NEWMARKET COURT FILE NO.: FC-15-49366-00 DATE: 20160823 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Jessica Njoki Applicant Antony Njoroge Gitomeh Respondent – and – E-Limika Consulting Inc. Respondent
Counsel for the Applicant, J. Gagné Counsel for the Respondents, S. Patel
HEARD: August 3, 2016
JARVIS J.:
Ruling on Motion
Introduction
[1] This is a motion by the applicant (“the wife”) for an Order for child and spousal support retroactive to October 9, 2015 being the date that this Application was started. The respondent (“the husband”) acknowledges his obligation to pay child support but disputes the wife's entitlement to spousal support. The principal issue is the husband's qualifying support income.
Background
[2] The parties began cohabiting in Kenya in 2000 and married there in 2002. They separated in Ontario on July 1, 2012. There are two children of the marriage, a son (15) and a daughter (9). They reside with their mother in rental accommodations.
[3] The wife is employed in the human resources field earning about $60,000 annually. The husband has an accounting background and is self-employed through a company (“E-Limika”) of which he is the majority shareholder (75%). His current partner, who is also his girlfriend, is the other shareholder. They live in Michigan, USA.
[4] E-Limika provides computer software consulting services, mostly training. For the fiscal years ending December 31st between 2013 to 2015, the company averaged $175,850 revenue annually against $154,187 average annual expenses, an 87.7 percent average revenue/expense ratio. According to the husband, the company maintains no ledgers. The husband prepares the company's financial and tax statements from available bank records. Since 2013, the husband’s declared line 150 tax return income has averaged around $13,000: in 2015, that income was $12,990. With the exception of some modest contributions towards his children's expenses totaling about $600, the husband has paid nothing for support since (at least) October 2014.
[5] After the parties separated they continued to reside in the matrimonial home until mid-2013 when the husband relocated to Michigan to conduct his company's business from there. The wife and children continued to reside in the matrimonial home until it was sold after power of sale proceedings were commenced. The father did not contribute to any of the family, or the home, expenses after July 2014. There is currently about $117,000 held in trust from the net sale proceeds of the property.
[6] The wife contends that there should be imputed to the husband an income of $150,000 a year because the expenses written off against E-Limika’s revenue are unreasonable or not corroborated. The husband is prepared to acknowledge an imputed income of $61,945.67.
Analysis
[7] Sections 18 (1) and (2) and 19(1), (d), (g) and (2) of the Child Support Guidelines (the “Guidelines”) deal with income attribution and imputation in circumstances where a spouse derives income from a corporation of which that spouse is a shareholder, officer or director and there is evidence that the income earned by that spouse does not fairly reflect all of the money available to pay child support.
(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. (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.
(1) The court may impute such amount of income to a parent or spouse as it considers appropriate in the circumstances, which circumstances include, (d) it appears that income has been diverted which would affect the level of child support to be determined under these guidelines; (g) the parent or spouse unreasonably deducts expenses from income; (2) For the purpose of clause (1) (g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act (Canada).
[8] Sections 18 and 19 of the Guidelines separately, but collaboratively, address situations where income is derived from a corporation and where no corporation is involved. There is a not unreasonable evidentiary onus placed on the business owner. As observed in Elder v. Dirstein, 2012 ONSC 2852,
- Whenever s. 18 comes into play the onus is on the shareholder, director or officer to show that corporate monies, whether retained earnings or pre-tax corporate income, are not available for support purposes: Nesbitt v. Nesbitt, 2001 MBCA 113, [2001] M.J. No. 291 (C.A.), paras. 19 & 21; Hausmann v. Klukas, 2009 BCCA 32, [2009] B.C.J. No. 121 (C.A.) 32, paras 51-61. That is because the payor parent knows more about the business than the recipient, and is therefore in the best position to explain why some or all of the company’s pre-tax income is not available for support.
[9] The observations made by Aston J. in Osmar v. Osmar, 8 RFL (5th) 368, [2000] O.J. No. 2058, [2000] O.T.C 398, 2000 CarswellOnt 1928 (Ont. Fam. Ct.) apply regardless of the business structure,
[5] There is a substantial body of case-law under s. 19 (1) (g) of the guidelines, not all of it consistent. It is fair to conclude that judicial discretion in this area makes the determination of income more of an art than a science. In my view, the guidelines require the court to examine expenses from the perspective of balancing the business necessity against the alternative of using those funds for child support. The court should respect the right of self-employed persons to run their business as they see fit, but may nevertheless, question whether particular expenditures ought to be indirectly subsidized by lower child support.
[10] The considerations applicable to determining a spouse’s income where that income derives from a sole proprietorship, a partnership or a controlled corporation were summarized by Sherr J. in Ehiagwina v. Ehiagwina, 2013 ONCJ 18,
[14] A self-employed person has the onus of clearly demonstrating the basis of his or her net income. This includes demonstrating that the deductions from gross income should be taken into account in the calculation of income for support purposes. See Whelan v. O’Connor, [2006] O.J. No. 1660, (Ont. Fam. Ct.). This principle also applies where the person’s employment income is derived from a corporation that he or she fully controls. See Mackenzie v. Flynn, 2010 ONCJ 184.
[15] The self-employed have an inherent obligation to put forward not only adequate, but comprehensive, records of income and expenses, from which the recipient can draw conclusions and the amount of child support can be established. Meade v. Meade (2002), 31 R.F.L. 5th 88 (SCJ).
[16] The onus rests upon the parent seeking to deduct expenses form income to provide meaningful supporting documentation in respect of those deductions, failing which an adverse inference may be drawn. See: Orser v. Grant, [2000] O.J. No. 1429 (S.C.J.).
[11] The wife seeks to impute to the husband a $150,000 income. She claimed that during the parties’ cohabitation the husband operated a home-based consulting business and that he was “extraordinarily aggressive in writing off personal expenses through his company”. The husband maintains that he was legally entitled to the company deductions claimed and that he used “his expertise and knowledge of the law to claim as much as [he was] legally entitled to for the company”. He challenged the wife to disprove the propriety of the deductions claimed.
[12] The husband claims that the following expenses should be deducted from his company’s gross revenue as being reasonable and necessary.
| Expenses | Amount |
|---|---|
| (a) Amortization of Tangible Assets | $13,000.00 |
| (b) Legal Fees | $4,000.00 |
| (c) Training Expense | $21,728.00 |
| (d) Repairs & Maintenance | $3,072.00 |
| (e) Salaries & Wages | $32,180.00 |
| (f) Computer Related Expenses | $24,410.00 |
| (g) Research & Development | $6,500.00 |
| TOTAL | $104,890.00 |
[13] On July 6, 2016 the wife’s lawyer requested explanations and supporting documentation for these expenses. The husband’s response was a tangled web of interwoven obfuscations mostly unsupported by the documentary evidence requested, the absence of which was also unexplained but, in my view, well within his ability to provide.
[14] Each of these expense categories will be separately reviewed.
(a) Amortization of Tangible Assets ($13,000)
[15] The husband’s affidavit explanation is that the assets comprise an online learning system and that it was being “tested”. He said that the cost was $65,000 which elsewhere he calculated as representing “the cumulated cost of Research and Development that E-Limika has been incurring during the last 7 years developing this solution”.
[16] The Answer delivered by the company claimed that the company’s assets comprised some electronic equipment and furniture having an estimated value of $650 and a 2012 used automobile purchased in 2015.
[17] The explanations by the husband and his company cannot be reconciled. Nor did he make any serious effort to substantiate the expenses claimed.
[18] For example, attached to the husband’s affidavit were a number of uncatalogued receipts for various expenses. One, for internet access and usage charges, included “Movie Channel” and “Regional Sports Channel”costs. Another, for $495.41 (USD), appears to represent monthly payments for the company automobile. While there was no explanation why or how the automobile should factor into the husband’s costs of doing business, or even whether it should be expensed under this category, I am prepared to allow an amount equal to one-half of this annual expenses grossed up by 25 percent to account for the USD/CDN exchange. That amount is $3,715.
[19] No other deduction shall be allowed under this category.
(b) Legal Fees ($4,000)
[20] The husband claimed that these fees were incurred for patent filing in Kenya, company registration in Kenya, business licences, office leasing services (likely in Kenya although no details were provided) and employee recruitment hiring and termination services. No other information was provided. No documentation such as legal accounts (even redacted) was provided.
[21] No deduction shall be allowed for this item.
(c) Training Expense ($21,728)
[22] These expenses mostly relate to an MBA program being taken by the husband and to a computer science degree for his partner (and girlfriend). Some documentation was provided for the MBA course but there was no explanation why this should be a company, as opposed to a personal, expense. The girlfriend’s degree “will provide [the company] with the abilities to provide more service in …computer design and development work…” There was some evidence that the girlfriend provided services to the company and that it paid for those by paying her study costs. Some allowance will be given for this later in these reasons (see “Salaries and Wages” below). Otherwise, the husband is writing off personal education expenses for him and his girlfriend through the company.
[23] No better or more persuasive explanation was made by the husband. With the exception of some MBA documentation, no other documents were provided.
[24] No deduction shall be allowed for this item.
(d) Repairs and Maintenance ($3,702)
[25] No explanation. No documents. No deduction.
(e) Salaries & Wages ($32,180)
[26] The husband provided copies of wire transfers from an Ontario bank account to Kenya totaling $9,500 (plus $60 wire handling fees). These funds were apparently sent to a business associate in Kenya who was related to him and his girlfriend. Also provided was a $3,000 wire transfer (plus $30 handing fee) to the girlfriend.
[27] The husband provided copies of letters to Kenyan residents appointing them to various employment positions and a July 19, 2016 notarized statement from the business associate identifying the company’s Kenyan employees, their roles and compensation. No other documentation was provided.
[28] I am only prepared to allow the husband $23,990 for this item comprising the husband’s line 150 declared income in 2015 of $12,990, the $9,500 wired to Kenya and fifty percent ($1,500) of the funds paid to or for his partner for her service to the company.
(f) Computer related expenses ($24,410)
[29] No explanation. No documents. No deduction.
(g) Research & Development ($6,500)
[30] The husband explained that for the past decade the company was developing solutions to revolutionize education in developing countries. No third party expenses were documented or even quantified, except for the wire transfers to Kenya (see “Salaries and wages” above).
[31] No documents. No deduction.
Summary
[32] The wife raised other concerns about several other expenses that the husband was having paid by the company. Some of these the husband acknowledged should be added back to his income. There was no co-relation though between what the husband was prepared to have attributed or imputed to him as income and the expenses deducted by the company. As an accountant he could have, but chose not to, provide less obtuse and better documented information than he did.
[33] While there is nothing wrong in a spouse organizing their affairs to minimize income tax payable, what may be permissible as a deduction for business purposes may not be allowed for family support determination purposes. This is what sections 18 and 19 of the Guidelines are intended to capture. I agree with Harvison Young J. in Cianciotta v. Cianciotta, 40 R.F.L. (6th) 338 (Ont. S.C.), a case upon which the husband relies, that “the mere fact that the payor’s line 150 income is established on the basis of all deductions available to him cannot, in and of itself, be held against him…” That case is distinguishable from this because the husband has failed to produce meaningful supporting documentation for his company’s expenses. His challenge to the wife to disprove the propriety of these deductions is consequently ill-conceived, and his explanations unpersuasive. It is noteworthy that while the husband was able to provide notarized statements from his Kenyan business associate and partner/girlfriend (both dated July 19, 2016) he was unable to produce documents which, given the wife’s clear requests and his profession as an accountant, could have shown why the company’s income wasn’t available for support purposes.
[34] In Sharma v. Sunak, 2011 ONSC 7670, the husband was a self-employed software development consultant, not unlike the husband in this case. McGee J. observed
[21] It will be the uncommon case that will not require some level of expert assistance to value income per section 18 of the Federal Child Support Guidelines and a party’s own interests in an incorporated, or incorporated company.
[35] I echo these comments.
[36] Without in any way commenting on the propriety of any of the other expense/deductions claimed by the husband through his company, and mindful of the admonition of Aston J. in Osmar that courts “should respect the right of self-employed persons to run their business as they see fit”, I agree with the wife that the husband is E-Limika and it him for the purpose determining the husband’s income for support purposes. In circumstances where the income of a business owner is being challenged for support determination purposes, it is incumbent on that party to not only provide a comprehensible narrative explaining why the business income isn’t available for support purposes but also the documentation that clearly and in an organized manner demonstrates why the expenses incurred were necessary and reasonable, neither of which was done in this case. Accordingly, I am only prepared on the evidence to allow the husband deductions of $27,615 such that there shall be imputed to him an income of $147,950 (ie. $175,565-$27,615). I am not otherwise prepared to gross up this amount as invited by the wife based on the evidentiary record.
[37] Based on the Guidelines a payor earning $147,950 a year must pay base monthly support of $1,988 for two children. No Section 7 special or extraordinary expenses were claimed.
[38] The wife is entitled to temporary spousal support. The parties cohabited for twelve years, there are two children of the marriage and the husband’s withdrawal of support for the children and her was unreasonable. While he challenges the wife’s entitlement, it is clear from the evidence that throughout most of the parties’ cohabitation she was financially dependent.
[39] I accept the observations of Penny J. in Knowles v. Lindstrom, 2015 ONSC 1408, 57 R.F.L. (7th) 402 at para 8 (as most recently approved in Bridge v. Laurence, 2016 ONSC 5075, by Mackinnon J.),
[18] It is well-established that interim support motions are not intended to involve a detailed examination of the merits of the case. Nor is the court required to determine the extent to which either party suffered economic advantage or disadvantage as a result of the relationship or its breakdown. These tasks are for the trial judge. Orders for interim support are based on a triable or prima facie case. An order for interim support is in the nature of a “holding order” for the purpose of maintaining the accustomed lifestyle pending trial, Jarzebinski v. Jarzebinski, 2004 CarswellOnt 4600 (ONSC) at para. 36; Damaschin-Zamfirescu v. Damaschin-Zamfirescu, 2012 ONSC 6689, 2012 CarswellOnt 14841 (ONSC) at para. 24.
[40] The SSAG suggest a mid-level range of $1,105. Taking into account the wife’s budget as reflected in her most recent financial statement sworn July 25, 2016, the child support payable and the new child benefits program, it is my view that $825 monthly is reasonable. The combined support payable will leave the wife and children with fifty-five percent of the family’s net disposable income and the husband with forty-five percent of that income. There were no Section 7 special or extraordinary expenses claimed.
[41] Without prejudice to the wife’s claims for support retroactive to a date before she started her Application, the husband shall pay to the wife temporary child and spousal support as follows:
(a) the sum of $1,988 for base child support monthly effective September 1, 2016; (b) the sum of $19,880 (i.e., 10 months x $1,988) for base child support for the period commencing November 1, 2015 to and including August 1, 2016; (c) the sum of $825 for spousal support monthly effective September 1, 2016; (d) the sum of $4,950 for spousal support for the period commencing November 1, 2015 to and including August 1, 2016. This amount has been reduced by forty percent to reflect that there no such payments will have been made before September 1, 2016 (i.e., [10 months x $825] x .6). The husband is not entitled to deduct this sum, nor shall the wife be required to include this amount, as income for 2016 tax reporting purposes.
[42] The amounts payable by the husband in paragraphs [41] (b) and (d) above total $24,830 and shall be paid to the wife from net sale proceeds of the matrimonial home held in trust and, subject to any direction to the contrary by the trial judge, allocated to the husband’s account once the parties’ net family properties have been calculated and the equalization payment (if any) has been determined. There was no evidence as to where or by whom the sale proceeds are currently held in trust. The Order now made should be sufficient for the trustee to release those funds to the wife but, if not, either party may bring a 14B motion for directions to my attention on seven days’ notice to the other party.
Disposition
[43] The husband shall pay to the wife temporary child and spousal in accordance with paragraph [41] above. The trustee holding the funds in trust shall forthwith pay to the wife directly the sum of $24,830, the balance of the funds being retained in trust pending further Order of the court or agreement between the parties.
[44] A Support Deduction Order shall issue.
Costs
[45] If the parties are unable to resolve the issue of costs, they shall, on or before September 9, 2016 deliver to the filing office their costs submissions limited to three double-spaced pages, such submissions to be filed as part of the Continuing Record. The parties shall also deliver (if applicable and if so desired) their Bills of Costs, Offers to Settle (if any) and the Authorities upon which they may be relying.
Justice D.A. Jarvis
Released: August 23, 2016