Court of Appeal for Ontario

Date: May 4, 2017

Docket: C61516

Judges: Juriansz, Lauwers and Hourigan JJ.A.

Parties

Between

Lisa Duffus Applicant (Respondent in Appeal)

and

Eric Frempong-Manso Respondent (Appellant)

Counsel

Maria N. Sirivar, for the appellant

Esther L. Lenkinski, for the respondent

Hearing

Heard: March 30, 2017

On appeal from: The order of Justice Dale F. Fitzpatrick of the Superior Court of Justice, dated November 16, 2015, with reasons reported at 2015 ONSC 7051.

Judgment

Hourigan J.A.:

A. INTRODUCTION

[1] Child support laws are designed to ensure fairness and consistency. However, the system only functions when litigants make full and fair financial disclosure. Where a litigant chooses not to make proper financial disclosure, the determination of support obligations becomes complex and unpredictable.

[2] A persistent problem in the family law system is litigants who believe that the rules of financial disclosure do not apply to them. They hide assets and sources of income, thereby forcing the opposing party and the court to waste valuable time and resources to get to the truth of their financial situation.

[3] The appellant is such a litigant. It is clear from the record that he does not feel bound by the rules of disclosure. He is quite prepared to lie and obfuscate to avoid paying support for his children. In a thorough judgment, the motion judge established a figure for the appellant's income and the resulting child support obligation.

[4] On appeal, the appellant's counsel wisely does not challenge the motion judge's factual findings about her client's conduct. Instead, she narrowly focuses on two alleged errors. First, she says the motion judge erred in calculating the corporate income that should be attributed to him. Second, she argues that the motion judge erred in changing a pre-existing order, which provided for payment of child support over ten months, to a new order that required child support to be paid over twelve months.

[5] The respondent does not concede that the motion judge made the alleged errors. However, she argues that this appeal should be dismissed on the basis that this court should defer to the motion judge in the circumstances of this case. Her point is that, given the appellant's conduct, the determination of his income is largely artificial. In other words, who can say with any certainty that there is not further income that is still being hidden? Accordingly, she submits that the motion judge did the best he could with the information before him and that this court should defer to his decision.

[6] The respondent's argument holds some attraction. There is an element of rough justice in having the appellant live with the results of the motions given his conduct. However, this court's primary function is to correct errors. Where a legal error has been made, or a palpable and overriding error of fact or mixed fact and law has occurred, this court is obliged make the necessary correction.

[7] I see no error in the motion judge's decision to order that child support be paid over twelve months. I would make an adjustment to the amount of corporate income attributed to the appellant on the basis of double counting, but would otherwise dismiss the appeal.

B. FACTS

[8] The parties were never married. They have one child who is now sixteen years of age.

[9] In May and June of 2012, the parties conducted a lengthy trial before Wildman J., which resulted in a consent order (the "Wildman Order"). That order dealt with both access and child support.

[10] The Wildman Order provided that child support would be payable for only ten months of the year because the child spent equal time with the appellant over the two summer months.

[11] The appellant swore a financial statement that was before the court when it made the Wildman Order. In that statement, he swore that he was T4 employee, with no additional income. Contrary to his sworn statement, and unbeknownst to the respondent and Wildman J., the appellant was diverting income through 1858910 Ontario Inc. (the "Corporation"). For 2011, his income was $61,740 greater than the $285,652.55 that was disclosed in his financial statement.

[12] Despite his success in obtaining an order based on an artificially low level of income, the appellant was not satisfied. He brought two motions to change. The first was commenced in July 2013 and sought a reduction in his child support commensurate with his reported taxable income of $140,000 for 2012, effective July 1, 2013. The second was brought in July 2014. In that motion the appellant sought an order for child support based on a taxable income of $152,000 for 2013, effective August 1, 2014.

[13] The respondent opposed the motions to change and brought a cross-motion for an order that the appellant's income from all sources be considered for child support purposes. She also sought clarification regarding access provisions. The motion judge's decisions on these motions and cross-motions are the subject of this appeal.

[14] The motions and cross-motion were heard over the course a five-day hearing before the motion judge in January 2015. The motion judge found that the appellant was "evasive and non-compliant with his disclosure obligations." In particular, he noted that the appellant did not disclose any interest in the Corporation until January 20, 2014. The motion judge rejected the appellant's evidence that he held only a 50 percent interest in the Corporation.

[15] The motion judge made a final order that required the appellant to pay monthly child support in the amount of $2,652 for 2012 based on an income of $337,667. He further ordered that the appellant pay monthly child support of $3,253 for 2013, based on an income of $418,869, and that those payments continue for 2014 pending further evidence and order of the court.

C. ISSUES

[16] The appellant submits that the trial judge made two errors:

1. In the calculation of the income available to him from his IT consulting business; and

2. Ignoring section 6(a) of the Wildman Order that required him to pay child support for ten months rather than twelve months.

D. ANALYSIS

Issue 1: Calculation of Income

[17] The appellant disputes several aspects of the motion judge's approach to calculating income. He asserts errors in:

(i) double-counting the non-arms-length loans made to him by the Corporation;

(ii) attributing to income the difference between management fees expensed by the Corporation and those claimed on the appellant's T4 income tax statement; and

(iii) grossing up the amounts attributed to rent and amortization.

[18] The motion judge's decision is entitled to great deference. In the face of inadequate disclosure, judges face an almost impossible task of assessing the appropriate level of income on which to base awards of support. However, and as sated above, an appeal is an opportunity for a party to dispute an award where there has been an error in principle. In this case, I believe that there was such an error in relation to the loan amounts.

[19] I start with first principles. The Ontario Child Support Guidelines, O. Reg. 391/97 ("CSGs") are enacted under the Family Law Act, R.S.O. 1990, c.F.3 and provide a comprehensive approach to determining income for the purpose of paying child support.

[20] The starting point for calculating annual income, as found in s. 16 of the CSGs, is a payor's "total income," also known as "line 150" income. Where, however, in the court's view, the line 150 income does not fairly reflect the money available for payment of child support, s. 18(1) permits the court to consider all or part of the pre-tax income of a corporation or an amount commensurate with services provided:

Shareholder, director or officer

18. (1) Where a parent or spouse is a shareholder, director or officer of a Corporation and the court is of the opinion that the amount of the parent's or spouse's annual income as determined under section 16 does not fairly reflect all the money available to the parent or spouse for the payment of child support, the court may consider the situations described in section 17 and determine the parent's or spouse's annual income to include,

(a) all or part of the pre-tax income of the Corporation, and of any Corporation that is related to that Corporation, for the most recent taxation year; or

(b) an amount commensurate with the services that the parent or spouse provides to the Corporation, provided that the amount does not exceed the Corporation's pre-tax income.

[21] Any amounts paid by a corporation as salaries, wages, management fees or other payments that are non-arm's length are presumptively added into the corporate income pursuant to s. 18(2):

Adjustment to 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 parent or spouse establishes that the payments were reasonable in the circumstances.

[22] The motion judge rejected the calculations in the appellant's expert's report on the basis that those calculations were informed by unsupported information provided by the appellant. For example, the expert report accepted the appellant's claim that he was only a 50 percent shareholder in the Corporation. Having rejected the expert evidence, the motion judge proceeded to calculate the appellant's income on the basis of ss. 18(1) and (2) of the CSGs.

[23] In calculating the appellant's income, the motion judge took the approach under ss.18(1) and (2) of adding to the Corporation's pre-tax income all amounts paid by the Corporation as salaries, wages or management fees, or other payments or benefits that are non-arm's length:

Adjustment	2012	2013
Employment Income	$90,000	$90,000
Dividends	$50,000	$62,000
Difference between Taxable and Actual CDN Dividends	($10,000)	($12,500)
Personal Expenses Paid by 1858910 Ontario Inc. ($7,500 automotive + $3,643 professional fees for 2012; $7,500 automotive + $10,727 travel + $17,109 furniture for 2013) grossed-up based on 49.3% notional tax rate	$21,978	$69,696
Difference between management fees expensed by 1858910 Ontario Inc. and the amount claimed in Mr. Frempong-Manso's income tax return	$52,307	$42,356
100% of Pre-Tax Corporate Income	$55,308	$71,068
Loans from 1858910 Ontario Inc.	$78,074	$95,749
Total	$337,667	$418,869

[24] While this overall approach was appropriate, in my view, there was a clear error in its execution in relation to the loan amounts. The motion judge attributed corporate loans to the appellant as income in the appellant's hands under s. 18(1). However, at para. 94 of his reasons the motion judge found that the appellant had repaid the loans. Loans that were repaid should not have been attributed to the appellant as income.

[25] This error resulted in the adjusted income attributed by the motion judge to the appellant in 2012 and 2013 exceeding the total revenue of the Corporation. The total revenue for the Corporation for 2012 and 2013 was $260,222 and $355,430, respectively.

[26] The amount the motion judge arrived at for 2012 almost exactly exceeded the Corporation's total revenue by the amount of the loan: $337,667 - $78,074 = $259,593 (only $629 short of the Corporation's total revenue for that year).

[27] For 2013, simply subtracting the amount added in relation to the loan yields an amount that falls short of the Corporation's total revenue by $32,310: $418,869 - 95,749 = $323,120. This is because of additional expenses in 2013 for rent ($10,600), advertising and promotion ($10,174), insurance ($2,805), office-related ($2,327) and telephone ($5,625) expenses, which the motion judge considered legitimate and therefore appropriately did not add back in to the adjusted amount.

[28] Other than the loan error, the motion judge made no other clear errors. The appellant submits a number of additional errors. These include attributing to the appellant the difference between management fees expensed and claimed, grossing up amounts attributed to rent and amortization, and failing to take into account that the company and appellant's tax year did not line up. On the basis these errors, the appellant requests a rehearing of the issue of income.

[29] The motion judge attributed to the appellant the difference between the management fees expensed by the Corporation and the fees that he declared as income on his T4 income tax statement. There was, in my view, no clear error in doing so. There was no suggestion that anyone other than the appellant received the management fees paid by the Corporation.

[30] I also see no clear basis for the additional submission raised in oral argument that the motion judge erred in grossing-up amounts attributed to rent and amortization. The motion judge found that for 2012 the Corporation had no legitimate rent expenses. Accordingly, it was appropriate for him to add back what he found to be an illegitimate deduction. This amount was not grossed-up but simply denied as a deduction and added back to the corporate income amount. For 2013, when there was evidence that the Corporation had a legitimate rent expense to an arm's length landlord, the rent amount was not added back.

[31] Similarly, the motion judge found, at para. 81 of his reasons, that the amortization deductions should be disallowed as expense deductions in the calculation of the Corporation's pre-tax income because he found that there were no actual payments made in relation to these expenses. Again, these amounts were not grossed-up but simply eliminated as deductions from the Corporation's pre-tax income.

[32] The amounts that the motion judge did gross-up were personal expenses paid by the Corporation, such as those for car expenses, so-called professional fees, travel and furniture. These were appropriately grossed-up because had the Corporation not paid for them, they would otherwise have been paid for out of the appellant's after-tax income.

[33] It is possible that there is something to the argument that the corporation and appellant's tax year did not line up. If accepted, this might result in some small adjustment although it is not clear that over multiple years it would necessarily be in the appellant's favour. Furthermore, if there is any error here it does not in my view rise to the level of palpable and overriding error warranting appellate intervention. This is part of the risk the appellant incurred in providing inadequate disclosure to the court as well as inaccurate information to his expert.

[34] Correcting only for the palpable and overriding error in counting the loans as income, I would accordingly attribute income to the appellant for 2012 and 2013 in the amounts of $259,593 and $323,120.

[35] Although these amounts are above $150,000, I would not interfere with the motion judge's determination that there was no evidence that awarding the presumptive amounts under the CSGs would be inappropriate.

[36] Based on this income, the CSGs indicate a monthly amount of $2,073 for 2012 and $2,544 for 2013. The motion judge did not have income information for 2014 and so continued the same monthly amount from 2013. I would, therefore, order that he pay $2,544 for 2014 pending further evidence and order of the court.

Issue 2: Ten months vs. twelve months of support

[37] The appellant submits that the motion judge erred in not continuing the provision in the Wildman Order that child support be paid for ten months each year. I disagree.

[38] When the appellant brought his motions to change, the court was obliged to consider any variation in accordance with the CSGs: Doyle v. Doyle, 2006 BCCA 128, 223 B.C.L.R. (4th) 271, at para. 11 and s. 17(6.1) of the Divorce Act, R.S.C. 1985 c. 3.

[39] Pursuant to s. 9 of the CSGs, for a parent to meet the 40 percent threshold warranting a set-off of child support, the parent must exercise a right of access for "not less than 40 percent of the time over the course of year." The appellant's submission is inconsistent with s. 9. If accepted it would permit a set-off based on equal time with both parents over the two summer months that does not meet the annual 40% threshold required by s.9.

[40] It is not open to the appellant to pick and choose the portions of the CSGs he wants to apply to his case. The motion judge made an order consistent with s.9 of the CSGs. There is no basis for appellate interference.

E. DISPOSITION

[41] I would allow the appeal to the extent that paragraph 1 of the motion judge's order is amended to reflect an income of $259,593 and a monthly child support figure of $2,073. Paragraph 2 of the motion judge's order is amended to reflect an income of $323,120 and a monthly child support figure of $2,544. The appeal is otherwise dismissed.

[42] There has been divided success on the appeal. Normally that would result in an order that the parties bear their own costs. However, given the appellant's conduct, I would order that he pay the respondent her costs of this appeal, which I would fix at $10,000, on a partial indemnity basis, inclusive of fees, disbursements and H.S.T. This costs order may be enforced in the same manner as child support.

Released: May 4, 2017

"C.W. Hourigan J.A."

"I agree. R.G. Juriansz J.A."

"I agree. P Lauwers J.A."