COURT FILE NO.: F1006/12

DATE: April 28, 2014

SUPERIOR COURT OF JUSTICE – ONTARIO
FAMILY COURT

RE: Tania Darlene Rawluk-Harness, applicant

AND:

Bradley John Harness, respondent

BEFORE: MITROW J.

COUNSEL:
Marie Tukara for the applicant

Iain Sneddon for the respondent

HEARD: March 5, 2014

ENDORSEMENT

INTRODUCTION

[1] The issue on this motion is interim child support payable by the respondent father.

[2] The applicant seeks an increase of interim child support effective May 1, 2013.

[3] The main issue relating to child support is the respondent’s income – specifically whether his income should be grossed-up to reflect tax savings on a personal level resulting from the respondent electing to receive income as a dividend, rather than a salary, from his corporation, wholly owned by him.

[4] The respondent also raises an issue that the eldest child is with him not less than 40% of the time and therefore s. 9 of the Federal Child Support Guidelines (“Guidelines”) comes into play.

BRIEF BACKGROUND

[5] The parties were married to each other in 1994. They separated in 2003. There are two children of the marriage, Russell (age 18) and Ryan (age 14). Both children attend high school; they reside primarily with the applicant; and they have regular visitation with the respondent.

[6] The granting of a divorce was severed from corollary issues. The parties were divorced pursuant to a divorce order dated June 6, 2013.

[7] Over the years, the respondent derived his income from a publishing business known as “Banner Publishing,” and since 2005, the respondent deposes he also derives income from his business “Maple Publishing.”

[8] There is a dispute between the parties as to whether the applicant was involved in Banner Publishing as a partner rather than an employee. The applicant alleges she was a partner; the respondent asserts she was an employee.

[9] There are a number of property issues that relate to Banner Publishing, including the respondent’s allegation that the applicant improperly withdrew money from Banner Publishing. The resolution of those issues will need to include a determination as to whether the applicant was an owner or only an employee.

[10] I agree with the applicant’s submission that the property issues are separate and distinct from the respondent’s obligation to pay interim child support, and any allegation by the respondent that money should be paid to him by the applicant will have to await the final resolution of these issues, and should not affect the respondent’s ongoing obligation to pay interim child support.

[11] It is not in dispute that as of 2012 both Banner Publishing and Maple Publishing began operating through Trafalgar Victory Ltd., a corporation in respect of which the respondent is the sole shareholder. Both businesses, prior to 2012, were unincorporated.

[12] It is also common ground that there is no domestic contract or order dealing with child support.

[13] The applicant sets out the child support voluntarily paid by the respondent since the date of separation in her affidavit (see paragraph 14 of the affidavit sworn January 22, 2014). These numbers are not disputed by the respondent.

[14] The most recent child support payments are the ones that are relevant for this motion.

[15] Effective May 1, 2012, the respondent began to pay child support in the amount of $632 per month based on his 2011 line 150 income of $43,141. This amount included net business income of $42,780 (with the gross business income being shown as $245,902).

[16] It is the applicant’s position, on an interim basis, that consistent with what had occurred in 2012 (when the respondent, for 2012 paid child support based on his 2011 income), that for 2013, starting May 1, 2013, the child support should be adjusted again based on the respondent’s 2012 income.

[17] Given that the respondent is self-employed, and that his income has fluctuated historically, I find it is not unreasonable to approximate child support for a given year based on the previous year’s income.

[18] The applicant complains in her affidavit (sworn January 22, 2014) that it was only recently that she finally received the respondent’s 2012 income tax return.

[19] The respondent’s line 150 income for 2012 is shown as $62,924; of this amount, $62,500 was a dividend from the respondent’s corporation. This dividend amount was shown as a taxable dividend on the respondent’s notice of assessment.

[20] The parties agree that the actual dividend received by the respondent was $50,000 and that the taxable dividend consisted of the actual dividend ($50,000) plus a 25% gross-up ($12,500), for a total taxable dividend of $62,500.

[21] The respondent relies on s. 5 of Schedule III of the Guidelines that requires the following adjustment to his line 150 income:

5. Replace the taxable amount of dividends from taxable Canadian corporations received by the spouse by the actual amount of those dividends received by the spouse.

[22] The respondent submits that his 2012 income has to be adjusted, as required by s. 5 of Schedule III, and that only his actual dividend of $50,000 should be included in his income.

[23] The applicant argues, in effect, that by electing to take income from his corporation as a dividend, rather than salary, that the respondent, when his income is adjusted as required by s. 5 of Schedule III, will pay less child support than if he had elected to take his income (over which he has full control) as a salary. Accordingly, it is the applicant’s submission that the respondent’s actual dividend should be grossed-up for child support purposes.

THE LAW

[24] Sections 18 and 19(1)(h) of the Guidelines are relevant:

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

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

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

(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.

19. (1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:

(h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax; and

[25] In Riel v. Holland, 2003 3433 (ON CA), 67 O.R. (3d) 417 (C.A.), the Court of Appeal for Ontario accepted the principle that a proper interpretation of s. 18 and 19 of the Guidelines (the court in that case was also dealing with the Federal Child Support Guidelines) is to ensure that two parents, where one earns a salary and the other has a similar business income, but pays less tax, are treated consistently in respect of their child support obligations. The court stated at para. 35 as follows (and this includes the text of the footnote referred to in para. 35):

35 Subject to observing that s. 19 of the Guidelines defines certain specific circumstances in which income may be imputed and sets out the criteria to be met in those circumstances [Note 1], I agree with the general approach adopted in these cases. Section 1(d) of the Guidelines states that one of the objectives of the Guidelines is "to ensure consistent treatment of spouses and children who are in similar circumstances". An interpretation of ss. 18 and 19 of the Guidelines that would impute the same income for child support purposes to two parents, one earning a salary of $128,000 and paying tax of $48,000 and the other receiving business income of $128,000 and paying tax of $5,000, would be remarkably out of step with the "consistent treatment" objective of the Guidelines.

Note 1: For example, s. 19(1)(g) permits the court to impute income where "the parent or spouse unreasonably deducts expenses from income" (emphasis in original), while s. 19(1)(h) requires that a parent or spouse derive a significant portion of income" (emphasis in original) from sources that are taxed at a lower rate than employment or business income" as a pre-condition to imputing income.

[26] The helpful analysis by R.J. Smith J. in Austin v. Austin, 2007 CarswellOnt 7130, citing Riel, supra, analyzed the advantages enjoyed by a taxpayer who receives dividend income from his or her wholly owned corporation, as compared to a taxpayer who receives a salary income.

[27] At para. 20 in Austin, supra, R.J. Smith J. gives an example of a taxpayer who derives income from his/her wholly owned corporation. The example uses a corporate tax rate of 20% and a 25% gross-up of the actual dividend. Assuming there was $100,000 of pre-tax income in the corporation available for distribution, the following is the result:

a) if the taxpayer elected to have the corporation pay out $100,000 in salary, then the corporation would deduct the salary as an expense and would have no taxable income; the taxpayer would have line 150 income of $100,000 (T4 income) and would have an after-tax income of $60,000 (assuming 40% tax rate for the purpose of the example);

b) however, if the taxpayer elected to declare a dividend, which must come from after-tax corporate income, the corporation would pay $20,000 income tax and the taxpayer would receive an actual dividend of $80,000;

c) although the taxpayer would declare grossed-up dividend income of $100,000 on line 150 (being the $80,000 actual dividend plus 25% gross-up), the taxpayer would have been entitled to a $20,000 dividend tax credit (25% x $80,000 actual dividend received);

d) in the above examples, both taxpayers would have a line 150 income of $100,000;

e) in the situation where a dividend is paid, the dividend tax credit (in the example used) offsets the tax paid by the corporation, so that the total tax paid by the taxpayer and his/her corporation remains the same, and is equal to the tax paid by the taxpayer who received his/her income as a salary;

f) the disparity that occurs, regarding child support, is that the taxpayer who received a salary pays child support on line 150 income of $100,000; whereas the taxpayer who receives the dividend, pays child support on the actual dividend of $80,000 after applying s. 5 of Schedule III of the Guidelines.

[28] Although the above example makes some assumptions and achieves “perfect” integration, the example is very helpful in illustrating the disparity that can occur depending on how a taxpayer elects to receive income from his/her wholly owned corporation.

[29] I adopt the analysis in Austin, supra (at para. 24), that after applying s. 5 of Schedule III of the Guidelines in cases where the corporation is wholly owned by the payor parent, it is then necessary to apply a second step utilizing s. 19(1)(h) of the Guidelines.

[30] One way in which this can be accomplished is by including in the payor’s income the full amount of taxable dividend (i.e. the grossed-up dividend), rather than the actual dividend received.

[31] In Henderson v. Casson, 2014 CarswellOnt 1259 (S.C.J.), A.C. Trousdale J., in applying Austin, supra, included the full amount of the husband’s taxable dividends in his income for child support purposes where the court was satisfied that the dividend income came from a corporation wholly owned by the husband (see paras. 152, 157 and 167).

DISCUSSION

[32] During oral argument on the motion, I did query the applicant’s counsel, Ms. Tukara, as to whether the quantum of any gross-up, or other adjustment to the respondent’s income, after applying s. 5 of Schedule III of the Guidelines, should be left to the trial judge to quantify on more complete evidence as to the calculation of any gross-up. Not surprisingly, the respondent’s counsel, Mr. Sneddon, endorsed this suggestion.

[33] However, after reviewing the motion material and the authorities, I find it is appropriate to adjust the respondent’s income on an interim basis pursuant to s. 19(1)(h) of the Guidelines after first applying s. 5 of Schedule III.

[34] The respondent’s resources available to pay child support are not accurately reflected by using his actual dividend of $50,000. The application in this case was issued late June 2012, close to two years ago. The respondent was not as prompt as he should have been in providing his 2012 income tax return. Also, notwithstanding his argument that $50,000 actual dividend income should be used, the respondent even failed to increase the child support based on that income and has continued to pay child support on his 2011 income of $43,141.

[35] I find that while this case is ongoing (soon to be two years), that the respondent should be meeting his full responsibility for child support on an interim basis.

[36] In Ex. 2 filed on the motion, the applicant has provided the DIVORCEmate calculations for child support that incorporate the gross-up calculation pursuant to s. 19(1)(h). The gross-up is calculated to be $9,520, which is then added to the $50,000 actual dividend, plus a small amount of self-employment income rounded to $425, to produce an annual income of $59,945 for child support for 2012.

[37] DIVORCEmate calculations, that also include Spousal Support Advisory Guideline (“SSAG”) calculations, where appropriate, are routinely used by counsel and the courts. I see no reason why I should not rely on Ex. 2 in quantifying the s. 19(1)(h) gross-up on an interim basis. At this interim stage, it is understandable that the applicant, given her income of a little over $30,000, would be reluctant to incur the expense of engaging a professional to perform the gross-up calculations.

[38] In the example referred to in Austin, supra, and given the assumptions made, the result was “perfect” integration, and the necessary gross-up pursuant to s. 19(1)(h) would have been equivalent to the dividend tax credit (being $20,000 in that example).

[39] In the case at bar, the respondent’s 2012 notice of assessment shows a federal dividend tax credit of $8,333.31 and a provincial dividend tax credit of $2,812.50, for a total dividend tax credit of $11,145.81.

[40] Although total dividend tax credit is approximately $1,600 higher than the gross-up calculated by DIVORCEmate, it is not significantly different, and in my view, corroborates the range of an appropriate gross-up, which can always be adjusted at trial if better evidence is available.

[41] I find that the respondent’s income is $59,945 for 2012 for child support purposes, and I use that income in approximating his income for 2013 onwards. This finding is without prejudice to the position of either party at trial. The child support based on that income is $892 per month.

[42] I accept the applicant’s position that this child support should be payable from May 1, 2013, giving credit to the respondent for the payments made.

[43] The arrears for the period May 1, 2013 to March 31, 2014 inclusive are calculated as follows:

May 1, 2013 –
March 31, 2014

Total due
$892 x 11 = $9,812

Less amounts paid
$632 x 11 = $6,952

Balance Owing
$2,860

[44] When the respondent’s income for 2013 is known, it would not be unreasonable for the parties, on an interim basis, to make an adjustment to the child support effective May 1, 2014 as an approximation of interim child support based on 2013 income.

[45] I do not accept the respondent’s submission that the child, Russell, spends 40% or more of his time with the respondent. There is insufficient evidence to make that finding for several reasons.

[46] The respondent calculates that Russell spends 43% of his time with the respondent based on the number of hours.

[47] For week #1, Russell is with the respondent from 4:30 p.m. Wednesday until he goes to school on Friday morning, and for week #1 Russell spends his weekend with the applicant. However, the respondent counts Russell’s school time until 4:30 p.m. on Friday as part of the access time. I disagree with that. The evidence supports more strongly than not the applicant’s assertion that she routinely deals with the school in relation to the children irrespective of whether the children may be staying with the respondent. On the facts before me, I find that the respondent’s access to Russell ends on week #1 when Russell leaves for school on Friday morning.

[48] On the respondent’s weekend, Russell stays with the respondent until Monday morning when he goes to school. However, the respondent calculates as access time the school hours until 4:30 p.m. on Monday. For reasons similar to those expressed above, I find that the respondent’s weekend time with Russell ends when Russell goes to school Monday morning.

[49] The above adjustments would be more than sufficient to place the respondent’s access time with Russell below 40%.

[50] However, in addition, the applicant’s reply evidence, not disputed, is that in November 2013, Russell goes on most weekends to spend time with his girlfriend in Niagara Falls. This would further reduce the time Russell actually spends with the respondent.

ORDER

[51] For reasons set out above, an interim order shall issue incorporating the following:

1. Effective April 1, 2014, the respondent shall pay interim child support to the applicant for the children, Russell and Ryan, in the amount of $892 per month based on an income of $59,945. The respondent shall be credited towards this child support obligation with any amounts paid by the respondent for child support on or after April 1, 2014;

2. On an interim basis, for the period May 1, 2013 up to and including March 31, 2014 inclusive, the respondent shall pay to the applicant for the children, Russell and Ryan, lump sum child support in the amount of $2,860 payable forthwith;

3. This order is made pursuant to the Divorce Act;

4. This order is without prejudice to the right of either party to request the trial judge to order a different amount of child support for the period of time covered by this order;

5. If the parties cannot agree on costs, then within 30 days the parties shall forward written costs submissions to the trial coordinator. Counsel shall agree between themselves as to the order of the submissions. The submissions shall not exceed three typed pages plus any offers, time dockets and authorities. Reply submissions, if any, shall not exceed more than two pages.

“Justice Victor Mitrow”

Justice Victor Mitrow

Date: April 28, 2014