COURT FILE NO.: FS-11-365733
DATE: 20120531
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Linda Joy Reisman aka Linda Joy Wiseblott
Applicant
– and –
Howard Johnathan Reisman aka Howard Jonathan Reisman
Respondent
Evelyn Rayson and Eli Antel, counsel for the Applicant
Nancy Iadeluca and Marta Balcewicz, counsel for the Respondent
HEARD: September 19, 20, 21, 22, 23, October 24, 25, 26 and November 1, 2011
REASONS FOR JUDGMENT
Madam Justice D.A. Wilson
[1] This application was commenced by the wife on March 28, 2008 seeking spousal support, child support, an order for custody and access, and equalization of net family property. It was amended in October 2009 to seek an order that the Respondent provide financial disclosure to determine the value of his assets in a company called Marion Reisman Limited [“MRL”] as a result of a reorganization which took place in 1998-1999.
[2] The parties settled the issues of custody and child support. At trial, the issues were: spousal support, quantum and duration; and property issues including the value of the Respondent’s interest in the Howard R. Trust at the date of marriage and its contingent disposition costs; and the value of the Respondent’s Class A shares in 1330650 Ontario Inc. as at the date of valuation and the value of the contingent disposition costs on those shares; and whether the reorganization undertaken in 1998 was a fraudulent conveyance.
Background
[3] The Applicant Linda Joy Reisman [“Linda”] was born in 1964 and is currently 48 years of age. She married the Respondent Howard Reisman [“Howard”] in 1986 and they have four children: Risa, born 1989; David, born 1990; Max, born 1993; and George, born 1995. The parties separated in 2006. At the time of trial, Max was living with the Applicant and George divided his time between his parents. Risa attended Carleton University and David lived in Waterloo. Max suffers from mental health issues and David and Max have learning disabilities.
[4] The parties lived separate and apart in the matrimonial home until it was sold in April 2008. In December 2007, the parties entered into an interim agreement which provided that:
(a) the matrimonial home be sold and Linda received her half of the proceeds plus an advance on equalization of $226,538.00;
(b) Howard received the remaining proceeds;
(c) the parties shared joint custody of David, Max and George with the boys spending equal time with each parent;
(d) the parties agreed that instead of Howard paying child support, the children’s income from the trust established by their grandparents would be divided equally between the parties for the children’s use;
(e) Risa would receive income of $23,000 per year to be used for her university expenses;
(f) the parties shared the children’s section 7 expenses equally; and
(g) Howard paid Linda spousal support of $5,750/month on a without prejudice basis.
[5] After the sale of the matrimonial home, Linda received the advance on equalization. She bought a house on Chilmar Crescent in Thornhill in April 2008. Howard paid the sum of $75,000 to his mother, as she held a mortgage on the house, which was disputed by the Applicant. The sum of $75,000 was held in trust from Linda’s share of the proceeds of sale of the house.
[6] In June 2008, Linda commenced an action for a declaration that she owed nothing under the Marian Reisman mortgage. That action was eventually resolved with the agreement of the parties that the debt to Marian Reisman would not be taken into account in the calculation of the parties’ Net Family Property. The issues of custody, access and child support were settled in November 2010 and it was requested that this agreement be incorporated into the final judgment.
[7] Linda obtained a diploma in Early Childhood Education and worked on a full-time basis as a kindergarten teacher for the first few years of marriage. She also worked for a few years at her father’s company. In 1997, Linda started a giftware/basket business, which she operated on a part-time basis for a number of years. It was not successful and eventually it closed. She worked doing some event planning on a part time basis for a couple of companies. She also worked at Rocky Mountain Chocolate Factory as a sales clerk for a brief period of time and, at the time of trial, she was working at Swarovski, a jewellery store at the Promenade Mall, earning $13.52/hour and working between 20-35 hours per week.
Issues for Trial
[8] It is the position of the Applicant that she was the primary caregiver for the children and worked very little after her marriage, never earning more than $15,000/year. She seeks an order of retroactive spousal support to April 2008, the date when the matrimonial home was sold.
[9] The Applicant argues that an estate freeze undertaken by Howard’s father Fred Reisman [“Fred”] in 1998 is a fraudulent transaction because it was designed to intentionally manipulate Howard’s net family property by freezing the value of Howard’s shares in the family company as of 1998 to exclude any future growth from division under the Family Law Act,[^1] [“FLA”]. To put it another way, Linda argues that the estate freeze undertaken in 1998 was done with the intent to defeat her claims to an equalization payment. The Applicant argues that the property in Howard’s Trust was property which ought to form part of the Respondent’s Net Family Property. The Applicant requests a declaration that the 1998 Estate Freeze is a fraudulent transaction and an order requiring the Respondent to obtain a valuation of the common shares of MRL for the purposes of equalization of the parties’ Net Family Property.
[10] The Respondent argues that the Applicant has not made reasonable efforts to obtain full-time employment and had she done so, she could have earned in the range of $35,000-$40,000 annually. He asks that $30,000 per annum be imputed to Linda as reasonable employment income and that the spousal support he has been making be reduced to $4,000/month. The Respondent also argues that Linda has depleted assets and incurred debt since the separation.
[11] It is the position of Howard that the 1998 corporate reorganization and estate freeze were done for legitimate business purposes. Following the separation in 2006, it was discovered that the solicitor who did the paperwork for the 1998 transactions made a number of errors. Thus, four separate rectification applications were commenced in Commercial Court to correct these errors. Linda received notice of the application with respect to the rectification in November 2008 and she filed an Appearance. She was provided with all of the documentation concerning the freeze. She retained counsel but did not file any responding material. She elected not to conduct cross-examinations of Howard or his father or the solicitor who handled the transaction in 1998.
[12] She brought a motion in January 2009 to consolidate the Rectification Application and the Matrimonial Application. This was dismissed with costs and on February 10, 2009, Justice Pepall granted the rectification application and Linda was ordered to pay costs.
[13] The Respondent asks that the property claims sought by Linda in this application be dismissed with costs.
Motion
[14] At the outset of trial, I heard a motion by the Respondent to introduce the evidence of Fred Reisman by way of affidavit sworn November 14, 2008, which was filed at the rectification proceeding. This was opposed by the Applicant. In support of the motion, an affidavit of the Respondent sworn August 23, 2011 was filed in which he deposed that his father was 86 years of age and suffering from Alzheimer’s disease with significant memory loss, which would prevent him from giving evidence at trial. Included in the Respondent’s affidavit was a letter from Fred’s doctor, Dr. Stern, which said that Fred’s ability to recall past events and details was severely affected by his dementia.
[15] Rule 23(20) of the Family Law Rules[^2] permits a witness to give evidence at trial by way of affidavit in certain circumstances, for example if a witness is ill or unavailable to come to Court for some other good reason.
[16] While Ms. Rayson argued that it was prejudicial to her client to allow the affidavit into evidence, I rejected this argument. There was no evidence proffered by the Applicant to contradict the view of Dr. Stern that the ability of Fred to testify was compromised. Furthermore, the Applicant has been in possession of the affidavit which deals with the reasons behind the need for rectification since 2008. It has been her position since that time that the reorganization was a fraudulent conveyance. She cannot profess surprise by the contents of the affidavit or the position of Fred on the estate freeze. Had the Applicant wished further information from Mr. Reisman or the opportunity to cross-examine him on the contents of his affidavit, she had ample time in which to undertake these steps and there was no effort made to do so.
[17] As I understand it, no attempts were made by the Applicant to question Fred on the share transfer transactions nor has he been subpoenaed for this trial. Ms. Iadeluca has undertaken to call the corporate solicitor who handled the rectification application so, in my view, counsel for the Applicant will have the opportunity to ask any questions she has about the nature of the estate freeze and thus, no prejudice results to the Applicant by the inability of Fred to testify at the trial.
[18] In her closing submissions, Ms. Rayson asked that an adverse inference be drawn from the failure of Fred to attend trial and give viva voce evidence. The basis for this request was the evidence of Mr. Yip that Fred goes to work on a daily basis and is still the one making the decisions for the company. I do not agree with this submission put forward by Ms. Rayson. The fact that a person of advanced years attends the workplace does not mean that he is “working” and thus, has all of his faculties. Often, people of advanced years continue to attend at the office, not because they are contributing in a meaningful manner, but rather because it is a familiar environment to them and gives them a sense of self esteem. As I have indicated, the uncontradicted evidence of Fred’s physician is that he is unable to attend trial because of the manifestations of his Alzheimer’s Disease, including memory problems. There is no basis, in my opinion, upon which an adverse inference ought to be drawn in these circumstances.
Spousal Support
[19] The entitlement to spousal support is not disputed by the Respondent; rather, the duration and quantum is. Since April 2008, the Respondent had been paying $5,750/month in spousal support on a without prejudice basis. The Applicant takes the position that this was a traditional marriage and the parties made the joint decision that Linda would stay home and take care of their four children. She has only a diploma and has worked at a variety of part-time jobs over the years, but has only earned modest amounts. It is submitted that as a result of the challenges faced by two of the children, Linda needs to be “available” for her children at all times for support and professional appointments. It is submitted that at Linda’s age, retraining is unlikely. She is currently working 20-35 hours a week as a salesclerk which is a job that she enjoys, and she plans to continue with that job.
[20] The Respondent submits that Linda has not made reasonable efforts to find remunerative employment and has spent her money foolishly. She has taken numerous trips to Europe to visit her boyfriend. The Respondent notes that in November 2008, the Applicant’s lawyer confirmed that she was not making any efforts to secure full-time employment and the explanation offered was that she needed to be “available” for the children after school. It is submitted by the Respondent that Linda has the ability to earn in the range of $35,000-$40,000 working full-time and the spousal support ought to be reduced to $4,000/month.
Analysis
[21] The evidence at trial [exhibit 1] demonstrated that during the marriage, Linda received income from Howard’s company, usually in the range of $60,000. She declared small amounts of employment income from her part-time work. Since separation, she has received the spousal support payments and earned less than $20,000 from employment. She admitted that she has not looked for other employment because “her household is very busy”. She acknowledged that she prefers not to work on a full-time basis at the present time.
[22] The Applicant agreed that Howard has always worked for his father and the salary she received from Howard’s company was for income splitting, not because she did any work for the company. During the marriage, the parties “never had to worry about income” because cheques came from Fred’s business for the family and for the children. While Linda was certainly involved in her children’s lives, she had help from 1990 onwards including a nanny, a gardener, and a snow removal service. Money was not a concern for the parties during the marriage, although they did not lead an extravagant life. It is clear from the evidence that the Respondent was also involved in the lives of the children: he took them to activities, helped with homework and coached the boys’ hockey teams for more than 10 years.
[23] Linda worked as an event planner in 2006 and 2007. In 2007, she worked for nine months and earned approximately $24,000. She testified that while she could earn more money as an event planner than she does at her current job, she has not looked into working as an event planner because of the demands of her children. It was the submission of the Applicant that the Spousal Support Guidelines ought to apply and the higher end of the range is $6,265/month in spousal support. Alternatively, it is argued, Linda is entitled to receive $7,719/month in spousal support based on an equal split of the net disposable income.
[24] It is within the Court’s discretion to make an order for payment of spousal support and when doing so, the Divorce Act,[^3] sets out the considerations that the Court shall take into account when making an order for spousal support. These factors include the length of the relationship, and the functions performed by each spouse during the time they lived together. The Divorce Act also states that support orders should address the economic advantages/disadvantages to a spouse arising from the marriage or its breakdown, any economic hardship to a spouse arising from the marital breakdown; and apportioning between the spouses any financial consequences from the care of any child of the marriage. Further the Divorce Act states “insofar as practicable, the economic self-sufficiency of each spouse should be promoted within a reasonable period of time.”
[25] While I appreciate that when the children were younger, it was Linda who bore most of the responsibility for organizing the children and taking them to doctor’s appointments and various activities, I also find that Howard was an involved father. This was not a marriage where the husband was working very long hours while the wife was at home in a traditional role because of the husband’s job and thus it cannot be argued that the Wife’s sacrifice enabled the family to live a better life than would otherwise have been possible.
[26] Rather, it was the generosity of Fred that raised the family’s standard of living. Both of the parties agree that they made a joint decision that Linda would not work after the children were born.
[27] Since separation, the parties have shared the responsibilities of the children. George splits his time between the houses of the parties and Max has lived with one or the other parent at different times. Linda seeks spousal support retroactive to 2008. She states that she has depleted her assets and gone into debt since the separation. She maintains that she is capable of earning only $20,000/year while Howard was earning over $200,000 at the time of trial.
[28] Section 15.2(6) of the Divorce Act stipulates that a wife must make reasonable efforts to become self-sufficient within a reasonable period of time after separation. The onus of demonstrating that reasonable steps have been taken to obtain work rests with the party asserting entitlement to support. The evidence indicates that in the year after separation, Linda earned $24,000 in gross income when she only worked for eight months of the year and took numerous vacations. The Applicant testified that it was in September 2009 that she commenced looking for a job. At the time of trial, she had never sought employment on a full-time basis and the explanation given for this was that her children needed her ongoing care.
[29] I am not persuaded that the Applicant is working at her capacity or that duties associated with her children prevent her from working more hours than she currently is or at a higher level of employment. No evidence was presented of efforts to secure higher paying employment or of attempts to upgrade her skills to become more competitively employed.
[30] I reject her assertion that she must be available to her children “at all times” and this prevents her from working more than she does. She currently works between 20-35 hours per week. George only lives with her half of the time and that Max is now 19 years of age and was finishing high school at the time of trial. While I appreciate that he has mental health issues, I also note that the Respondent is available for his son and has a great deal of flexibility in his work schedule so that if an emergency situation arose, Howard would be able to deal with it if Linda were not available.
[31] While the Applicant went on at length about how busy her house was at the present time, I do not accept that this prevents her from working more than she does now. Certainly, her home situation is not as it was at the time of separation in 2006. Currently, Risa is 23 and has been living away from home for some years attending university. David is 21 and lives in Waterloo. Max is 19 and George is 17. The demands from the children are less than they were seven years ago. Linda is able to go to Europe for weeks at a time to visit her boyfriend and when she does so, she leaves Howard in charge of the children.
[32] She seems to have no particular plan for future work apart from stating that she intends to keep working at Swarovski for the foreseeable future, on a part-time basis. I am not satisfied in the circumstances that she has taken sufficient steps to obtain suitable employment. Therefore, I find that income ought to be imputed to the Applicant for the purpose of determining spousal support.
[33] In Drygala v. Pauli,[^4] the Ontario Court of Appeal stated that in order to determine the correct amount of income to impute, the Court must look at the “age, education, experience, skills and health of the parent” as well as “the availability of job opportunities”. In the case at hand, the Applicant has no health concerns that would impact on her ability to work. Even if the Applicant were to stay at Swarovski and increase her hours to 40 hours/week, her income would rise to $28,000. I am of the view that the Wife could earn $30,000 per year without much difficulty. Therefore, income will be imputed to the Wife in this amount for the purpose of calculating spousal support.
[34] The solicitor for the Respondent argues that a step-down order is appropriate, pursuant to s.15.2(3) of the Divorce Act. I agree. In my view, this is a case where the Applicant needs to be encouraged to become self-sufficient; she cannot continue to expect the same standard of living that she enjoyed prior to separation which, for the most part, was due to the generosity of Fred. An award of spousal support is not intended to provide a stream of income similar to a pension. Rather, it is to enable a disadvantaged spouse to take steps to return to the workforce and be in a position to become self sufficient.
[35] In Fisher v. Fisher[^5] the Court of Appeal reviewed the objectives of the Divorce Act, noting that various factors must be balanced when determining the quantum and duration of spousal support. They include the receiving spouse’s age, work history, health and whether children or other dependants would have an impact on the ability of the receiving spouse to work.
[36] In this case, the Applicant has enjoyed the benefit of significant payments of spousal support; yet, she has not taken the opportunity to upgrade her skills, retrain or pursue other employment opportunities. She has evinced an attitude of entitlement to a certain lifestyle and there is no basis for this. The Applicant is young, in good health and is certainly able to take steps to move into becoming self sufficient or, if she chooses not to do so, she must adjust her lifestyle accordingly. The fact that she is in debt is as a result of the choices that she has made since separation concerning her investments and other monies.
[37] I agree with the comments of Justice Aston in Bergeron v. Bergeron[^6] where he noted, “Limits on the quantum or duration of support are nevertheless an effective way of emphasizing the support recipient’s obligation under section 15.2 of the Divorce Act.”
[38] The Spousal Support Advisory Guidelines indicate that the range of spousal support using the Respondent’s current salary and an imputed income to the Applicant of $30,000 is between $4,050 and $5,400. Using the reasoning expressed in Savonarota v. Savonarota,[^7] I agree that the lower end of the range is appropriate. The children have their own income and the Applicant is capable of working.
[39] In my view, it is reasonable in all of the circumstances that the Respondent commences paying spousal support in the sum of $4,500 per month to commence June 1, 2012.
[40] Payment of spousal support shall continue at this rate until a material change in circumstances justifying a reduction or termination of the support, or the expiry of ten years, whichever is earlier. The Applicant’s remarriage or co-habitation for a period longer than three years shall constitute a material change in circumstances.
[41] If there is no material change in circumstances, after the expiry of 10 years, the Respondent’s obligation to pay spousal support shall terminate. In my opinion, this is a an appropriate period of time to recognize any economic disadvantage that was suffered by the Applicant by reason of the marriage and it promotes the economic self-sufficiency of the Applicant within a reasonable period of time, which is one of the primary purposes of any spousal support order.
In making this order, I am mindful of the fact that given the quantum of spousal support that the Respondent has been paying on a regular basis since April 2008, there is an argument that there has been an overpayment of spousal support. My order has taken this into consideration and there shall be no issue taken by the Respondent with respect to past support payments.
Property Claims
[42] In her amended application, the Applicant has sought the following: an order for equalization of the parties’ net family property; an order that the reorganization of the shares in 1330650 Ontario Inc. which took place in 1998-1999 be set aside as a fraudulent transaction on the basis that it was done solely to defeat the Applicant’s claim for equalization.
[43] An Agreed Statement of Facts was filed [Tab 7 of the Trial Record]. Paragraph 2 indicates that only the following remained in dispute: the value of the Respondent’s 24,500 Class A Shares in 1330650 Ontario Inc. [“Howardco”], the v-date value of the contingent disposition costs on those shares; the value of the Respondent’s interest in the Howard R. Trust at the date of marriage; and the value of the contingent disposition costs in respect of that interest at the date of marriage.
[44] Schedule “A” to the Agreed Statement of Facts states that the one class B share of 1330650 Ontario Inc. acquired by gift is excluded. The items identified as disputed as of October 21, 2006 are: the 24,500 Special Class A Shares of 1330650 Ontario Inc.; the contingent taxes on the Class A shares; and the beneficial interest in the Howard R. Trust as at the date of marriage.
Background to issues concerning the shares
[45] The Respondent’s father, Fred Reisman, created trusts in 1965 for each of his 4 children and his wife, Marian. The trust of the Respondent was the Howard R. Trust. Fred was the only trustee and the Respondent never had any control over the Trust. Fred’s discretion was unfettered and he was permitted under the terms of the trust to make distributions of income or capital to the beneficiaries.
[46] Marian Reisman Limited [“MRL”] is a real estate holding company which holds income producing properties and land. At all times, this company was and continues to be controlled by Fred.
[47] Prior to 1998, the Howard R. Trust (and not the Respondent personally) owned 50 Class C preference shares in MRL, which represented 13.89% of the equity of the company. There were no other assets in Howard’s trust. The beneficiaries of the Howard R. Trust were Howard and his issue. As the date of marriage, the sole beneficiary of Howard’s trust was the Respondent.
[48] In 1998, Fred undertook a corporate reorganization and estate freeze at the recommendation of his financial advisors.
[49] Since the existing trusts were approaching the deemed disposition date, in order to defer the taxes on future growth and provide some protection against family law issues, it was determined to do an estate freeze, which is a mechanism by which future growth in a company is transferred, and the freeze is usually intergenerational. The objective of an estate freeze is to deal with the tax on the trust, because every trust is deemed to dispose of its assets every 21 years and is required to pay tax.
[50] It was decided to wind up the trusts, freeze the value of the MRL shares they owned and transfer the frozen value to Fred and Marian, their children and grandchildren. In addition, a new trust was created, F&M GrandKidsCo, for the 13 grandchildren of Fred and Marian and 26% of the frozen value was transferred to this new company. The frozen share in MRL was replaced by new equity shares which were gifted to Fred’s children. Exhibit 9, tab 60 contains a chart prepared by the lawyers who acted on this transaction, showing the steps related to the 1998 MRL freeze. Since the passage of the Family Law Act in 1986, such gifted shares are considered excluded property.
[51] To put it simply, the value of the MRL shares was frozen and new classes of shares were created. Howard R. Trust received 24,500 Class A Special Shares in exchange for the shares it owned in MRL. Fred gifted 50 Class D Common Shares of MRL to Howard. 1330650 Ontario Inc. [“Howardco”] was incorporated as a holding company and Howard subscribed for one Class D Common Share. Howard R. Trust transferred its 24,500 frozen shares of MRL to Howardco in exchange for 24,500 Class A Common Shares. Howard then rolled the 50 Class D Common Shares of MRL which had been gifted to him by Fred into Howardco for one Class B Common share. Howardco then sold 24,500 Class A Special Shares in MRL to MRL in exchange for 50 Class D Common Shares in MRL. There was a period of perhaps 10 days when Howardco had retractable shares. Each child of Fred was treated in the same manner in the estate freeze, as they each received 25% of the MRL shares.
[52] The final allocation was that Howard had one Class D Common Share in Howardco and all of his siblings subscribed for one class D share in their own holding company; 24,500 Class A Common Shares in Howardco; and one Class B Common Share in Howardco. It is to be noted as well that Howardco had 100 Class D Common Shares in MRL which are neither redeemable nor retractable. Howardco had no other material assets. Following the reorganization, Fred continued to control MRL.
[53] The Respondent called Patricia Robinson as a witness at the trial. Ms. Robinson is a lawyer at Goodmans’ LLP who specializes in estate planning. Ms. Robinson was involved in the rectification proceedings. Her evidence was very helpful. She explained that the original solicitor who handled the 1998 estate freeze had made some errors and they had to be corrected. There were three objectives of the reorganization, as set out in the affidavit of Fred Reisman: (1) to freeze the value of the equity shares in MRL; (2) to cause a distribution of trust to the children and grandchildren; and (3) to protect the future growth in MRL in order to take advantage of exclusions under the FLA for gifted property. The Applicant’s expert on valuation, Mr. Maisel, agreed that these were the objectives of the reorganization, which was not unusual.
[54] Ms. Robinson confirmed that the Applicant was served with the rectification application and had counsel representing her. The Applicant took the position that the estate freeze was a fraudulent conveyance and she was added as a Respondent to the application. Although cross-examinations of Fred and Howard were scheduled, they did not proceed. Justice Pepall made the order of rectification on February 10, 2009.
Was the estate freeze in 1998 a fraudulent transaction?
[55] The Applicant asks for a declaration that the 1998 estate freeze be deemed a fraudulent transaction on the basis it was “designed to intentionally reduce Howard’s net family property in the event of a breakdown of the marriage”.
[56] The amended application pleads:
It is Linda’s position that the reorganization was a fraudulent transaction which resulted in her being denied the equalization payment she would otherwise be entitled to. There was no tax or business purpose for Howard’s father, Fred, to subscribe for shares and gift them to his children. The only possible reason for the transaction is to deny Linda and the spouses of Howard’s siblings a portion of their equalization payment.
[57] Sections 1 and 2 of the Fraudulent Conveyances Act,[^8] (“Act”) state the following:
- DEFINITIONS – In this Act
“conveyance” includes gift, grant, alienation, bargain, charge, encumbrance, limitation of use or uses of , in, to or out of real property or personal property by writing or otherwise;
- WHERE CONVEYANCES VOID AS AGAINST CREDITORS – Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and lawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.
[58] One of the badges of a fraudulent transaction is the finding that the parties had an unlawful intention at the time of the transfer [emphasis mine]. The Court must look at the circumstances surrounding the conveyance when making this determination.
[59] In A&B Landscaping & Interlocking Ltd. v. Bradsil Ltd.,[^9] the Court set out a list of suspicious facts that might be indicative of a fraudulent conveyance:
a. secrecy;
b. haste in closing the deal;
c. action pending or execution issued;
d. inadequate consideration; and
e. a non-arm’s length relationship between the parties to the conveyance.
[60] The Court must, however, look at all of the surrounding circumstances to determine if it is a fraudulent transaction; simply because certain of the hallmarks of fraud are present does not lead to such a finding. The Court may be satisfied on the evidence that a satisfactory explanation has been provided even if certain “badges of fraud” are present: A&B Landscaping v. Bradsil.
[61] The facts of the case before me are very different than those in Stone v. Stone[^10]. Here, the unchallenged evidence is that the reorganization was done for tax reasons and estate planning. It affected all of the children of Fred and Marian, not simply the Respondent. In the case before me, there is absolutely no evidence of any intention on the part of the Respondent to somehow defeat a claim that could be asserted by the Applicant. A critical element for the finding of a fraudulent conveyance is the unlawful intention that must exist at the time of the transaction: FL Receivable Trust 2002-A (Administrator of) v. Cobrand Foods Ltd.[^11]
[62] In order to be successful on her application for a declaration, the Applicant Wife must satisfy the Court that at the time of the impugned transaction, she was a creditor whose rights were defeated by the reorganization of the shares. The issue for consideration, then, is whether the Applicant was a creditor at the time of the share transfers. In Stone, the Court examined the nature of the relationship between spouses and whether it can be considered that of a creditor-debtor. The Court of Appeal stated at paragraph 25:
Therefore, in order for a spouse to qualify as a person who is intended to be protected from conveyances of property made with intent to defeat her interest, she must have had an existing claim against her husband at the time of the impugned conveyances, that conveyances, that is a right which she could have asserted in an action.
[63] In Stone, in finding the Wife was a creditor, the trial judge noted that the Husband, shortly before his death, disposed of his property to his children by a trust in order to defeat the Wife’s equalization of net family property under the FLA. The Wife had not commenced a claim at the time because her Husband had hidden the transactions from her. The Court however, found her to be a creditor within the meaning of the Fraudulent Conveyances Act because she had an existing claim against her Husband at the time of the impugned transaction.
[64] On the evidence before me, it is clear that the Applicant had not commenced an action under the FLA nor did she have a potential claim that she could have asserted entitlement to these assets under s. 5 of the FLA. Thus, I find that the Applicant is not a creditor within the meaning of the Fraudulent Conveyances Act.
[65] The timing of the transaction is not the same as in Stone. In that case, the Husband knew his death was imminent and that this event would trigger the Wife’s entitlement to an equalization payment, which he did not want to occur. Thus, Mr. Stone deliberately hid the transfers from his wife. In the Reisman transaction, it was done in 1998, approximately eight years prior to the separation of the parties. There was no evidence that there was any matrimonial problem between the parties at the time of the reorganization. Indeed, the Applicant testified that in 1998, the marriage was happy and she got along very well with her in-laws. There had been no periods of separation.
[66] On the whole of the evidence, I am satisfied that the corporate reorganization done in 1998 and amended by the rectification order was not a fraudulent conveyance within the meaning of the Act. I accept the evidence of Fred Reisman contained in his affidavit and corroborated by the testimony of Ms. Robinson. When the reorganization and estate freeze was done in 1998, there were legitimate purposes for undertaking the work, and there was no evidence to suggest one of the motives was to defeat the Applicant’s entitlement under the FLA.
Issue Estoppel
[67] In her submissions, counsel for the Respondent argued that the Applicant is precluded from arguing the estate freeze was a fraudulent conveyance on the basis of issue estoppel. In considering this argument, I note that there were findings made by Justice Pepall in the rectification application. She found:
…the evidence before me is clear that the objectives and intention of Fred Reisman were to avoid capital gains tax, to gift future growth in the company to MRL in a manner that protected the growth from equalization claim under the Family Law Act, and to transfer a portion of the value of MRL to a corporation for the benefit of his grandchildren…
[68] It is a well-established principle that issue estoppel prevents issues that have been determined in a prior proceeding from being the subject of further litigation. The reasons behind this doctrine are set out in Angle v. Minister of National Revenue[^12] and include finality to litigation, and protection of a person from multiple lawsuits arising from the same issues.
[69] It is significant that in the case before me, the Applicant was served with the Application for the rectification proceeding, because her position that the estate freeze was a fraudulent conveyance was known to the Respondent and by this point, the parties had been separated for several years. The evidence at the trial was that the Applicant was added as a party and retained counsel for the rectification application. She indicated that she intended to conduct cross-examinations and file responding materials and participate in the argument. For reasons that were not explained, the Applicant took none of these steps and did not make any submissions before Justice Pepall at the hearing.
[70] Given my finding that the estate freeze was not a fraudulent transaction, it is unnecessary for me to rule on the issue of estoppel. However, in my view, given that she had the opportunity to oppose the rectification proceeding and chose not to, the Applicant cannot now submit to this court that the decision of Justice Pepall on the point of the intention behind the reorganization is wrong. It would contravene the doctrine of issue estoppel to permit the Applicant to argue the objective of the estate freeze was to preclude her from asserting her claims to equalization when there is a contradictory finding in a final order of a judge.
Equalization issues
[71] Each party has prepared net family property statements. The Applicant asserts that she is owed an equalization payment of $3,198,562.50. The Respondent’s position is that he owes the Applicant an equalization payment of $133,785.00. There are several reasons for the wide disparity in the numbers. The Applicant has included in her statement the Class B Common Share of Howardco which she has valued at $2,072,388.00. She has also included the Class B Common Share of MRL with a value of $1,657,612.00. Further, she values the 24,500 Special Class A Shares of Howardco at the date of separation at $3,600,000.00 based on the opinion of her expert, Neil Maisel [“Maisel”].
[72] The Respondent takes the position that the Class B Common Share of Howardco which was gifted by Fred is excluded. Further, the 24,500 Special Class A Shares are valued at $1,715,000.00 in accordance with the valuation done by Bonnie Prussky [“Prussky”].
[73] The contingent taxes on the Class A shares are valued differently by the experts as well.
Should the Class B Common Share of Howardco, which was gifted in the estate freeze, be excluded?
[74] The Application was issued March 28, 2008 and was amended in October 2009 to plead the corporate reorganization was a fraudulent transaction or, alternatively, it resulted in an unconscionable outcome. It is not pleaded that the gift from Fred to Howard’s company of the common share was not a gift or that it ought not to be excluded from net family property.
[75] The Agreed Statement of Facts done in October 2010 agrees that the parties’ assets and liabilities are set out in Schedule “A” which is attached to the signed agreement [Tab 7 of the Trial Record]. In that document, it is noted that the value of the 24,500 Special Class A Shares of Howardco is disputed and the contingent taxes on these shares as well as the beneficial interest in the Howard R. Trust at the date of marriage are all disputed. The Class B Share which was acquired by gift is noted as being excluded, as is the beneficial interest in The Howard Reisman Family Trust.
[76] Pleadings serve many functions but they must contain information that sets out the facts upon which a party relies for their claim as well as the nature of the claim and the relief sought. As is noted in the commentary under Rule 25.06 in Ontario Superior Court Practice,[^13]
The purpose of pleadings is to define the issues for the parties and for the court. The pleadings govern the trial and the interlocutory proceedings. ..Parties to a legal suit are entitled to have a resolution of their differences on the basis of the issues joined in the pleadings…
[77] The amended statement of claim is silent on the issue of the gifting of the share during the reorganization. Given that the purpose of the amendment was to plead that the estate freeze was a fraudulent conveyance which deprived the Applicant of her proper equalization payment, that would have been the time to indicate that the gifting of the share was being challenged. If there were evidence before me to suggest that this was always the position of the Applicant throughout the litigation, I might be inclined to view the failure to specifically plead this position as an oversight. However, this was not the case.
[78] Further, in the Agreed Statement of Facts, the Applicant did not indicate that the gifting or the exclusion of the share was being disputed. Parties must set out their positions on issues at the earliest possible date. Adverse parties must know the case they have to meet at trial and be able to prepare for it. In the case at hand, the financial issues are complicated and both sides retained experts because of this. The corporate reorganization and estate freeze was a complex undertaking. During the course of litigation at case conferences, mediations, pre-trials and settlement conferences, many issues between litigants get resolved or streamlined. Even if the action cannot be resolved in its entirety but requires a trial, as the case before me, the parties can narrow the issues, as was done here.
[79] The Court relies on Agreed Statements of Facts and if a party seeks to resile from a position adopted in this document, there must be a motion brought on a proper evidentiary record and an order obtained from the Court. I agree with the submission of counsel for the Respondent that to change a position from that adopted in an Agreed Statement of Facts is akin to withdrawing an admission or changing a position from that set out in a Request to Admit.
[80] In the case before me, the Applicant did not bring a motion to change the Agreed Statement of Facts. There was no explanation offered at all to explain the apparent change in position. Ms. Rayson submitted in her closing argument that Howard always took the position that the share was excluded and never attached a value to it.
[81] In order to withdraw an admission, which is what changing the Agreed Statement of Facts would result in, there requires an explanation and well as demonstrating to the Court that any prejudice to the other party caused by the withdrawal can be compensated for in costs: Forget v. Forget.[^14] In this case, there is no satisfactory explanation that has been put forward. Further, it was during the course of trial that the issue was raised and in my view, the prejudice to the Respondent at that point could not have been compensated for by costs or an adjournment.
[82] The solicitors prepared an Agreed Statement of Facts, which each party would presumably rely on in their trial preparation. In this case, the Respondent understood that the exclusion of the Class B Share that was acquired by him as a gift from his father in the estate freeze was not being disputed. In my view, it would be unfair for the Applicant to now take the position during the trial that she does not agree that the share ought to be excluded.
[83] Similarly, the Applicant in her Net Family Property Statement has included as an asset the Class B Common Share representing 11.11% of MRL, which is valued at $1,657,612.00. Counsel also prepared a second NFP Statement which excluded that share. It is unclear to me on what basis that share was included in the first statement but on the Agreed Statement of Facts, it is not listed. For the same reasons as I cited concerning the exclusion of the gifted share, the Applicant cannot make the argument that the Class B Common Share which was 11.11% of MRL ought to be included as an asset on the NFP Statement.
What is the proper value of the disputed Special Class A Shares of Howardco?
[84] There are a number of steps that must be undertaken to arrive at the proper valuation of the shares in Howardco at the date of separation. First, there must be a calculation of the value of MRL at the date of marriage; Howard’s trust had 13.89% equity interest in MRL; then a determination can be made of the value of Howard’s interest in the trust at the date of marriage, because the Respondent was a beneficiary of a trust that held assets, he did not hold them himself. After the re-organization, Howardco was incorporated and the Trust transferred its 24,500 frozen shares in MRL to Howardco as 24,500 Class A shares. Howardco acquired the 24,500 common shares from the Trust. Some shares from the Trust were transferred to the parties’ daughter Risa, so the Trust had 12.25% of MRL as opposed to 13.89%.The Respondent ended up with one share of Howardco which held 24,500 Class A special shares and 50 growth shares, which meant 25% of the future growth of MRL.
[85] Neil Maisel was retained by the Applicant and he was qualified as an expert entitled to provide the Court with expert opinion in the area of valuation. Maisel was asked by the solicitor for the Applicant to calculate the value of the Respondent’s interest in the Howard R. Reisman Trust at the date of marriage and to calculate the adjusted fair market value of the Respondent’s interest in Howardco as of December 30, 1998, not the date of separation. He was not asked to calculate any contingent disposition costs to the Respondent personally but rather those costs of MRL.
[86] Maisel determined that the fair market value of MRL as of August 31, 1986 was $20,400.00. He estimated the contingent disposition costs at 50% due to the uncertainty of timing. After taking into account the refundable dividend tax, he calculated the value of MRL at August 31, 1986 to be $11,728,775.00. The equity interest of Howard R. Trust was 13.89%, which works out to be $1,629,127.00. Because the trust held the assets and the Respondent was a beneficiary with the trustee exercising discretion concerning distributions, Mr. Maisel applied a discount of 30% and came to a final value to Howard of $1,140,389.00 as of the date of marriage.
[87] Maisel also prepared a calculation of the fair market value of the Respondent’s interest in Howardco as of December 30, 1998, the date of the reorganization. This calculation is of limited value since it was not done as of the date of separation. It is unclear why Maisel was asked to do the valuation as at 1998, as that date has no significance in the family law proceeding, unless it is the position of the Applicant that the Respondent depleted his net family property under section 5 of the FLA, which is not pleaded. In any event, there is no evidence before this Court that the Respondent depleted his assets or that the reorganization was in any way improvident. Maisel used the financial statement of MRL for the year ending December 30, 1997. Prior to the reorganization, the Respondent owned through the Trust 13.89% of the equity of MRL. After the reorganization, his equity interest was 12.25% held through Howardco. Maisel in determining the fair market value of Howardco’s shares discounted the disposition costs by 50% to reflect the uncertain timing of disposition. Maisel estimated the fair market value of MRL as of December 1998 to be $29,381,331.00. The sum of $3,600,000.00 is 12.25% of that figure.
[88] The expert retained by the Respondent, Prussky, was also qualified as an expert in the area of business valuations. She was retained to determine the fair market value of the Respondent’s beneficial interest/shares in the Trust as at the date of marriage and the fair market value of Howard’s Class A special shares of Howardco as at the separation date. She was asked to comment on the valuation done by Maisel of the Trust at date of marriage.
[89] Prussky agreed with the approach taken by Maisel as well as his valuation of the trust at the date of marriage. She agreed with his 30% discount for contingent taxes and the 50% discount for MRL’s corporate contingent taxes. Prussky calculated the personal tax liability as at the date of marriage, which Maisel did not, and arrived at a net figure of $1,102,750.00 rounded up to $1,103,000.00. The most significant difference between the calculations done by Maisel and those done by Prussky is the discount for the contingent taxes and the adjustment for the refundable dividend on tax on hand [“RDTOH”].
[90] For the calculation of the net value of the Respondent’s 24,500 Class A special shares in Howardco at the date of separation, she noted they were redeemable and retractable at $100 per share. Thus, the redemption value to Howard at that time was $2,450,000.00. Prussky testified that although the corporate structure was different following the freeze because the shares were held in a holding company as opposed to a trust, the “economic realities” were the same at the date of marriage and the valuation date. Thus, she took a discount of 30% to take into account that Howard would not control the distribution of any of the assets, and distributions from MRL were controlled by Fred. Prussky used the discount value of 30% because it was unlikely that Howard would be able to sell the shares to anyone other than a family member and would have to sell at a discount. Essentially, the 30% discount was to recognize that Howard had no control to turn the investment into cash.
[91] After discounting the shares, Prussky arrived at a figure of $1,715,000.00. She then considered the personal taxes on disposition of the shares, assuming a disposition date of the death of Howard’s parents. To do this, she used the life expectancy tables for Fred and Marian and assumed that the Respondent would receive his proceeds 13 years after separation. Applying at tax rate of 31 percent, she calculated the present value of the taxes of $522,054.00. Thus, the net value of the shares at date of separation was $1,192,946.00 rounded up to $1,193,000.00.
[92] Prussky was also asked to calculate the fair market value of the Class A Special Shares in Howardco at the date of separation based on the valuation done by Maisel. Even taking the value of the shares at $3,600,000.00 as Maisel did in his report, Prussky testified that the 30% discount must be applied to reflect the inability of Howard to realize on the shares, resulting in a net value of $2,520,000.00. The deemed dividend on the redemption of $3.6 million must be taken into account, then the 31 percent tax rate applied and the taxes present valued for 13 years which is $767,105.00. After taking the deduction for taxes, there is a net value of $1,752,895.00 for the shares, rounded to $1,753,000.00 as of the separation date.
[93] Given that Maisel was asked to value the Respondent’s interest in Howardco as of December 30, 1998, I find his valuation of very little assistance to the Court in light of the issues that remain outstanding between the parties. I prefer the approach to valuation of Prussky over that of Mr. Maisel. On the valuation of the trust to Howard at the date of marriage, the difference between the Prussky valuation and that of Maisel is relatively small--$37,639.00. This difference is due to the fact that Maisel did not take into account the effect of personal taxes. In my view, given the assumptions necessary to arrive at a valuation, the personal taxes to Howard should not be ignored.
[94] Further, the fact that the Respondent does not have the ability to force MRL to sell his interest so he can realize on his investment is significant and must be taken into consideration during valuation. While he held the 24,500 Class A Special shares at the separation date, he had no control or ability to turn these shares into cash. As Prussky stated, he had “an illiquid equity interest in a company.” Howardco had no cash or other assets, apart from the common shares in MRL, which were controlled by Fred. Howard has no control to make his shares turn into cash so, in my view, the 30 percent discount is appropriate to be applied. The control continues to be in the hands of Fred.
[95] I do not accept the opinion of Maisel that for the brief period between December 22, 1998 and January 2, 1999 when Howardco had 24500 fixed value Class A shares in MRL that were retractable and thus he could have converted them into cash. To value the shares at $3,600,000.00 without a discount does not have an air of reality about it. I agree with the view of Prussky that the only other prospective purchasers for the shares would be his family members and Howard could not force them to purchase his shares on an undiscounted basis. Why would Howard’s siblings have paid more than the fixed value for the shares? If Howard wished to convert for cash, why wouldn’t his other siblings have taken the same step? Based on the circumstances of the transaction and the manner in which the shares were held, I prefer the view of Prussky that discounts must be taken for both valuations. It is clear that Howard cannot access the shares in any event at least until Fred has died. Contingent taxes are a deductible liability if there is persuasive evidence that the disposition of the asset will take place in the future. In considering this evidence, the court must take into account the tax that would likely be owing and the determination of the proper discount rate: Sengmueller v. Sengmueller.[^15] In my view, there is nothing speculative about the disposition of the shares and the taxes that would accrue upon this event, so in my view, it is appropriate to discount the value to account for this reality in the future.
[96] The pattern of distributions in the past is a factor to be taken into account as well and the evidence on this point is that it was always Fred who made the decisions about when distributions were going to be made and in what quantum. Fred had exclusive control of MRL at the date of separation and it was this company that provided for Fred and his wife, their children and 13 grandchildren. There is no basis upon which to conclude that Howard would have been able to dispose of his shares at anything other than on a discounted value basis.
[97] The shares after reorganization were fixed value shares with a redemption value and, in my view, the preferable approach is to assume that the Respondent has a right to $2,450,000.00 based on their fixed value of $100 per share. Using Prussky’s calculations for the value of the shares on the valuation date of $1,715,000.00 less the contingent taxes of $522,054.00, I find the net value of the Class A shares as of October 21, 2006 to be $1,193,000.00. I agree that the taxes on the trust interest in the sum of $37,639.00 must be deducted. Using these figures, I find that Howard’s net family property of the date of separation was $106,581.66.00.
Should there be an unequal division of net family property?
[98] Section 5(6) of the FLA enables the Court to make a division of net family property that is not equal if it is of the view that to do otherwise would be unconscionable having regard to various circumstances, including depletion of net family property. It is clear that the onus on a party asserting there should be an unequal division is a heavy one as unconscionability must be demonstrated. The fact that the particular facts of a case seem unfair or would create a hardship on one of the parties would not be sufficient. Rather, to meet this burden, “…an equal division of net family properties in the circumstances must shock the conscience of the court”: Serra v. Serra.[^16]
[99] In the case before me, there is no evidence of unconscionable conduct on the part of Howard—there is no mala fides on his behalf related to the estate freeze. To the contrary, the evidence makes it clear that Howard really had no part in the reorganization. Fred made the decision to undertake the estate freeze on the advice of his financial advisors and Howard had no role in it, apart from being one of the children of Fred who was treated no differently than his siblings.
[100] In my view, there is no basis upon which the Court ought to make an unequal division of net family property in this case.
Conclusion
[101] On consent, an order shall go incorporating the terms of the agreement pursuant to the accepted Offer to Settle dated November 5, 2010 relating to issues of custody, access and child support into a final judgment.
[102] An order shall go imputing income from employment to the Applicant Wife in the sum of $30,000 per year retroactive to April 25, 2008.
[103] An order shall go that the Respondent pay spousal support in the sum of $4,500/month commencing June 1, 2012 and he shall continue making these payments until a material change in circumstances occurs justifying a reduction or termination of the support payments, or the expiry of ten years, whichever is earlier. The remarriage of the Applicant or cohabitation for a period of not less than three years shall constitute a material change of circumstances. If there is no such material change in circumstances, after the expiry of ten years, the Respondent’s obligation to pay spousal support shall terminate.
[104] The Applicant’s request for an unequal division of net family property is dismissed.
[105] If the parties are unable to agree on costs or interest calculations, I may be spoken to.
D.A. Wilson J.
Released: 20120531
[^1]: Family Law Act, R.S.O. 1990, c. F.3 [^2]: Family Law Rules, O. Reg. 114/99. [^3]: Divorce Act, R.S.C.1985, c.3 (2nd. Supp.) [^4]: Drygala v. Pauli, (2002), 2002 CanLII 41868 (ON CA), 219 DLR(4th) 319 at para. 45 (O.C.A.). [^5]: Fisher v. Fisher, 2008 ONCA 11, [2008] O.J. No. 38 (C.A.). [^6]: Bergeron v. Bergeron, 1999 CarswellOnt 2712 at para. 9 (S.C.). [^7]: Savonarota v. Savonarota, 2011 CarswellOnt 8851 (S.C.). [^8]: Fraudulent Conveyances Act, R.S.O. 1990, c F. 29. [^9]: A&B Landscaping & Interlocking Ltd. v. Bradsil Ltd., 1993 CarswellOnt 664 at para. 69 (Gen. Div.). [^10]: Stone v. Stone, 2001 CarswellOnt 2781 [Ont. C.A.] [^11]: FL Receivable Trust 2002-A (Administrator of) v. Cobrand Foods Ltd., 2007 CarswellOnt 3697 (C.A.). [^12]: Angle v. Minister of National Revenue, [1974] 2 S.C.R. 248. [^13]: Ontario Superior Court Practice, Justice Todd Archibald, ed., (Markham: LexisNexis Canada Inc., 2008) [^14]: Forget v. Forget, [2001] O.J. No. 3691 (S.C.) [^15]: Sengmueller v. Sengmueller, [1990] O.J. No. 1161 (S.C.). [^16]: Serra v. Serra, 2009 ONCA 105, 2009 CarswellOnt513 (C.A.)