CITATION: Walters v. Walters, 2015 ONSC 3336

COURT FILE NO.: FC-10-398-02

DATE: 20150526

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

LEANNE ASHLEY WALTERS

Applicant

– and –

KENLOCK EARL WALTERS

Respondent

M. Miller, for the Applicant

Respondent, Self-Represented

HEARD: May 20 and 21, 2015

HEALEY J.

Nature of the Trial

[1] This is a Motion to Change the final order of Justice Lauwers dated April 23, 2012 (the “Lauwers’ order”), commenced by the respondent father, Kenlock Walters. That order requires Mr. Walters to pay monthly support, commencing May 1, 2012, in the amount of $775 for the only child of the marriage, Reece Walters, born October 30, 2005.

[2] The parties were married on October 23, 2004 and separated on October 7, 2009.

[3] Following the trial heard by Justice Lauwers in March, 2012, Mr. Walters’ income was assessed at $100,000. Under the Federal Child Support Guidelines, SOR/97-187, as amended (the “Guidelines”), an annual income of $100,000 requires a child support payment of $880 per month. However, according to Justice Lauwers, the access schedule determined at trial provided Mr. Walters with access just over the 40% threshold, and so he applied a 12% reduction, lowering the amount to $775. The Lauwers’ order further required Mr. Walters to pay child support arrears for November 1, 2010 to December 31, 2011 of $5,544, and $1,596 for the period January to April, 2012, for a total amount of support arrears of $7,140.

Relief Sought by the Parties

[4] Mr. Walters’ Motion to Change seeks to have the ongoing support changed to reflect an annual income of $30,270. He asks for a complete “set off” pursuant to s. 9 of the Guidelines due to an equal sharing of access time, resulting in payments in the sum of $34.86 per month commencing January 1, 2014. He also seeks to have any child support arrears fixed at $0 as of September 2, 2014. In his Form 15A, Mr. Walters identifies the following changes in circumstances to have taken place since the Lauwers’ order was made:

• His family fitness business has closed due to market changes and he faced imminent bankruptcy;

• His 2013 income reduced dramatically to $30,000;

• He has no spouse to mitigate his costs of living.

[5] In her amended Response to the Motion to Change, Mrs. Walters seeks an order for lump sum child support as a result of a recalculation of Table support from January 1, 2011 to present, based on Mr. Walters’ actual income. It is her position that he failed to disclose his actual income at the trial before Justice Lauwers, and continues to do so ongoing.

[6] At the time of the trial before Justice Lauwers, Mr. Walters’ income for 2011 was uncertain, in part because neither he nor the corporations controlled by him had filed their tax returns. This uncertainty was described by Justice Lauwers in his Reasons for Judgment as follows:

[100] I accept Mr. Miller's argument that in order to meet the expenses that Mr. Walters has listed, his actual income would have to be considerably higher than his nominal income. I therefore reject the salary Mr. Walters earns from the gym at $52,000.00 as the right number for calculating child support. I also believe that the imputation of $9,400.00 more income to him that Mr. Craig concedes is also insufficient in the circumstances. In the absence of evidence that enables me to determine this number with certainty, since Mr. Walters did not call his accountant as a witness, I fix his income for child support purposes at $100,000. I note that this number reflects the income that Mr. Walters has used in discussions with lenders. [Emphasis added]

[7] Before starting this Motion to Change, Mr. Walters provided Mrs. Walters with his corporate financial statements and income tax returns to the end of 2013. Some of the information contained therein caused Mrs. Walters and her counsel to have concerns. In the result, inquiries were made of Mr. Walters' long-time accountant, who is Helen Power of MDS LLP, Chartered Accountants. Essentially, two large sums of money were questioned by Mrs. Walters. These sums largely formed the basis of Mrs. Walters' claims in this proceeding, and contributed to her resistance to Mr. Walters' Motion to Change.

[8] Ms. Power attempted to address these two sums in a letter dated November 5, 2014, from which the following excerpt is derived:

3. I have attached a copy of the general ledger accounts for 2009 and 2010 for Reecol Ltd. that explain the $348,067 loan payable. In September of 2009 we separated the actual mortgage amounts and the amounts that Ken Walter Jr. withdrew from the company up to the end of 2009. The amount of $439,380.20 should have been included in his personal tax return in 2009. We will be looking to adjust his tax filing for that year to include the funds.

4. In 2011 Ken Walter Jr. was considering selling Ultimate Fitness. The company had large losses that he did not want to sell so they were transferred to Walters Mortgage Group Inc. by including income from Walters Mortgage Group Inc. into Reecol Ltd. The mortgage payable and all other loans were transferred to Walters Mortgage Group Inc. in exchange of the accounts receivable from the revenue transferred. The consulting fee of $397,484 in Walters Mortgage Group Inc. was included in income in Reecol Ltd. in 2011.

Issues

[9] There are four years for which the appropriate quantum of support is in question in this proceeding - 2012, 2013, 2014 and 2015 to the date of trial - and accordingly a determination of income for the years 2011 to 2014 must be made. However, Mr. Walters is content that the Lauwers’ order remain unchanged for the period prior to January 1, 2014. It is Mrs. Walters who seeks to have support reviewed from January 1, 2012 onward, as she argues that the respondent experienced a significant increase in income in 2011.

The Evidence

[10] Mr. Walters opened a gym in 2009. Between 2009 and 2014 that gym, operating under the name Ultimate Fitness, was run under various corporate structures. The only one of relevance in this proceeding is Reecol Ltd. Mr. Walters is also involved in the mortgage brokerage industry, obtaining his brokerage license in 2014, a business which he operates through a different corporation, Walters Mortgage Group Inc.

[11] As outlined in the excerpt of the letter from Ms. Power, part of the impetus for Mrs. Walters' position is the 2011 year-end financial statement for Reecol Ltd., which showed net income of $321,403, an increase of over $270,000 from the previous year's net loss of $51,089. Ms. Power testified for Mr. Walters at this trial. She is a Chartered Professional Accountant and a Chartered Financial Divorce Specialist. Ms. Power has acted as Mr. Walters’ personal and corporate accountant since 1999, the year that he began to operate his gym. She is familiar with each of the corporations operated by Mr. Walters over the years, having prepared the tax returns for each. She also prepared Mrs. Walters' tax returns during the course of the marriage. Her evidence left no doubt that she has great familiarity with the financial status of Mr. Walters, including the debts owed to his parents resulting from them mortgaging their personal real estate in order to infuse start up and operational capital into the gyms operated by Mr. Walters over the years.

[12] While Mrs. Walters attempted to portray Ms. Power as a partisan witness, I find to the contrary. She may have had reason, in fact, to provide unfavorable evidence to Mr. Walters if it existed - he has not paid her for last year's work related to Walters Mortgage Group Inc., and he was unable to pay her for her full-day attendance in court. She also showed little support for his financial predicament, testifying that it is her view that his parent should not have mortgaged their properties to give him money, given their proximity to retirement. She explained that both have compromised their financial security to do so. Further, although she readily admitted to supporting the reporting of Mrs. Walters to Canada Revenue Agency (“CRA”) for filing false returns, I find that her explanation for doing so was not directed specifically against Mrs. Walters, but was rather a principled aversion to those taxpayers who attempt tax evasion or seek benefits to which they are not entitled. That latter evidence also helped this Court evaluate the evidence that she provided on behalf of Mr. Walters. In the result, I found her to be a credible and knowledgeable witness who has attempted to engage in negative tax planning, and not tax evasion, in order to provide her client with the maximum benefits available. She candidly testified that two of her strategies required research under the Income Tax Act and she could not say whether they would be acceptable to CRA in the final result. Although Mr. Walters’ 2009 income was ultimately not an issue in this proceeding, evidence was led in respect of that year and accordingly is included in the following evaluation. From Ms. Powers' evidence, I make the following findings:

i) she advised Mr. Walters to scrutinize his ledgers for Reecol Ltd. for 2011, 2012 and 2013, and to add up all amounts he received either in draws or through payment of expenses by that corporation from which he benefited personally, either in whole or in part, for the purpose of calculating his income for child support purposes;

ii) Mr. Walters carried out that exercise[^1], and included 100% of payments made for expenses for which he would otherwise have had some deduction for income tax purposes (vehicle, entertainment, cellular phone, etc.);

iii) the sum of $439,380.20 referred to in Ms. Powers’ letter of November 5, 2014 was an accumulation of draws given to Mr. Walters by the fitness companies over a ten year period, previously the subject of no taxation because of the size of the shareholder advance account. It was never income earned. The idea behind characterizing it all as 2009 income was strictly to provide more room in the shareholder advance account, by designating that sum as income in the year prior to Mr. Walters declaring personal bankruptcy, which he did in 2010. Ms. Power has not yet refiled for the 2009 taxation year and will not do so if her research bears out that her methodology is not viable. However, whether she does or not is a red herring; I am satisfied that the amount of $439,380.20 is not an amount that should ever be considered as having been available to Mr. Walters as income for child support purposes in 2009;

iv) the consulting fee of $397,484 referred to in paragraph 4 of Ms. Power's correspondence and “received” in 2011 should also not be considered income.

[13] The reason for not considering this latter sum as income is that Ms. Power testified, as she had explained in her letter, that this increase in reported income for Reecol Ltd. occurred as a result of the transfer of "income" from the unrelated company, Walters Mortgage Group Inc., by way of a consulting fee. Ms. Powers testified that money was not actually received by Reecol Ltd.; this was strictly a journal entry done to preserve business losses accumulated by Reecol Ltd. over the years. Mr. Walters was considering selling the Ultimate Fitness business in 2011, and it was her advice to him that, again, if viable under the Income Tax Act and in accordance with CRA policy, he should avoid losing those business losses through a sale, and instead preserve them for future use by transferring the losses to Walters Mortgage Group Inc. Accordingly, both the mortgage payable to Mr. Walters Sr. and the loss carry forwards were transferred over to the mortgage company, and in return the income was artificially increased in Reecol Ltd. The result is that Walters Mortgage Group Inc. now has a loss carry forward of $397,484 that can be used to offset income over the next 20 years. Again, whether or not any of this will be viable when scrutinized by CRA is a red herring; I accept that there is no evidence supporting a true payment to Reecol Ltd. in 2011 such that it should be considered income available to Mr. Walters for support purposes.

[14] There is no evidence that would compel this Court to adjust child support based on a change in 2012 income, and ultimately, at trial neither party urged the Court to review Mr. Walter’s income for that year.

[15] Mr. Walters testified that in 2013 two new competitor fitness facilities opened in Barrie, which undercut his business. Throughout 2013, Ultimate Fitness was unable to make enough sales to pay its ongoing expenses. On October 17, 2013, Mr. Walters transferred the sum of $64,000 into Reecol Ltd. in order to keep Ultimate Fitness afloat. He refinanced his home to do so. By the end of that year he began to focus more on his mortgage brokerage work, in the hope that that source of income would cover his personal expenses. His mother accepted responsibility for the operations of the gym. The gym was still in a loss position by the end of 2013, with insufficient income to meet its expenses.

[16] Mr. Walters earned $14,901.61 in self-employed commissions as a broker for Homeguard Funding in 2013. However, the total sales shown in the 2013 corporate return of Walters Mortgage Group Inc. are $18,817. Although operating expenses have been deducted from this amount for CRA purposes, Mr. Walters did not give testimony as to what those amounts were. Accordingly, the Court takes the approach that he took with his income from Reecol for 2013, which is to disallow all expenses. Because of Mr. Walters infusion of $64,000 into the shareholder account in 2013, and the fact that his draws were less than this amount, his income via draws and benefits was low in 2013. I have reviewed and compared the figures prepared by him[^2] against the Quickbooks journal entries for 2013. Mr. Walters' calculations are accurate. He has included 100% of the value received by him for travel, telephone and internet, entertainment, clothing and vehicle.

[17] Accordingly, I find that income from Reecol Ltd. for 2013 is therefore $24,215.50, and from Walters Mortgage Group Inc. is $18,817, for a total of $43,032, grossed up by 25% for a figure of $53,790 for child support purposes.

[18] Mrs. Walters' counsel argued that Mr. Walters had at least as many expenses in 2013 as he had in 2010, when his sworn financial statement showed expenses of $68,000 per year. Further, these expenses are understated in that he has allowed no expenses related to income taxes, support obligations for both Reece and a younger child of a subsequent relationship, debt repayment to Capital One, clothing and alcohol. Mr. Miller argued that these additional expenses may require an income in the range of $120,000 per year, continuing to date.

[19] Mr. Walters argued in response that his mother has kept him afloat with gifts of money, including paying for some school fees for his youngest daughter. He further gave evidence that he has done without from 2013 onward.

[20] Mrs. Walters' theory is difficult to accept given the history of Mr. Walters' parents being exceedingly generous to him financially, and the evidence that his father's home has been the subject of power of sale proceedings, as well as his own home currently being subject to the same proceedings. Even if he may be able to bring the mortgage back into good standing by the deadline of June 3, 2015, as he testified that he hoped to, it is too much of a stretch to believe that Mr. Walters deliberately placed himself in such a precarious financial situation in order to make himself look more favorable at trial.

[21] In light of these facts, I accept that Mr. Walters experienced a true decline in income starting in 2013, which continues through to today.

[22] In 2014, the premises from which Ultimate Fitness was operating closed its doors and the landlord took possession on August 23, 2014. Mr. Walters testified that he warned the landlord in advance that he would be unable to pay his rent. Mr. Walters also testified that, again, the expenses exceeded income each month during 2014. He did not submit the year-end financial statements or the corporate returns for 2014 for either corporation, as he testified he does not have the money to have them prepared, and has yet to pay Ms. Power for last year.

[23] Mr. Walters did submit two T4A statements from Homeguard Funding for 2014, totalling $46,463.15. Grossing up this commission income results in income for support purposes of $58,079.

[24] In 2013 Mrs. Walters' income was $26,386. She testified that she did not receive a raise in 2014, or work any more hours, and so she anticipates that her 2014 income was the same. She resides with her common law spouse, Mr. Green, in a jointly owned home. She testified that Mr. Green pays most of the household expenses, and that Reece is covered under his medical benefit plan. The Court did not receive evidence about Mr. Green’s income. Given Mrs. Walters’ testimony that “he takes care of us”, I infer that he has a higher income than that of Mrs. Walters.

[25] Mr. Walters testified that in 14-day cycle, Reece spends seven nights with her mother and seven nights with him. This routine is set out in the Lauwers’ order, and Mrs. Walters confirmed during her cross-examination that the parties have followed it, other than a minor adjustment regarding summer holidays. Accordingly, despite Justice Lauwers’ remark that “the access just edges Mr. Walters over the 40% threshold”, I find that the access arrangements are a true equivalency, with each parent having 50% of the available time.

[26] Mr. Miller argued that since there has been no change in circumstances in access since the Lauwers' order, there should be no alteration in the 12% reduction. I disagree. There has been a change in Mr. Walters’ income, and so the approach used by Justice Lauwers may no longer be appropriate. The Supreme Court of Canada in Contino v. Leonelli-Contino, 2005 SCC 63 made clear that courts are to look at the conditions and means of each parent, and the needs of the child, in properly exercising the discretion set out in s. 9. At para. 55 of Contino, Justice Bastarache indicated that an application to vary a prior support arrangement will usually raise different considerations from a s. 9 application where no prior order or agreement exists. His remark highlights, in my view, the need to review all aspects of the existing circumstances at the time of the making of a variation order; to automatically apply the approach taken by the trial judge may not result in the most appropriate order.

[27] Based on the findings made above, the household incomes of each of the parties have been comparable since the beginning of 2013. While Mrs. Walters’ income has been roughly one-half of Mr. Walters’, she has the benefit of having her living expenses shared, if not completely met by, her common-law spouse. Mr. Walters testified that he shares his home only with his two daughters; there was no evidence presented to the contrary. Evidence was heard about the fact that Mr. Walters performed $80,000 worth of landscaping to his home after the trial in 2012, including installing an inground pool. He increased the financing on his home in 2012 in order to do so. He is now paying the price of this decision; his combined mortgage and tax payments are $3,200 per month. As the Notice of Sale Under Mortgage indicates, he had been unable to pay this debt. This evidence of discretionary spending on luxury items, having occurred prior to the 2013 decline in income and being 100% financed, is not evidence of increased income in this particular case.

[28] There is no presumption under s. 9 that there will be an automatic reduction in the amount of Table support. However, in this case, given the alignment of the two household incomes, with that of the Walters/Green household likely being higher at present, a reduction is warranted. Given the findings of the parties’ incomes, a straight set-off in 2014 and 2015 would result in a payment by Mr. Walters of $272 for 2014 and $314 for 2015, calculated as follows:

Taxation Year

Income of Mr. Walters

Guideline Amount

Income of Mrs. Walters

Guideline Amount

Set-off Amount

2013

$53,790

$485

$26,386

$213

$272

2014

$58,079

$527

$26,386

$213

$314

[29] Because of the parity between the two household incomes, a set-off is a reasonable starting point. Neither party has significant assets. Both have similar expenses in terms of caring for Reece. They share her extracurricular costs related to cheerleading. The only difference in ongoing expenses is that Mrs. Walters has increased costs of access in relation to driving Reece to school in Barrie from Minesing. However, given that Mrs. Walters must travel to the south end of Barrie for work in any event, there is currently no additional cost to her related exclusively to Reece’s educational needs. Lastly, there was evidence that Mr. Walters was reluctant to contribute to camp costs for Reece; for the upcoming summer these are expected to be approximately $400. Given that these parties have had difficulty in the past reaching agreement on financial matters, the simplest resolution would be to increase the amount of set-off support in order to give Mrs. Walters reimbursement for summer camp costs incurred this year. No evidence was heard of the cost of camps in 2014. Given the ratio of the parties’ incomes for 2014, Mr. Walters should be paying 69% of camp costs, estimated to be $276 in 2015. Dividing that figure by 12 months results in increasing the support payment by $23 per month.

[30] In the final result, the Lauwers’ order shall be varied to provide that Mr. Walters will pay child support commencing January 1, 2014 in the amount of $272 per month, and will pay child support commencing January 1, 2015 in the amount of $337 per month until such order is varied or terminated.

[31] During this proceeding an issue arose as to whether the parties shared joint custody of Reece. This issue was determined by Justice Lauwers. At paragraph 33 he wrote:

I find that, despite their past communications problems, the parties have demonstrated an ability to co-operate. The access arrangements are working well and there is no reason to assume that things will change for the worse. I find that joint custody is appropriate in line (sic) with the principles in Kaplanis v. Kaplanis, 2005 1625 (ON CA), [2005] O.J. No. 275, 249 D.L.R. (4th) 620, 10 R.F.L. (6th) 373 (C.A.), and Ladisa v. Ladisa, 2005 1627 (ON CA), [2005] O.J. No. 276, 11 R.F.L. (6th) 50 (C.A.) per Weiler J.A.

Unfortunately this finding and determination did not make its way into the formal order issued by the Court.

[32] In the event that either party seeks to change the child support order in the future, they seek a mechanism that will be more efficient and less costly. For that reason, the order made herein provides a process that the parties must follow before another Motion to Change may be commenced.

[33] This Court orders that the Order of April 23, 2012 shall be changed as follows:

i) Based on Mr. Walters’ 2013 income of $53,790 and Mrs. Walter’s 2013 income of $26,386, Mr. Walters shall pay a set-off amount of child support to Mrs. Walters pursuant to s. 9 of the Guidelines in the amount of $272 per month commencing January 1, 2014;

ii) Based on Mr. Walters’ 2014 income of $58,079 and Mrs. Walter’s 2014 income of $26,386, Mr. Walters shall pay a set-off amount of child support to Mrs. Walters pursuant to s. 9 of the Guidelines in the amount of $337 per month commencing January 1, 2015;

iii) Any overpayment of support made by Mr. Walters resulting from this order shall be credited by the Family Responsibility Office against future support as it accrues.

iv) The parties shall exchange annual income information each year by no later than July 15 in order to determine whether there has been a material change in his or her financial circumstances as at January 1, 2015 and after, as follows:

a) Each shall produce to the other copies of his or her full personal and corporate income tax returns, in Mr. Walters’ case, for any corporation in which he is the directing mind, whether or not a director, officer, or shareholder, including all T4s, T4As, T5s, schedules and attachments.

b) Each shall produce copies of all personal and corporate Notices of Assessment or Notices of Re-assessment for the preceding taxation year.

v) In the event that either party is claiming a material change in his or her income, or in the other party’s income based on the documentation received, then he or she must give at least 30 days’ written notice of his or her intention to commence a Motion to Change in order that the parties may try to achieve a settlement of the issue prior to a proceeding being commenced.

[34] If the parties are unable to reach an agreement on costs of this proceeding, the issue shall be determined through written cost submissions, not to exceed 3 typed, double-spaced pages plus any offers to settle and bill of costs. Mr. Walters’ material must be served on the opposing party and delivered to the Court on or before June 8, 2015, Mrs. Walters’ material by June 15, 2015, and any reply by June 19, 2015. If these dates pass without materials being filed, the Court will assume that the issue of costs has been settled by the parties.

HEALEY J.

Released: May 26, 2015

[^1]: The results of which are at Exhibit 1, tab 26, page 696

[^2]: Exhibit 1, tab 26, page 696