COURT FILE AND PARTIES

COURT FILE NO.: FS-13-47740

DATE: 2014/10/02

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: SUSAN WOODRUFF, Applicant

AND:

DAVID HOWARD, Respondent

BEFORE: The Honourable Justice D.A. Broad

COUNSEL: Michael B. Wannop, for the Applicant

Denise Marchildon, for the Respondent

HEARD: September 11, 2014

ENDORSEMENT

[1] The applicant has brought a motion for interim spousal support. After argument of a contested adjournment on July 31, 2014, I ordered the respondent to pay spousal support to the applicant, on a without prejudice basis, in the sum of $5,000.00 per month, pending full argument on a long motion. Full argument of the motion took place on September 11, 2014.

Background

[2] The parties had a 21 year relationship, having commenced cohabiting in September, 1992. They became married on August 7, 1998 and separated on August 1, 2012. The applicant is currently 58 years of age and was previously divorced. Respondent is currently 68 years of age and was also previously divorced. The applicant and respondent have no children together. The applicant has two children from a previous marriage and the respondent has one child from a previous marriage. None of these children are dependent.

[3] The applicant was employed from 1994 to 1998 and from 1998 to 2000 she was engaged in a business with her sister. Since 2000 the applicant has not been employed or self-employed, however she became a non-voting shareholder in D. Howard Sales Inc., a corporation controlled by the respondent, carrying on business as a food broker (the “Corporation”), and commenced drawing a salary from the Corporation. The respondent holds one voting common share in the Corporation and the applicant holds one non-voting common share.

[4] The parties are agreed that the salary paid to the applicant was an income-splitting measure, as the applicant provided minimal services to the Corporation. As of 2013 the applicant was drawing an annual salary of $125,000 from the Corporation. Effective at the end of July, 2013, the applicant’s employment with the Corporation was terminated by the respondent. At that time the applicant’s coverage under the Corporation’s group health and medical benefit package was also terminated, until it was reinstated following correspondence from the applicant’s lawyer to the respondent’s lawyer.

[5] The applicant’s line 150 income for 2012 was $126,915, comprised entirely of salary drawn from the Corporation, and her line 150 income for 2013 was $50,563, similarly comprised entirely of salary from the Corporation. The applicant has not worked since the termination of her employment by the Corporation in July, 2013, and until the Order of July 31, 2014, support payments received from the respondent in the sum of $2,500 per month from October 2013 to June, 2014 comprised her only income. The respondent paid no support to the applicant for the months of August and September, 2013.

[6] The respondent’s line 150 income for 2013 was $123,040, $151,013.16 in 2012, $191,071.89 in 2011 and $170,328.82 in 2010.

[7] During their marriage, the parties enjoyed a comfortable lifestyle. They owned a vacation property in Scottsdale, Arizona which was sold following their separation for approximately $215,000 (USD). They jointly own a condominium in Toronto which has been valued at $810,000 as of January, 2014. The parties own multiple pieces of fine art, both personally and through the Corporation. The corporate art collection has been appraised at $171,000 and the value of their personally-owned work exceeds $85,000. During their marriage, the parties took a number of trips outside Canada, largely connected with the respondent’s business, and dined out frequently.

[8] The applicant argues that the respondent has been able to write off through the Corporation numerous personal expenses including parking, cell phone, Internet, refreshments, mileage and travel expenses, entertainment, Nexus renewal, CAA and Costco membership, and household cleaning supplies. The respondent disputes that any such expenses written off through the Corporation were personal in nature, but rather have been validated as legitimate business expenses.

[9] The respondent acknowledges that the applicant is entitled to spousal support. The only issue between the parties is the quantum of support that the respondent should be ordered to pay.

[10] The parties have each retained an expert to prepare a report on the respondent’s earnings for the purposes of spousal support.

[11] The applicant’s expert Brad Borkwood, CA, CBV, prepared a report based on the respondent’s income for the years 2010 to 2012, including income generated by the Corporation, the applicant’s personal income received from the Corporation, corporate earnings from the Corporation available to the respondent, including personal expenses, and income tax gross-up to account for the tax savings from the respondent paying for personal expenses with pre-tax corporate income. Mr. Borkwood determined the average earnings of the respondent for support purposes for the years 2010 to 2012 to be the sum of $443,000 per annum.

[12] The respondent’s expert Timothy Martin, CA, CBV, calculated the respondent’s income for support purposes, based upon all income amounts available to him, at $465,000 in 2010, $387,000 in 2011, $423,000 in 2012, $277,000 in 2013 and $291,000 in 2014. Mr. Martin also provided calculations for the respondent’s income for spousal support purposes excluding certain non-recurring amounts of income and losses for those same years. The figure for 2013, excluding non-recurring income and losses, was $201,000 and for 2014 was $291,000.

Position of the Applicant

[13] The applicant submits that the respondent should pay interim spousal support of $8,500 per month commencing August 1, 2013 and that the respondent should receive credit for payments made by him to the applicant from that time to and including August 2014 in the sum of $32,500. She also seeks an order that the respondent maintain extended health, medical benefits available to him through his employment with the Corporation for the benefit of the applicant for so long as the applicant is eligible, and that he maintain his existing policies of life insurance naming the applicant as irrevocable beneficiary for so long as he has an obligation to pay spousal support.

[14] The applicant’s figure for interim monthly spousal support of $8,500 is the mid-point figure under the Spousal Support Advisory Guidelines (the SSAGs) based upon the respondent’s income for spousal support purposes for 2014 of $291,000, as calculated by the respondent’s expert Mr. Martin.

Position of the Respondent

[15] The respondent submits that he should be ordered to pay spousal support of $5,000 per month commencing October 1, 2013 to and including December 1, 2013 and $6,250 per month commencing January 1, 2014. The former figure is based on income for the respondent of approximately $170,300 under the SSAGs and the latter figure is based on an income of approximately $210,000.

[16] The respondent argues that the fortunes of the corporation have declined and will continue to do so, and it is not realistic to expect him to be able to draw $291,000 from the Corporation in order to maintain spousal support payments of $8,500 per month. He points to the annual sales of the Corporation declining from $800,000 per annum in 2010 to $500,000 per annum in 2014. He also indicates that the Corporation has lost two substantial customers which will result in a further 35% decline in sales in 2015. The respondent also points out that his serious health issues, including his past diagnosis of malignant melanoma in 1979, a heart attack in 2003, medication for high blood pressure and high cholesterol currently, and a diagnosis of prostate cancer in 2009, with associated surgery and radiation treatments, will impact his ability to continue to work and travel on business at the same level he has in the past, thereby impacting his, and the Corporation’s, income.

[17] The respondent argues that, according to her recent Financial Statement, the applicant has monthly expenses of $2,670.53, exclusive of legal and accounting fees, and accordingly, monthly spousal support of $6,250 will be more than adequate to meet her needs. He states that in order to pay increased spousal support he will have to increase his salary from the Corporation which would reduce the annual net income of the Corporation which has, to this point, been deposited to an investment account from which the applicant will derive benefit as an equal shareholder. He says that this will result in the applicant receiving taxable income for spousal support as opposed to an increase in the non-taxable value of her share in the Corporation should the Corporation be able to continue to retain its excess earnings.

Guiding Principles

[18] Pursuant to s.15.2(6) of the Divorce Act, R.S.C. 1985, c.3 (2nd Supp.), the stated objectives of an order for spousal support, including, an interim order for spousal support are as follows:

(a) to recognize any economic advantages or disadvantages to the spouses arising from the marriage or its breakdown;

(b) to apportion between the spouses any financial consequences arising from the care of any child of the marriage over and above any obligation for the support of any child of the marriage;

(c) to relieve any economic hardship of the spouses arising from the breakdown of the marriage; and

(d) insofar as practicable, to promote the economic self-sufficiency of each spouse within a reasonable period of time.

[19] Lemon, J. in the case of Driscoll v. Driscoll 2009 66373 (ON SC), [2010] W.D.F.L. 1324 (S.C.J.) recited, at para. 14, a useful set of principles governing interim support orders, derived from the case of Robles v. Kuhn, 2009 BCSC 1163, [2009] B.C.J. No. 1699 (B.C. Master), , as follows:

1. On applications for interim support the applicant's needs and the respondent's ability to pay assume greater significance;

2. An interim support order should be sufficient to allow the applicant to continue living at the same standard of living enjoyed prior to separation if the payor's ability to pay warrants it;

3. On interim support applications the court does not embark on an in-depth analysis of the parties' circumstances which is better left to trial. The court achieves rough justice at best;

4. The courts should not unduly emphasize any one of the statutory considerations above others;

5. On interim applications the need to achieve economic self-sufficiency is often of less significance;

6. Interim support should be ordered within the range suggested by the Spousal Support Advisory Guidelines unless exceptional circumstances indicate otherwise;

7. Interim support should only be ordered where it can be said a prima facie case for entitlement has been made out;

8. Where there is a need to resolve contested issues of fact, especially those connected with a threshold issue, such as entitlement, it becomes less advisable to order interim support.

[20] S. 18 of the Federal Child Support Guidelines provides that, where the court determines that the amount of the payor's annual income does not fairly reflect all the income available to him or her, the court may consider all or part of the pre-tax income of a corporation of which the payor spouse is a shareholder, director or officer for the most recent taxation year.

[21] In Brophy v. Brophy (2002), 2002 76706 (ON SC), 32 R.F.L. (5th) 1 (Ont. S.C.J.), aff'd (2004), 2004 25419 (ON CA), 45 R.F.L. (5th) 56 (Ont. C.A.), Linhares de Sousa, J., at para. 35, found the principle enunciated in s. 18 of the Child Support Guidelines to be equally applicable to spousal support, as both situations relate to a paying spouse’s ability to provide support to a dependent.

[22] At para. 36 of Brophy Justice de Sousa set forth certain factors to be considered by the court in determining whether retained earnings ought to be included in annual income for spousal support purposes, as follows:

1. Because of the separate legal entity of the corporation, should there be a general reluctance by the court to automatically attribute corporate income to the shareholder?

2. Is there a business reason for retaining earnings in the company?

3. Is there one principle shareholder or are there other bona fides arm's length shareholders involved?

4. What is the historical practice of the corporation for retaining earnings?

5. What degree of control is exercised by the spouse over the corporation?

Analysis

[23] On a motion for interim support such as this, it is not possible, nor is it appropriate, to embark on an in-depth analysis of the parties’ circumstances, based upon competing affidavit material. As indicated in Driscoll that is a matter best left for trial.

[24] Although the applicant’s monthly expenses, exclusive of legal and accounting costs, as exemplified on her most recent Financial Statement, are relatively modest, they must be viewed in the context of the low level of support which was voluntarily paid by the respondent prior to the order of July 1, 2014. It is evident that the applicant has moderated her expenses to reflect the low level of support she has been receiving. As indicated in Driscoll, an interim support order should be sufficient to allow the applicant to continue living at the same standard of living enjoyed prior to separation if the respondent’s ability to pay warrants it.

[25] It is unrealistic for the respondent to expect the applicant to maintain her monthly expenses at the level disclosed in her Financial Statement given the disposable income available to him, through the earnings of the Corporation. Moreover, it would be unfair to discount the applicant’s legal and accounting expenses while the respondent retains the ability to set the amount which he draws from the Corporation in order to meet his living expenses together with his ongoing legal and accounting expenses.

[26] The historical practice of the respondent for dealing with retained earnings in the Corporation has been to invest them in an investment account within the Corporation which has now reached $1,342,593, on the respondent’s evidence. It is evident from this that there is no demonstrated business reason, related to the operations of the Corporation, to continue to build up retained earnings within the Corporation. The respondent has, as a tax-deferral mechanism, built up savings for himself and for the applicant within the Corporation on a tax-deferred basis rather than causing the Corporation distribute its earnings to himself and the applicant as equal shareholders.

[27] The applicant has chosen to seek increased spousal support from the respondent rather than to continue to permit the annual retained earnings of the Corporation to be held in an investment account within the Corporation, controlled by the respondent. Given this choice, it is not appropriate for the court confer on the respondent the authority to utilize excess earnings of the Corporation to build up an investment account under his sole control (albeit one which in which the applicant will share when the corporation is eventually wound up), in lieu of ordering spousal support to be paid to the applicant at a level commensurate with the income available to him, even though it might be considered beneficial from a tax perspective to permit the continued build-up of retained earnings within the Corporation. As a non-voting shareholder, the applicant has no input into the investment decisions made by the respondent in respect of the retained earnings of the Corporation. Similarly, she has no input into the timing and amount of dividend distributions from the retained earnings of the Corporation.

[28] I see no reason, on the evidence, to reduce the amount of the respondent’s available income for spousal support purposes below that determined by the respondent’s own expert, particularly on an interim basis. Although the respondent points to indicators that the Corporation’s current level of earnings is not sustainable, his projections respecting the future prospects of the Corporation remain just that - projections. It is more appropriate for the trial judge, based upon all of the evidence led at trial, to undertake a full analysis of the circumstances and prospects of the Corporation and to determine the degree to which the excess earnings of the Corporation, if any, at the time of trial should be considered for the purpose of setting spousal support on a final basis.

Disposition

[29] I would therefore order that the respondent pay to the applicant interim spousal support in the sum of $8,500 per month, commencing August 1, 2013, based upon the respondent’s income for spousal support purposes of $291,000 per annum, as determined by respondent’s expert. The respondent is to be credited with all payments of support made by him to the applicant from and after August 1, 2013. If the parties are unable to agree on the appropriate credit to be given to the respondent in respect of payments of support made by him to date, I may be spoken to by counsel. It is expected that this will not be necessary. The arrears of spousal support shall be paid within 30 days hereof.

[30] It is also ordered that the respondent maintain extended health, medical and dental benefits available to him through his employment with the Corporation for the benefit of the applicant for so long as the applicant is eligible, and that the respondent execute any and all documentation reasonably required to permit the applicant to submit claims to receive reimbursement from the insurance carrier, Sun Life, directly.

[31] It is ordered that the respondent shall maintain his existing policies of life insurance naming the applicant as a revocable beneficiary for so long as he has an obligation to pay spousal support.

Costs

[32] If the parties cannot agree on costs, the applicant may make written submissions as to costs within 21 days of the release of this endorsement. The respondent has 14 days after receipt of the plaintiff’s submissions to respond. All such submissions shall be brief, not exceeding three double-spaced pages (excluding Bills or Costs and Offers to Settle) and are to be forwarded to me at my chambers at 85 Frederick Street, 7th fIoor, Kitchener, Ontario N2H 0A7. If no submissions are received within this timeframe, the parties shall be deemed to have settled the issue of costs as between themselves.

D.A. Broad

Date: October 2, 2014