Riel v. Holland
67 O.R. (3d) 417
[2003] O.J. No. 3901
Docket No. C37970
Court of Appeal for Ontario
Carthy, MacPherson and Simmons JJ.A.
October 8, 2003
Family law — Support — Child support — Federal Child Support Guidelines — Husband abandoning successful independent electrical contracting business and accepting salaried position with another company at greatly reduced income — Trial judge not erring in concluding that husband was intentionally underemployed within meaning of s. 19(1) of Guidelines or in imputing income to husband pursuant to s. 17(1) of Guidelines
— Trial judge not erring by “grossing up” husband’s income for last three years of operation of his business to take account of fact that he paid very little tax on his business income — Federal Child Support Guidelines, SOR/97-175, ss. 17(1), 19.
The parties entered into Minutes of Settlement, which became a consent judgment, in 1998. The Minutes of Settlement required the husband to pay monthly child support of $1,732 based on his represented income of $147,250. At the time of separation, the husband did electrical contracting work through his company. In 2000, the husband ceased operating the company as an independent electrical contractor and took a salaried position at a salary of $52,500 per year. Payments were made to his company. The husband brought an application to reduce his child support obligation to $912 per month. He also sought to have charging orders which the wife had registered against his cottage and home discharged. The wife brought a cross- application for child support in accordance with the Federal Child Support Guidelines and an increase in spousal support.
The trial judge found that there was no reason for the husband to abandon his successful and reasonably lucrative independent electrical contracting business in favour of a position as an employee with another company at a greatly reduced income. The husband was “intentionally underemployed” within the meaning of s. 19(1) of the Guidelines. She then applied s. 17(1) of the Guidelines, which permits an averaging of the last three years of a spouse’s income. She noted that the husband’s use of a corporate vehicle to earn income and pay personal expenses in 1998, 1999 and 2000 resulted in substantial tax savings for him. This meant that the husband had significantly more real income than he would have had if he had been required to pay tax on personal income in the high figures he had earned during the 1998-2000 period. She found that the husband’s income for 1998 should be grossed up from $78,706 to approximately $125,000, for the year 1999 from $127,178 to $215,000 and for the year 2000 from $132,000 to $224,000. The average of the three grossed-up amounts was $188,000. That income was imputed to the husband for the year 2001 pursuant to s. 17(1) of the Guidelines. The husband was ordered to pay child support in the table amount of $2,156.20 per month. The trial judge refused to discharge the charging orders. She dismissed the wife’s cross-application for an increase in spousal support. The husband appealed and the wife cross-appealed.
Held, the appeal and cross-appeal should be dismissed.
The trial judge did not err in concluding that the husband was intentionally underemployed. His explanation for his decision to take a salaried position — lack of credit, difficulty financing jobs, bad debts, trouble finding big jobs due to a lack of regular employees — was belied by the strong financial results of his [page418] company between 1998 and 2000. While the numbers are not everything in an “intentional underemployment” analysis, they are an important part of the analysis. An employment decision that would lead to two children receiving $912 instead of $1,732 per month needed to be justified in a compelling way. There was nothing in the husband’s conduct or testimony that came close to providing such a justification.
The trial judge did not err by “grossing up” the husband’s income to take account of the circumstance that he paid very little tax on his business income. Section 18 of the Guidelines is not a code with respect to income derived from a corporation. The husband clearly derived a substantial benefit from organizing his affairs under a corporate umbrella and using the corporation to pay personal expenses. Section 1(d) of the Guidelines states that one of the objectives of the Guidelines is “to ensure consistent treatment of spouses and children who are in similar circumstances”. An interpretation of ss. 18 and 19 of the Guidelines that would impute the same income for child support purposes to two parents, one earning a salary of $128,000 and paying tax of $48,000 and the other receiving business income of $128,000 and paying tax of $5,000 would be remarkably out of step with the “consistent treatment” objective of the Guidelines.
As the trial judge concluded in refusing to discharge the charging orders, there was enough in the husband’s conduct, especially in relation to his failure to provide support to the children, to raise the concern that some security should be provided.
At the time of the settlement, the wife was prepared to accept $150 per month in spousal support as she was satisfied with child support in the amount of $1,732 per month. As the trial judge had determined that the child support should be increased to $2,156.20 per month, the trial judge correctly concluded that the wife’s position was not significantly different from what it was at the time of the settlement. There was no basis for increasing spousal support.
Cases referred to
Brans v. Brans (2000), 13 R.F.L. (5th) 335 (Ont. S.C.J.); Brinkos v. Brinkos (1989), 69 O.R. (2d) 225, 33 O.A.C. 295, 60 D.L.R. (4th) 556, 34 E.T.R. 55, 20 R.F.L. (3d) 445 (C.A.), supp. reasons (1989), 69 O.R. (2d) 798 (C.A.), revg (1986), 25 E.T.R. 81, 4 R.F.L. (3d) 381 (Ont. H.C.J.); Drygala v. Pauli (2002), 61 O.R. (3d) 711, 219 D.L.R. (4th) 319, 29 R.F.L. (5th) 293 (C.A.); Lavoie v. Wills (2000), 13 R.F.L. (5th) 93 (Alta. Q.B.); Manis v. Manis, [2000] O.J. No. 4539 (QL), [2000] O.T.C. 880 (S.C.J.); Moran v. Cook (2000), 9 R.F.L. (5th) 352 (Ont. S.C.J.); Orser v. Grant, [2000] O.J. No. 1429 (QL) (S.C.J.); Sarafinchin v. Sarafinchin (2000), 189 D.L.R. (4th) 741 (Ont. S.C.J.) Rules and regulations referred to Federal Child Support Guidelines, SOR/97-175, ss. 1(d), 12, 17(1), 18, 19
APPEAL and CROSS-APPEAL from a judgment with respect to child and spousal support.
David M. Goodman, for appellant.
Jeffery Wilson and Brenda Christen, for respondent. [page419]
The judgment of the court was delivered by MACPHERSON J.A.: —
A. INTRODUCTION
[1] Section 19(1) of the Federal Child Support Guidelines, SOR/97-175 (the “Guidelines”), authorizes a court to “impute such amount of income to a spouse as it considers appropriate in the circumstances”. One of the circumstances a court may consider is whether “the spouse is intentionally under-employed or unemployed”. This appeal invites consideration of this provision in the context of a spouse who claims that he gave up a high income derived from his independent electrical contracting business in favour of a salaried position with a different company which generated a significantly lower income.
[2] The appeal also raises the issue of a trial judge’s discretion to “gross up” imputed income from corporate sources to take into account the sometimes substantial differences in tax liability between this category of income and personal income.
B. FACTS
(1) The Parties and the Events
[3] Frederick Riel (“Riel”) and Jan Holland (“Holland”) were married on December 14, 1981. They separated 16 years later, on September 5, 1997. There are two children of the marriage, Amanda, born September 3, 1984, and Christopher, born January 21, 1988.
[4] After their separation, Riel and Holland entered into Minutes of Settlement on November 17, 1998, which became a consent judgment on the same date. The Minutes of Settlement required Riel to pay monthly child support of $1,732, based on his represented income of $147,250. Riel was also required to pay Christopher’s hockey costs and an equivalent amount for Amanda’s expenses and spousal support of $150 per month, indexed to a cost of living adjustment.
[5] Riel is an electrician by trade. In 1982, he and Holland incorporated Dominion Electric and Equipment which bought and sold electrical equipment. This company was closed in 1994. In the same year, a new company was incorporated, Dominion Electric (Canada) Ltd. (“Dominion Electric”), with Riel as the sole shareholder. This new company did regular electrical contracting work.
[6] At trial, Riel claimed that in the summer of 2000 he ceased operating Dominion Electric as an independent electrical contractor and took a salaried position with Markham Electric at [page420] $52,500 per year plus a car allowance of $450 per month. Although this job was personal in nature, Riel submitted invoices through Dominion Electric and payments were made to Dominion Electric, not Riel.
[7] In January 2001, Riel terminated his relationship with Markham Electric and took a salaried position with Lawrcon Electric Machine Corporation (“Lawrcon Electric”) at $55,000 annually. Once again, he organized matters so that payments were made to Dominion Electric.
(2) The Litigation
[8] On November 27, 2000, Riel brought an application to reduce his child support obligation to $912 per month. He also asked to reduce his obligations for Christopher’s hockey and Amanda’s expenses.
[9] Section 12 of the Guidelines authorizes a court to order a spouse to provide security for the payment of a child support order. On March 8, 2001, Ferrier J. made an interim order permitting Holland to register charging orders of $50,000 each against Riel’s cottage and home. At trial, Riel sought to have the charging orders discharged.
[10] Holland brought a cross-application requesting that Riel’s application be dismissed for failure to make proper disclosure and failure to comply with support obligations. In the alternative, she requested child support in accordance with the Guidelines and an increase in spousal support. In addition, Holland questioned whether Riel had actually closed down Dominion Electric’s business operations.
[11] The application and cross-application, including testimony by the parties, were heard by Croll J. over the course of three days in November and December 2001. The trial judge released comprehensive reasons for judgment on February 23, 2002.
[12] On the central issue of Riel’s current income, the trial judge rejected Riel’s submission that it should be the $55,000 salary he was receiving from Lawrcon Electric. After a careful and detailed analysis of Riel’s and Dominion Electric’s available financial records, she determined that Riel used Dominion Electric as a vehicle for paying personal expenses and that the real income available to Riel when he operated Dominion Electric as an independent electrical contracting business was $78,706 in 1998, $127,178 in 1999 and $132,000 in 2000. The trial judge acknowledged that some of her figures might be somewhat generous. However, she found that this was due to “the completely inadequate disclosure that colors this entire proceeding” and that [page421] Riel “must accept any adverse inferences that result from his failure to disclose”.
[13] The trial judge then stated that her detailed analysis of these records would be irrelevant if she accepted Riel’s submission that he earned only $55,000 from his salaried position with Lawrcon Electric. However, she rejected this submission:
I am not persuaded that this is the case. I note that the financial statement sworn by Mr. Riel on October 9, 1997 stated that his income was $18,000, yet on cross-examination he said his income at that time was between $40,000 and $60,000. This is further inconsistent with the numbers Mr. Riel uses to calculate money available to him in 1997. In other words, Mr. Riel has provided three different answers to the question of his available income in 1997. In addition . . . there was no reason for Mr. Riel to wind down Dominion Electric. Even on his numbers, the income available to Mr. Riel went from $41,649 in 1998, to $111,149 in 1999 to almost $73,000 in 2000, a year in which he says that he did not work the entire 12 months. Even accepting that 1999 was an unusually good year, there is no evidence of a gross decline in funds available to Mr. Riel such that, on an objective basis, the business had to be discontinued. The business may have been difficult, and challenging, but to his credit, the numbers imply that Mr. Riel was able to meet the challenge.
[14] Based on this analysis, the trial judge concluded that Riel was “intentionally underemployed” within the meaning of s. 19(1) of the Guidelines. She then applied s. 17(1) of the Guidelines which permits an averaging of the last three years of a spouse’s income. She said:
Mr. Riel asks the court to accept that, despite what he may have earned in earlier years, he earns less now. I am not satisfied that this is the case, and, in my view, the three- year averaging is the most reliable indicator of Mr. Riel’s current income.
[15] The trial judge then noted that Riel’s use of a corporate vehicle to earn income and pay personal expenses in 1998, 1999 and 2000 resulted in substantial tax savings for him. This meant that Riel had significantly more real income than he would have had if he had been required to pay tax on personal income in the high figures he had earned during the 1998-2000 period. She reasoned:
Accordingly . . . I find that the income for the year 1998 should be grossed up from $78,706 to approximately $125,000, for the year 1999 from $127,178 to $215,000 and for the year 2000 from $132,000 to $224,000. The average of these three grossed up amounts is $188,000. This is the income to be imputed to Mr. Riel for the year 2001 pursuant to section 17(1) of the Guidelines. On an income of $188,000, the child support guidelines provide for child support of $2,156.20 per month.
[16] On the security issue raised by Riel, the trial judge decided that the charging orders against Riel’s home and cottage properties should remain in place. [page422]
[17] Finally, the trial judge dismissed Holland’s cross- application for an increase in spousal support.
[18] Riel appeals from the trial judge’s conclusions on the “intentional underemployment”, “grossing up” of imputed income and security for support issues. Holland cross-appeals from the trial judge’s disposition of the spousal support issue.
C. ISSUES
[19] The issues on the appeal and cross-appeal are: Appeal
(1)Did the trial judge err by determining that Riel was “intentionally underemployed” within the meaning of s. 19(1) of the Guidelines?
(2) Did the trial judge err by “grossing up” Riel’s income to take account of the circumstance that Riel paid very little tax on his business income?
(3)Did the trial judge err by continuing the charging orders imposed by Ferrier J. as security for spousal and child support payments?
Cross-appeal
(4)Did the trial judge err by refusing to increase the spousal support payment?
D. ANALYSIS
Appeal Issues
(1) The “intentional underemployment” issue
[20] Section 19(1)(a) of the Guidelines provides:
19(1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:
(a) The spouse is intentionally underemployed or unemployed . . . .
[21] The trial judge invoked this provision. She could see no reason for Riel to abandon his successful and reasonably lucrative independent electrical contracting business in favour of a position as an employee with another company at a greatly reduced income.
[22] Riel contends that the trial judge erred in two respects: first, by giving no or insufficient weight to Riel’s explanation for [page423] the change in his employment status; and second, by refusing to admit into evidence an expert’s report which Riel wanted to use to corroborate his contention that he acted reasonably, from a financial standpoint, in not continuing his independent electrical contracting business.
[23] I do not agree with these submissions. Riel’s explanation for his decision to take a salaried position with another company — lack of credit, difficulty financing jobs, bad debts, trouble finding big jobs due to a lack of regular employees — was belied by the strong financial results of Dominion Electric in 1998, 1999 and 2000. I agree with the appellant’s submission that “the numbers are not everything” in an “intentional underemployment” analysis. However, the numbers must certainly be an important part of the analysis. Here, Riel claims that he made an employment decision that he says reduced his income by more than half. He coupled that decision with an almost immediate attempt to seek a reduction by almost half in his child support payments. It seems to me that an employment decision that would lead to two children receiving $912 instead of $1,732 per month needs to be justified in a compelling way. There was nothing in Riel’s conduct or testimony that came close to providing such a justification.
[24] I note that this court considered the meaning of “intentional underemployment” in Drygala v. Pauli (2002), 61 O.R. (3d) 711, 219 D.L.R. (4th) 319 (C.A.). Gillese J.A. said, at pp. 718-19 O.R., p. 328 D.L.R.:
Read in context and given its ordinary meaning, “intentionally” means a voluntary act. The parent required to pay is intentionally underemployed if that parent chooses to earn less than he or she is capable of earning.
In my view, Riel’s employment decision in 2000 — a decision he has maintained since then — fits precisely within this definition.
[25] Nor do I see any basis for disagreeing with the trial judge’s ruling excluding the expert report the appellant sought to introduce. The reasons in support of her ruling — the duplication between the expert’s financial analysis and Riel’s own information, the absence of backup documentation for the report and the irrelevance of the expert’s opinion on the legal question of “intentional underemployment” — are, in my view, entirely sound.
(2) The “grossing up” issue
[26] The appellant reaches this submission only if he is unsuccessful on his first ground of appeal. The premises of this second submission are that the trial judge was correct to calculate Riel’s income as the pre-tax income of his independent electrical [page424] contracting business and that she was also correct to employ the three-year averaging (1998-2000) of that income.
[27] The appellant relies on s. 18 of the Guidelines in support of his position on this issue. Section 18 provides:
18(1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse’s annual income as determined under section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the court may consider the situations described in section 17 and determine the spouse’s annual income to include
(a) all or part of the pre-tax income of the corporation, and of any corporation . . . for the most recent taxation year; or
(b) an amount commensurate with the services that the spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre- tax income.
(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
[28] The appellant contends that this provision imposes a cap or ceiling on the use a court may make of a spouse’s income from a corporation. The ceiling, explicit in both subparagraphs (a) and (b) of subsection 18(1), is the corporation’s pre- tax income including any ‘add-ons’ flowing from s. 18(2). Accordingly, the appellant submits, once the trial judge determined that the pre-tax income of Dominion Electric was $78,706 for 1998, $127,178 for 1999 and $132,000 for 2000, that was the end of the exercise. Section 18(1) of the Guidelines precluded a further ‘grossing up’ of these amounts to take account of the reality that Riel, through Dominion Electric, paid very little tax on this income.
[29] I do not agree with the appellant’s argument that s. 18 of the Guidelines is, in effect, a code with respect to income derived from a corporation. I begin by noting the stark difference in the income taxes paid by Riel and the income taxes that would be paid by a salaried employee. In 1998, Riel paid income tax of $3,110. In 1999, he paid income tax of $4,467. Riel did not disclose his income tax for 2000.
[30] At the trial, the trial judge admitted into evidence, and relied on, a report by Melanie Russell, a chartered accountant, who calculated the amount of pre-tax income required to realize several levels of income after the payment of personal income taxes: [page425]
After-Tax Income Required Pre-Tax Income
$61,000
$92,000 80,000 8128,000 8100,000 8166,000 8120,000
8205,000
[31] It is clear from the juxtaposition of the actual tax paid by Riel and Ms Russell’s table that Riel derives a substantial benefit from organizing his affairs under a corporate umbrella and using the corporation to pay personal expenses.
[32] In a series of decisions, judges of the Superior Court have ‘grossed up’ a spouse’s income to take account of similar striking differences in tax consequences between salaried employees and persons in receipt of other forms of income: see Orser v. Grant, [2000] O.J. No. 1429 (QL) (S.C.J.); Moran v. Cook (2000), 9 R.F.L. (5th) 352 (Ont. S.C.J.); Sarafinchin v. Sarafinchin (2000), 189 D.L.R. (4th) 741 (Ont. S.C.J.); Manis v. Manis, [2000] O.J. No. 4539 (QL), [2000] O.T.C. 880 (S.C.J.); and Brans v. Brans (2000), 13 R.F.L. (5th) 335
(Ont. S.C.J.).
[33] The leading case is Orser v. Grant in which Benotto J. analyzed the issue in this fashion, at paras. 10-13:
Gross-Up for Tax
Mr. Grant has arranged his financial affairs so that he paid only $7,362.31 in income tax, substantially less than he would pay were he a salaried employee. It means that he enjoys a net income after tax of $55,405.67.
The Child Support Guidelines base support on the payor’s gross taxable income. One of the objectives of the guidelines is to ensure “consistent treatment” of those who are in “similar circumstances”. Thus, there are provisions to impute income where a parent is exempt from paying tax, lives in a lower taxed jurisdiction, or derives income from sources that are taxed at a lower rate.
Where, as here, a parent arranges his or her affairs to pay substantially less tax on income, the income must be grossed up before the table is applied. This is the only way to ensure the consistency mandated by the legislation.
Here, I have been asked to use a 36 [per cent] average tax rate. This is reasonable. If I apply that gross-up to his net after tax income, his gross income would be over $85,000. Thus, Mr. Grant would have to earn this gross amount to net $55,405 for himself. This greater amount is what the table amount of support should be based on.
(Emphasis added)
[34] Benotto J.’s analysis was explicitly adopted by Speigel J. in Moran v. Cook, Sachs J. in Sarafinchin v. Sarafinchin, Lane J. in Manis v. Manis and Greer J. in Brans v. Brans. It was also followed by Rooke J. in Lavoie v. Wills (2000), 13 R.F.L. (5th) 93 (Alta. Q.B.). [page426]
[35] Subject to observing that s. 19 of the Guidelines defines certain specific circumstances in which income may be imputed and sets out the criteria to be met in those circumstances [Note 1], I agree with the general approach adopted in these cases. Section 1(d) of the Guidelines states that one of the objectives of the Guidelines is “to ensure consistent treatment of spouses and children who are in similar circumstances”. An interpretation of ss. 18 and 19 of the Guidelines that would impute the same income for child support purposes to two parents, one earning a salary of $128,000 and paying tax of $48,000 and the other receiving business income of $128,000 and paying tax of $5,000, would be remarkably out of step with the “consistent treatment” objective of the Guidelines.
[36] Fortunately, such an interpretation is not required. The wording of s. 19 of the Guidelines is open-ended (“which circumstances include”), thus indicating that the categories listed in that section are merely examples of situations in which income may be imputed. There are, therefore, other potential scenarios in which income can, and should, be imputed. Where significant amounts of untaxed business income are used for payment of personal expenses, ‘grossing up’ business income to place a spouse’s real income on a par with what it would be in a salary income context is, in my view, another such scenario. As Lane J. expressed it, in a particularly practical fashion, in Manis v. Manis, at para. 99: “The fundamental principle is that the court must estimate the actual means which the parent has available for child support. If less tax is paid, more is available.” I would add only the reminder that the Guidelines table amounts are based on the gross income of salaried employees without regard to potential differences in deductions. Accordingly, attempting to achieve absolute consistency between salaried employees and the self-employed is neither necessary nor appropriate.
[37] Finally, I wish to highlight the trial judge’s findings that Riel failed to make proper disclosure and that she did not accept his assertions that he earns less now than he did in the past. These findings support the trial judge’s decision to gross up Riel’s business income as part of determining his real income. [page427]
(3) The security issue
[38] The trial judge refused to discharge the charging orders of $50,000 each against Riel’s cottage and home. She found that “Mr. Riel has been in arrears of support from the commencement of this application and throughout the entire trial.” She also commented adversely on Riel’s non-disclosure of relevant financial information and his failure to send proper cheques to the Family Responsibility Office.
[39] I agree with the trial judge’s analysis and conclusion on this issue. The record before the trial judge established that “[t]here is enough in the husband’s conduct, especially in relation to his failure to provide support to the children, to raise the concern that some security should be provided”: see Brinkos v. Brinkos (1989), 69 O.R. (2d) 225, 60 D.L.R. (4th) 556 (C.A.), at p. 234 O.R. [Note 2].
Cross-Appeal Issue
(4) The spousal support issue
[40] Holland cross-appealed on the issue of spousal support, seeking an increase from $150 to $3,500 per month.
[41] The trial judge’s conclusion on this issue was: The evidence of Ms. Holland is that at the time of the settlement before Spiegel J. in November 1998, she was prepared to accept $150 per month in spousal support as she was satisfied with child support in the amount of $1,732 per month. I have determined that the child support should be increased to $2,156.20 per month, and I am not persuaded that Ms. Holland’s position is significantly different from what it was in November 1998. In addition, in light of section 15.3 of the Divorce Act, and the priority to be given to child support, I make no change to the existing spousal support order.
[42] I see no basis for disagreeing with this analysis and conclusion.
E. DISPOSITION
[43] I would dismiss the appeal and the cross-appeal. In accordance with the joint submission of counsel relating to this potential disposition, I would award the respondent costs fixed at $15,000, inclusive of disbursements and GST.
Appeal and cross-appeal dismissed. [page428]
Notes
Note 1: For example, s. 19(1)(g) permits the court to impute income where “the parent or spouse unreasonably deducts expenses from income” (emphasis added), while s. 19(1)(h) requires that a parent or spouse derive a significant portion of income” (emphasis added) from sources that are taxed at a lower rate than employment or business income” as a pre-condition to imputing income.
Note 2: I note that Hollnad brought a motion seeking dismissal of Riel’s appeal because he was substantially in arrears of his child and spousal support obligations. The motion was withdrawn when Riel deposited $39,200 with the Family Responsibility Office virtually on the eve of the appeal hearing.