamentally different than income and are treated as such by the Canada Revenue Agency ( CRA ); the decision of whether or not to pay a dividend is based on a number of business and tax implications, and WorkSafeBC should not intrude into this business process; and the CRA recognizes a difference between income earned from labour, and dividends. Excluding shareholder dividends would be more in line with CRA requirements under which dividends are not included in determining pensionable or Employment Insurance earnings. As a result of the change to assessment policy, this policy review was added to the PRRD s 2014-2016 Compensation, Occupational Disease, and Assessments Policy Priorities Workplan. 5.2 Dividends as Remuneration An option for consideration is to exclude shareholder dividends paid to principals from the calculation of their average earnings. Under this approach, principals who are paid a portion of their remuneration as dividends would receive compensation benefits based on a lower average earnings amount. Principals who receive all of their remuneration as dividends, with no other wages, would have no earnings on which to calculate their average earnings. The Act provides that, for a worker with no earnings, WorkSafeBC must determine their average earnings in a manner the Board considers appropriate. 15 Policy provides some specific examples for persons working without pay such as volunteer firefighters and sisters in Catholic institutions. 16 It does not provide guidance on a worker who receives pay in the form of dividends as opposed to wages. Regardless of whether a principal has no earnings, and receives no temporary or permanent disability benefits, they would still continue to receive health care benefits, and would receive the statutory minimum amount set out in the Act in case of permanent total disability or survivor benefits in the event of a fatality. 17 15 16 17 See section 33.7 of the Act. Policy items #67.30, Workers with No Earnings, and #67.32, Volunteer Firefighters and Ambulance Drivers and Attendants, and Sisters in Catholic Institutions, of the RS&CM. See sections 17, 22, 23, 29, and 30 of the Act. June 2014 Page 5
As well, principals, as workers, would continue to be precluded from recovering losses by taking legal action in the event of workplace injury or death. They would also not be permitted to purchase personal optional protection for additional coverage. An implication of this approach is that principals could be treated unequally with respect to compensation benefits and the structure of their earnings. A principal who receives all of his or her remuneration as wages would have the full amount included in determining their compensation, up to the maximum wage rate. Conversely, a principal with the same remuneration paid as dividends would be considered to have no earnings. This approach may also create an inequality for employers. If limited companies pay remuneration as dividends instead of wages, they would pay reduced or no assessment premiums. Consequently, the base rate to all employers in that rate group may be increased to reflect this circumstance, in order to ensure adequate funding of the accident fund. 5.3 Administrative Impact Currently, wage rate officers with WorkSafeBC determine, on a case-by-case basis, whether it is appropriate to include dividends in calculating a principal s average earnings. The nature of a principal s involvement and their relationship with a company is considered to determine whether the dividends they receive represent remuneration for work performed. If policy is amended, this evaluation would no longer be necessary. Currently, Review Division decisions involving the inclusion of shareholder dividends in principals average earnings are infrequent. However, when they do occur, the discretionary inclusion of dividends creates challenges for adjudicators in determining whether to include them and, if so, what proportion of dividends received by a principal represents remuneration for activity in a company. As a result, the Wage Rate Unit, the Review Division and the Workers Compensation Appeal Tribunal ( WCAT ) may reach different conclusions on the same facts. 18 If policy is amended as proposed, practice may be simplified but the number of claims being escalated to the Review Division and complaints to the Fair Practices Office may also increase where principals are dissatisfied with the decision on the amount of their average earnings. 18 See for example, Review Division decision #R0103954 and WCAT decision 2010-01621. The Review Division found that dividends paid to a principal did not constitute payment for the worker s labour and could not be included in calculating his average earnings. On the same facts, the WCAT found that the dividends should be included in calculating the worker s average earnings because they represented employment income for the worker s operation of the business. June 2014 Page 6
Another consequence of this approach is that a principal, in the event of injury, may choose to restate his or her dividend income as wages to the CRA prior to consideration by WorkSafeBC. Where a principal restates dividend earnings as wages, the wages also become assessable. If this process occurs within the 75- day statutory time limit for reconsideration, WorkSafeBC may accept the new earnings information and include it in the calculation of average earnings. 19 Where this process occurs outside of the 75-day time limit, the only option available to the principal is to request a review or an appeal. 20 Restating earnings to the CRA may be time consuming for both principals and WorkSafeBC. 5.4 Cost Implications It is difficult to estimate the potential cost implications of revising policy to remove dividends from the calculation of a principal s average earnings. Anecdotal evidence from the Worker and Employer Services Division indicates that approximately 25% to 30% of claims by self-employed individuals include a portion of dividends in determining compensation benefits. In 2013, 531 claims were made by principals who received wage loss benefits totaling over $3.8 million. It is not known how much is collected in assessments on shareholder dividends as reporting procedures require employers to report all payroll as a lump sum; i.e. shareholder dividends are not reported separately. 6. OPTIONS AND IMPLICATIONS Option 1: Status quo Under this option, no amendment would be made to compensation policy. Implications Assessment and compensation policy would not be aligned. The change to assessment policy in respect of shareholder dividends may need to be reviewed in the future. Compensation would be paid on amounts that are not assessed by WorkSafeBC. 19 20 See section 96 of the Act. A request for review to the Review Division must be filed within 90 days after a decision is made by WorkSafeBC. An appeal to the WCAT must be filed within 30 days of a review decision. A worker must request an extension of time if the time to file a review or appeal has expired. See sections 96.2 and 243 of the Act. June 2014 Page 7
Dividends would continue to be included in average earnings for the purpose of determining a principal s compensation. British Columbia would be the only jurisdiction in Canada where assessment and compensation policy on shareholder dividends are not consistent. Option 2: Exclude Shareholder Dividends from Average Earnings Under this option, compensation policy would be amended according to the attached Appendix to exclude shareholder dividends from the calculation of a principal s average earnings. Implications Assessment and compensation policy would be aligned. Principals who receive a portion of their remuneration as dividends would receive reduced payments for temporary and permanent disability than under current policy. Principals remunerated solely with dividends may receive no compensation for temporary partial, temporary total and permanent partial disabilities. However, these workers would still be entitled to health care benefits and statutory minimum benefits without paying assessment premiums. There may be an increase in the base rate for all employers to cover principals entitlement to health care and statutory minimums. WorkSafeBC s treatment of dividends would be consistent with the CRA s approach. It is anticipated that there would be an increase in the number of reviews and appeals. British Columbia would be consistent with all other jurisdictions, except Newfoundland and Ontario, in excluding dividends in calculating assessment premiums and compensation benefits. 7. CONSULTATION Stakeholders are invited to provide feedback on the discussion paper and options, and to make any additional comments that may be relevant to the issue. Stakeholder comments will be accepted until September 5, 2014. When responding, please provide your name, organization, and address. Comments may be sent by mail, fax or e-mail to: By e-mail: policy@worksafebc.com June 2014 Page 8
By mail: Pamela Austin Policy Analyst Policy, Regulation and Research Division WorkSafeBC P.O. Box 5350, Stn. Terminal Vancouver, B.C. V6B 5L5 By fax: 604 279-7599 An acknowledgement of receipt will be sent for each submission. Please be advised that stakeholders will not be contacted regarding the contents of their submissions unless clarification is needed. WorkSafeBC s governing body, the Board of Directors, will consider stakeholder feedback before it adopts any amendments to the current policies. Please note that all comments become part of the Policy, Regulation and Research Division s database and may be published, including the identity of organizations and those participating on behalf of organizations. The identity of those who have participated on their own behalf will be kept confidential according to the provisions of the Freedom of Information and Protection of Privacy Act. June 2014 Page 9
APPENDIX A REHABILITATION SERVICES & CLAIMS MANUAL, VOLUME II DRAFT POLICY #68.90 Principals Composition of Earnings The Assessment Manual sets out who may be a principal, and criteria for determining whether a principal is a worker. Principals' average earnings are calculated based on earnings from employment, including earnings shown on official statements issued by the firm for income tax purposes and management fees. When determining the composition of a principal's average earnings, the Board may consider dividends and the repayment of a principal's loan to the employer as earnings in cases where it is shown that the amount received by the principal represents payment for the principal's labour. If reported earnings are being received by a principal s spouse or child, then it should normally be considered for compensation purposes that the earnings belong to the spouse or child and not the principal. The same applies if information of this nature has been provided on Income Tax Reports. In making reports of this nature for Income Tax purposes, the company is asserting that the principal s spouse or child did work in the business and did earn the money paid. The Board is required to consider any evidence which may show that this assertion is incorrect and to make its own determination. However, the Board is entitled to rely upon this assertion unless there is good evidence to the contrary. Even if, upon investigation, the evidence shows that the spouse or child did not work for the company, that in itself does not mean that the payments to the spouse or child were earnings of the principal. There could be any number of other reasons why the company might make payments to the spouse or child. In compensating the principal of a small limited company, the Board s obligations extend only to the losses suffered in the capacity of employee. Wage-loss compensation cannot be paid to reflect any detrimental effect that the injury may have on the company s business. EFFECTIVE DATE: APPLICATION: January 1, 2008 TBD This policy applies to the calculation of average earnings for principals with injuries that occur on or after January 1, 2008 TBD. June 2014 Page 10