COURT FILE NO.: 00-FP-257671
DATE: 20150826
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Robert James Bradshaw
Applicant
– and –
Patricia Anne Langley, by her Estate Trustees, Kathryn Edith Hope, Lancelyn Rayman-Watters, Judith Clarkson and Edward P. Kerwin
Respondents
Jonathan Lisus, Paul Michell and Karon C. Bales for the Plaintiff
Peter H. Griffin and Brendan F. Morrison, for the Respondents
HEARD: June 22, 23, 25, 26, 29, 30 and July 2 and 3, 2015
Penny J.
Overview
[1] Robert Bradshaw and Patricia Langley married on August 5, 1982. They had no children together. Mr. Bradshaw enjoyed substantial financial success during the marriage. Ms. Langley unfortunately suffered from chronic pain, a condition that worsened as she got older. She became drug and alcohol dependent and was largely reclusive by the late 1990s. The couple separated September 1, 1999.
[2] Both parties kept substantial assets post-separation. Among other things, each party held business interests, the values of which were not known at the time of separation.
[3] Post-separation, Mr. Bradshaw provided generously for his spouse. It is agreed that in addition to assets retained by Ms. Langley (valued in excess of $15 million) Mr. Bradshaw paid to Ms. Langley, between 1999 and 2010, an additional $10.3 million.
[4] After initial pleadings closed in the matrimonial proceedings, there was no active litigation during Ms. Langley’s lifetime. There were discussions about a final settlement but no agreement was ever reached. An uncontested divorce was granted in July 2001. The remaining corollary relief sought by Ms. Langley was severed from the divorce.
[5] Ms. Langley died on January 7, 2011 at age 64.
[6] Kathryn Hope is the sister of Ms. Langley. Although estranged from Ms. Langley at the time of her death, Ms. Hope is now the sole remaining estate trustee and the sole remaining beneficiary of Ms. Langley’s estate (the Estate).
[7] The Estate sued Mr. Bradshaw for an equalization of net family property and brought a motion for summary judgment on this issue in 2013. Horkins J. granted summary judgment by order dated April 16, 2013 (the Order).
[8] Justice Horkins found that although discussions about the terms of a separation agreement continued off and on between counsel and parties or their representatives for many years, there was never any resolution and no agreement was ever reached.
[9] However, Justice Horkins relied on an admission contained in Mr. Bradshaw’s Reply and Answer to Counter-petition, in which he stated that “it was always the intention of both parties that they would have an equal interest in every asset which they owned, including the city and recreational homes registered in the respondent’s name, the contents thereof, as well as their various business interests.”
[10] Based on this admission which, she found, was consistent with the efforts Mr. Bradshaw made to value and divide all of the assets after separation and his repeatedly stated intention, post-separation, to divide all assets equally, Justice Horkins concluded:
Since Mr. Bradshaw admits in his pleading that all assets are to be divided equally there is no genuine issue concerning division of the assets. The only issue left is what amount one party might owe to the other to achieve the equal ownership in the assets. This will require each asset to be valued.
Justice Horkins therefore granted summary judgment “as requested.”
[11] The relevant portion of her Order (approved as to its form by counsel for both parties) provides:
Summary judgment is granted in favor of the Respondent’s Estate, specifically:
All property owned by either party at their date of separation, September 1, 1999, (including all personal property, real estate, and business assets as well [as] the sale proceeds of same) is deemed to be owned (or to have been owned) by both equally, and so held in trust by the owner for him or herself for both the estate of the Respondent and the Applicant, Robert Bradshaw.
[12] Of some significance, the Estate abandoned all other grounds of relief (including, for example, Ms. Langley’s claims for spousal support) sought in Ms. Langley’s pleadings.
[13] Mr. Bradshaw appealed the order unsuccessfully to the Court of Appeal for Ontario: 2013 ONCA 606, 2013 Carswell Ont 13678. His motion for leave to appeal to the Supreme Court of Canada was denied: [2013] S.C.C.A. No. 477.
[14] The parties retained accounting experts for the remaining issues to be tried. The experts took wildly different approaches to the valuation of the assets and to determining who owed what to whom. Not surprisingly, they also came to wildly different conclusions. Mr. Low, for the Estate, concluded in his report that Mr. Bradshaw owed Ms. Langley about $25 million. Mr. Cohen, for Mr. Bradshaw, concluded that the Estate owed Mr. Bradshaw somewhere between $2.5 and $8.2 million.
[15] The trial of this proceeding was conducted in June/July 2015 in order to determine the value of the parties’ net family property and what payment was required by whom to equalize those values.
The Issues
[16] The principal source of difference between the parties is the accounting methodologies used to determine who owes what to whom. This difference, in turn, arises from different interpretations placed upon the Order by the parties (and their experts). Thus, the first issue must be to resolve the dispute over what the Order means and which approach, Mr. Low’s or Mr. Cohen’s, is more congruent with the intent, purpose and effect of the Order.
[17] The second issue must then be to make findings on the content and value of the parties’ net family property. The two main sub-issues, the treatment of which contributes to almost all of the vast difference in equalization payments, are:
(i) the value of Mr. Bradshaw’s 53.3% interest in Benshar Holdings (which owned the shares of Zircatec Precision Industries Inc., the operating business which generated essentially all the wealth these parties enjoyed during their marriage and post-separation); and
(ii) the value of bonuses paid to Mr. Bradshaw by Zircatec from 1999 to 2006.
[18] The third issue is then to equalize the parties’ net family property – to make a finding about who owes what to whom.
Issue #1: The Meaning and Effect of the Order
[19] The issue of what the Order means cannot be resolved in the abstract. It is necessary to explore how the Order came about and the differing interpretations placed upon it, and consequent methodologies employed, by the parties’ experts.
The Proceedings Leading to the Summary Judgment Order
[20] The Estate’s January 17, 2013 motion for summary judgment sought orders:
(1) that there is no genuine issue for trial with respect to the ownership of all the parties’ assets including but not limited to their business assets;
(2) declaring that the respondent’s estate is one-half owner of the applicants’ 53.3% share of the proceeds of the sale of Zircatec and all other business assets owned by either party;
(3) requiring the applicant to account for same; and
(4) requiring the applicant to pay the amount owed to the Estate.
[21] A three-page affidavit in support of the motion was sworn by Mr. Kerwin, one of Ms. Langley’s former solicitors. In his affidavit, Mr. Kerwin referred to Mr. Bradshaw’s admission, (that it was always the parties’ intention that they would have an equal interest in every asset which they owned, including their various business interests) as an “oral contract.”
[22] In response, Mr. Bradshaw swore a 22-page affidavit in which he reviewed, in great detail, the history of the protracted negotiations (largely between he and Mr. Larry Ward, a senior accountant with Price Waterhouse Coopers, acting as Ms. Langley’s representative) in which he sought to make the point that there was never, at any time, any agreement about what Mr. Bradshaw would pay Ms. Langley or what, if anything, he owed in addition to what he had already paid.
[23] There was no cross-examination on either affidavit.
[24] The summary judgment motion was argued over two days, March 14, 2013 and April 16, 2013. After the first day of argument, counsel for the Estate provided a draft order seeking relief which was different from that sought in the notice of motion. In particular, the draft order contained the provision which ultimately made its way into the final order for summary judgment stating:
All Property owned by either party at their date of separation, September 1, 1999, (including all personal property, real estate, and business assets as well the sale proceeds at [sic] same) is deemed to be owned (or to have been owned) by both equally, and so held in trust by the owner for him or herself for both the estate of the Respondent and the Applicant, Robert Bradshaw.
[25] For reasons that were never fully explained, counsel for Mr. Bradshaw approved the form of the final Order of April 16, 2013, including the language regarding a “trust.” I can only conclude, in the circumstances, that when Justice Horkins granted summary judgment “as requested,” she was referring not to the January 17, 2013 notice of motion but to the draft order submitted by the Estate’s counsel.
[26] It was that Order from which Mr. Bradshaw took his appeal. It is necessary to observe that the essential basis for the appeal (to the Court of Appeal for Ontario) and the motion for leave to the S.C.C. was that by making a declaration as to joint ownership of the assets, the Order effectively did an end run around the scheme established under Part I of the Family Law Act R.S.O. 1990, c. F.3 (FLA), dealing with the calculation of net family property and equalization. That scheme, of course, normally requires the parties to value their assets as of the date of separation, not some subsequent date. As noted, Mr. Bradshaw’s appellate efforts in this regard were unsuccessful.
[27] Once the appeals had run their course, the parties were left with tackling the exercise of actually valuing the assets found to have been “owned by both equally, and so held in trust.”
Mr. Low’s Approach
[28] Mr. Low, testifying for the Estate, interpreted the Order to mean that the assets held by each of the parties were held in trust for both parties pending an equal division of the marital assets. However, following September 1999, the parties used, consumed, sold or otherwise realized on the assets held by each of them. Accordingly, in order to effect the division of their marital assets and to eliminate post-separation consumption, investment and reinvestment decisions of the parties, Mr. Low categorized the assets held by each and dealt with them on a “crystallization approach.” This meant that Mr. Low determined, for each asset held as of September 1, 1999, the value at the first date at which the asset was or became a liquid, realizable asset. Thus, for example, Mr. Low used the value of Mr. Bradshaw’s 53.3% interest in Benshar (which owned the successful nuclear fuel manufacturing company, Zircatec) as of the date of sale of Benshar to an arm’s length third party in 2006, not the value those shares may have had on September 1, 1999.
[29] In other cases, where there was no “crystallization” date, Mr. Low used a calculation of value as at January 31, 2015.
[30] Mr. Low included bonuses paid to Mr. Bradshaw by Zircatec as jointly owned assets crystallized on the date of receipt. He did so on the basis that these bonuses were, in his view, more in the nature of shareholder distributions (dividends) than economic remuneration for services rendered to Zircatec.
[31] To these “crystallized” values, Mr. Low applied a rate of 3% on a compounded basis from the crystallization date of each marital asset to January 31, 2015. He used this as a proxy for a “market return” on investment for those crystallized values. On this basis, Mr. Low concluded that Mr. Bradshaw’s assets would have been worth about $98 million and Ms. Langley’s about $21 million (that is, eliminating the fact that each of these parties actually lived on, or funded their day-to-day consumption from, these amounts for an extended period of time). Equalizing half of each of these amounts and accounting for the amounts Mr. Bradshaw already paid to Ms. Bradshaw (which the parties agree was about $10.3 million) meant that Mr. Bradshaw owed the Estate about $25 million by way of equalization.
Mr. Cohen’s Approach
[32] Mr. Cohen, testifying for Mr. Bradshaw, interpreted the order to require a tracing of the value of all assets owned by each party on September 1, 1999.
[33] To do so, Mr. Cohen identified the assets and liabilities held by Mr. Bradshaw and Ms. Langley at the separation date, obtained values for cash and cash equivalent accounts held at the separation date and identified all sources of income from those assets to determine an annual amount received by each party since the separation date.
[34] He then traced the assets held at separation date into assets held today. For example, Mr. Cohen traced conversions of assets held at separation date into different assets and traced proceeds from operations or dispositions from assets held at separation date into assets held as of January 17, 2013 (the date on which the notice of motion for summary judgment was served). He differentiated these proceeds from other possible sources of funds or investment equity, such as employment income. Mr. Cohen used essentially the same value for the Zircatec shares as that used by Mr. Low. Mr. Cohen did not, however, include bonuses paid to Mr. Bradshaw by Zircatec on the basis that they were treated, by the payor and the recipient, as income.
[35] Mr. Cohen then considered additional assets acquired and liabilities incurred after separation that resulted from assets and liabilities held at the separation date. He also identified withdrawals and contributions from either party from the assets and liabilities existing at separation and all payments made between Mr. Bradshaw and Ms. Langley since separation.
[36] He also identified all non-arm’s length or non-economic transactions, including capital and income gifts. He considered the income tax implications of additions and dispositions and considered the cost of maintaining various assets on an annual basis.
[37] Using this tracing methodology, he determined the value of the various assets originally held on separation date which remained as of January 17, 2013.
[38] Mr. Cohen was unable to identify the disposition of more than $11 million from Ms. Langley’s assets and the Estate was unable to identify the purpose of these payments. As a result, Mr. Cohen was unable to determine whether the funds were utilized to purchase additional assets or were used for consumption only. Accordingly, Mr. Cohen presented his results in two scenarios: including these amounts as trust assets and excluding these amounts as trust assets. In his updated June 16, 2015 report, Mr. Cohen concluded that the Estate owed Mr. Bradshaw somewhere between about $2.5 million and $8.2 million depending on the treatment of the unidentified $11 million.
[39] Unlike Mr. Low, Mr. Cohen did not seek to eliminate the parties’ consumption from the valuation process. If a dollar of value held at separation date was spent on a consumable item such as a candy bar, it was gone. If that dollar were traceable to another asset, such as the purchase of a share in Microsoft Corporation, it remained part of the trust equation.
[40] The justification for this approach was outlined in Mr. Bradshaw’s closing argument. The problem with Mr. Low’s approach, he argues, is that it wrongly assumes that the parties were under a trust obligation at the time they made decisions about their consumption and the disposition of their assets between their separation in 1999 and Justice Horkins’ Order in April 2013.
[41] Mr. Cohen’s approach assumes that Justice Horkins imposed obligations in the nature of a trust on Mr. Bradshaw and the Estate only from the date of her Order forward and that the parties were free to spend, use or consume whatever they had before that date. Mr. Bradshaw argues:
In reality, neither Robert nor Trisha were trustees at the time that they made consumption, investment, and reinvestment decisions, had no reason to believe that they were, and did not act as though they were trustees. Both Robert and Trisha freely disposed of assets and spent funds which were subsequently deemed to be the subject of a trust. That is very different from having been under trust obligations at the time those decisions were made. No such obligation existed at the time for either party.
Analysis
[42] The legal framework governing the interpretation of a judicial order is not in controversy. Court orders must be interpreted using the same principles of interpretation as those used to interpret contracts and statutes. The overriding concern is to determine the intent of the instrument, giving the words their ordinary meaning consistent with the surrounding circumstances at the time the order was made. Both court orders and contracts must be interpreted through the lens of commercial reasonableness. They should not be interpreted in such a way as to bring about an absurd or inconsistent result.
[43] It is important to remember that the issue of remedy and valuation methodology was not before Justice Horkins on the motion for summary judgment. She was asked only to make a specific determination on co-ownership of assets. She did so on the basis of essentially two factors:
(1) Mr. Bradshaw’s admission that it was always the intention of both parties that they would have an equal interest in every asset which they owned, including their various business interests; and
(2) Mr. Bradshaw’s own conduct post-separation, as disclosed in the extensive negotiation history set out in his affidavit sworn on the motion for summary judgment.
[44] The Order itself has two components. It deems that:
(a) all property owned by either party at their date of separation, September 1, 1999, (including all personal property, real estate, and business assets as well the sale proceeds of same) was owned by both parties equally; and
(b) this property is held in trust by the owner for both him or herself and the other party.
[45] The meanings of these declarations of co-ownership and of the related “trust” were both the subject of controversy at trial. I will begin with the trust issue.
[46] Both parties, in their written and oral closing arguments, seemed to take the position that Justice Horkins did not intend to create a trust after the fact reaching back to September 1, 1999. The Estate argues this point to undermine the entire approach taken by Mr. Cohen, i.e., the tracing exercise. Mr. Bradshaw takes this point to argue that both parties understood, until Ms. Langley’s death, that they were living on, and were entitled to live on, the assets they had such that their consumption decisions were not a breach, or subject to the obligations, of a trust.
[47] The trust language used in the Order of April 16, 2013 is nowhere found in the substantive portions of Justice Horkins’ Endorsement. The word “trust” is only found in her recitals of the pleadings and the order sought on the motion.
[48] I find that the trust language in the Order was not intended to reach back to September 1, 1999 and retroactively to impose the obligations of a trustee on these parties with respect to the assets they held after separation. This is not what was pleaded and not what was sought in the notice of motion for summary judgment. It is also entirely inconsistent with both parties’ conduct and how they treated and used the assets they held post-separation, i.e., to spend the money obtained from these assets on their respective incidents of daily living. That they were both subject to the obligations of a trustee is not, I find on the evidence, consistent with the parties’ reasonable expectations from September 1, 1999 to at least January 7, 2011 when Ms. Langley died. To impose such obligations now would, I find, be unreasonable and unfair to all concerned.
[49] I find that the phrase “and so held in trust by the owner for him or herself for both the estate of the respondent and the applicant, Robert Bradshaw” adds nothing to the obligations the parties actually had to one another post-separation until the date of the Order. This language of the Order was intended to play a limited role, effective only as of the date of the Order itself.
[50] That role was to ensure the preservation of the equally-owned assets that existed at the time and any proceeds from the sale of those equally-owned assets, pending final resolution of the parties’ net family property and equalization rights and obligations at the trial conducted in June and July of 2015.
[51] The second component of the Order, also controversial, is the declaration of equal co-ownership of all assets held on the date of separation.
[52] Mr. Bradshaw gave evidence that the “admission” in his Answer and Counter-petition was intended to do no more than assert both parties’ basic rights under Part I of the FLA, using a September 1, 1999 valuation date.
[53] However, Mr. Bradshaw has never proferred a valuation of Zircatec/Benshar shares as at September 1, 1999. The conclusion of Justice Horkins that both parties’ business assets were co-owned equally was well supported by evidence put before the court by Mr. Bradshaw himself. More to the point, this very issue was advanced as the principal ground of Mr. Bradshaw’s appeal of the Order to the Court of Appeal for Ontario and in the motion for leave to the Supreme Court of Canada. Both were unsuccessful.
[54] Part I of the FLA is designed to deal with the common situation where one spouse owns the material assets accumulated during the marriage. When assets are co-owned equally, however, there is no need or role for Part I of the FLA. When an asset co-owned by spouses in equal shares is sold, each spouse is prima facie entitled to half the proceeds of sale after all taxes, fees and disposition costs, regardless of when the sale takes place. That is precisely what was ordered by Justice Horkins. Any question of a September 1, 1999 valuation date is res judicata.
[55] Any attempt by Mr. Bradshaw to return to a September 1, 1999 valuation date is, therefore, foreclosed by the decision of Justice Horkins that all assets held by either party were co-owned in equal shares and by the failure of Mr. Bradshaw to profer, any time prior to or even after the motion for summary judgment, a September 1, 1999 valuation of Zircatec and Benshar shares.
What do these conclusions mean for the Court’s assessment of the equalization calculations performed by the expert accountants?
[56] Each side attacked the work of the other’s expert.
[57] Against Mr. Low it is said that he failed to attempt to learn anything about the Zircatec business, contrary to the valuation standards on which he purported to rely. Is also said that his valuation dates are arbitrary and opportunistic, employed in an effort to maximize the Estate’s claim.
[58] Most fundamentally, it is argued on behalf of Mr. Bradshaw that Mr. Low’s analysis produces a totally unrealistic and unreasonable result; one which even Mr. Low was bound to concede bore little relationship to these parties’ reality. For example, Mr. Low conceded that neither party invested every dollar of asset value held by them on or since September 1, 1999 at a 3% compounding return. He conceded that, in fact, the parties had to use some of these assets to fund their daily living expenses. Nor, Mr. Low conceded, did Mr. Bradshaw ever have assets worth $98 million nor did Ms. Langley or her Estate ever have assets worth $21 million.
[59] Against Mr. Cohen it is said that he was retained as a litigation consultant, not an independent expert, that he failed to observe valuation standards established by the Canadian Institute of Certified Business Valuators, that his report is the least reliable form of report available under applicable standards, that his assumptions were biased in favor of Mr. Bradshaw, that he was unfamiliar with the details of the tracing exercise (which was not actually performed by him) and that he had never employed his tracing methodology before in a case remotely similar to this one.
[60] Most fundamentally however the Estate attacks Mr. Cohen’s conclusions as being unreasonable because, under the methodology employed by Mr. Cohen, the more Mr. Bradshaw spent on consumption, the less he is obliged to account to Ms. Langley for by way of equalization. As Mr. Griffin put it in oral argument, under Mr. Cohen’s tracing methodology, if Mr. Bradshaw had liquidated all his assets at any time between September 2, 1999 and April 15 2013, and burned all the money on a personal consumption whim, but Ms. Langley had lived frugally and prudently invested her assets, Mr. Bradshaw would owe the Estate nothing and would be entitled to one half of whatever Ms. Langley or her Estate has remaining. This, he argued on the Estate’s behalf, is precisely what is happening in this case. Mr. Bradshaw has spent lavishly and now claims, as a result of that lavish spending, that the Estate owes him between $2 million and $8 million.
[61] Both parties’ criticisms contain meritorious concerns. I find myself unable to accept the conclusions expressed in the reports of either expert at face value.
[62] I agree that Mr. Low’s methodology produces an entirely artificial construct reflecting a retroactive application of the “trust” concept referred to in the Order which is, based on my interpretation above, incorrect and divorced from the lengthy course of conduct actually engaged in by both parties; a course of conduct in which it was assumed that they were not holding their assets in trust and would need to consume, and did consume, those assets to live on until a final resolution was reached.
[63] Mr. Griffin to some extent conceded this point in final argument when he abandoned the claim for 3% compounding interest on the “crystallized” value of the assets held by Mr. Bradshaw. This had the effect of reducing the Estate’s claim from about $25 million to about $19 million.
[64] I agree as well that Mr. Cohen’s report and methodology also produces an unreasonable result and relies on an interpretation of the “trust” concept contained in the Order which I have found is unwarranted. The tracing exercise Mr. Cohen employed, I find, was not required or mandated by the Order. It is, in fact, ultimately contrary to the Order for reasons I will set out in more detail below. Essentially, Mr. Cohen’s modified tracing methodology, in which any amounts consumed are simply taken out of the equation for calculating the value of net family property is, I find, unreasonable. It is unreasonable because, among other things, it rewards Mr. Bradshaw’s excessive consumption (or, for that matter, Ms. Langley’s own somewhat lavish spending) at the expense of the other spouse of 17 years in a context where all the parties’ assets were acquired during the marriage.
[65] As noted above, when an asset co-owned by spouses in equal shares is sold, each spouse is prima facie entitled to half the proceeds of sale after all taxes, fees and disposition costs, regardless of when the sale takes place. That is precisely what was ordered by Justice Horkins. Absent the compounding return and other issues with which I will deal in more detail in the next section of these Reasons, that is more or less what Mr. Low has attempted to do in his analysis and report. It is Mr. Low’s approach which is, subject to these adjustments, conceptually more congruent with the Order and which I accept as the starting point for my analysis of the value of the parties’ net family property.
[66] Thus, while I find the parties were not trustees of each other’s assets from 1999 to 2013, they were co-owners and have an obligation to account for the proceeds of sale or the value of those assets remaining.
[67] Theoretically, one way of dealing with post-separation consumption decisions would have been to establish a reasonable budget for each party and to deduct the amounts necessary to fund that budget from the calculation of net family property. Neither party did this, however, and there is no evidence upon which the court could possibly make a finding in this regard.
[68] Given the evidence before me, I have concluded that eliminating any recovery of a return or interest by either party on assets held by the other is the best way to account for the ongoing living expenses and consumption decisions of the parties post-separation.
[69] I come to this conclusion for two reasons.
[70] First, this approach strikes a balance between the parties’ obligation to account for the value of the co-owned assets held by them and their mutual recognition of the need to spend at least some of that value on their daily living expenses. This approach, in effect, preserves capital while entitling the parties to utilize the notional return for living expenses.
[71] Second, the fact that both parties were content to let this matter drag on for almost 12 years after their separation is, by itself, a reason to deny recovery of interest on any equalization payment found to be owing.
[72] For these reasons, I conclude that it is appropriate, as the Estate has done in final argument, to exclude any consideration of interest or a return on the value of assets held by either party. It is, however, equally appropriate, for the reasons outlined above, to exclude consideration of specific consumption decisions which may have had the effect of depleting the value of the co-owned assets between September 1, 1999 and the date of trial.
Issue #2: The Parties’ Net Family Property and Its Value
[73] In the Agreed Statement of Facts, Ex. 1, the parties agreed on the assets held, and by whom, on September 1, 1999. This included real estate, vehicles, bank accounts, securities, business interests, insurance policies and miscellaneous items such as liquor, jewelry, art and furniture.
Ms. Langley’s Assets
[74] Ms. Langley held two real properties, 2 Moore Hill in Rosedale and a Bracebridge cottage. 2 Moore Hill was sold for $4 million in 2004. Thus, $4 million is the appropriate realizable value of this co-owned asset.
[75] The cottage is still owned by the Estate. It was appraised at $1.15 million in 2011. Reference was made to a more recent appraisal in Mr. Cohen’s report but that appraisal was never produced and was not entered into evidence. The best evidence of the value of the cottage, therefore, is $1.15 million. The value of real property held by Ms. Langley was therefore $5.150 million.
[76] Household goods and furniture were valued by Ms. Langley at $1 million and by Mr. Bradshaw at $3.5 million in their sworn financial statements. Later valuations (in 2011) were much lower. However, there was little or no evidence to show that the household goods and furniture owned in 1999 was the same as the household goods and furniture valued in 2011. Mr. Bradshaw offered no evidence to support his value of household goods and furniture of $3.5 million. Accordingly, I find that the best evidence of value is Ms. Langley’s sworn admission of a value for household goods and furniture of $1 million.
[77] The value of all cars, boats and vehicles retained by Ms. Langley was stated to be about $60,000 by both parties in their sworn financial statements. I find this to be the best evidence of value for those assets.
[78] Ms. Langley’s jewelry was stated to have a September 1, 1999 value of $270,000 in Ms. Langley’s sworn financial statement. Again, appraisals done much later are for less but there is no satisfactory evidence that the jewelry valued in 2011 is the same jewelry held on September 1, 1999. Accordingly, I find Ms. Langley’s sworn financial statement showing a value of $270,000 to be the best evidence of the value of her jewelry.
[79] Ms. Langley valued art in the two homes at $170,000 in her sworn financial statement. Mr. Bradshaw referred to the art in his sworn financial statement but provided no value. An appraisal was done for estate purposes in 2011 after Ms. Langley’s death. Again, there is no satisfactory evidence that the art held on date of separation is the same art appraised in 2011. Accordingly, the best evidence of the value of Ms. Langley’s art is Ms. Langley’s admitted value of $170,000.
[80] The total of all household items, art, vehicles etc. held by Ms. Langley is therefore $1.5 million.
[81] At date of separation, Ms. Langley held RRSP and other bank and savings accounts worth $3,412,941.
[82] It is not controversial that Ms. Langley had insurance policies on Mr. Bradshaw’s life with a cash surrender value, shortly after the date of separation, of $290,000. These were, however, only redeemed after Ms. Langley’s death for $146,276. In my view, given that Ms. Langley had the benefit of the potential insurance proceeds while the policies were in force, the later cash surrender value of $146,276 is the appropriate amount for NFP purposes.
[83] With respect to business interests, it is also common ground between the parties that Ms. Langley received, through her interest in a holding company, Angel Works Inc., payments on account of business interests held by her in the total amount of $6,354,659.
[84] Ms. Langley had debts and other liabilities, entirely associated with tax liabilities on her assets, of $983,882.
[85] Based on these findings, I conclude that the relevant value of Ms. Langley’s co-owned assets is $15,579,994.
Mr. Bradshaw’s Assets
[86] As noted earlier in these reasons, Mr. Bradshaw’s interest in Zircatec, held through a holding company, Benshar, was by far the most significant asset in this family and generated most of the wealth enjoyed by the parties both pre and post-separation.
[87] There is largely no controversy over the value of Mr. Bradshaw’s interest in Ziractec as of the date of the sale in 2006. There are minor controversies over a few smaller items. And there is a major controversy over the treatment of bonuses paid by Zircatec to Mr. Bradshaw between September 1999 and January 2006 when Zircatec was sold. I will deal with the Zircatec bonuses, therefore, as a separate item below.
[88] All of the values assigned to Mr. Bradshaw’s assets in Mr. Low’s analysis were well supported by documentary or other more or less contemporaneous evidence and were, for the most part, not controversial.
[89] Mr. Bradshaw retained one vehicle post-separation which I find was reasonably valued at $108,150. His whiskey collection was reasonably valued at $9,000.
[90] Mr. Bradshaw had savings of $1,156,683. In addition, Mr. Cohen’s report referred to a CIBC term deposit held by Mr. Bradshaw in the amount of “$832,106 (assumed).” There was no independent evidence, documentary or otherwise, given at trial to support or justify that number.
[91] Mr. Low noted that Mr. Bradshaw’s February 2001 sworn financial statement identified a CIBC term deposit in the amount of $1.5 million. Mr. Low had neglected to include this term deposit as an asset of Mr. Bradshaw’s in his original report. In an Addendum, Mr. Low prepared two amendments to his report, one assuming the term deposit was worth $1.5 million, the other assuming the term deposit was worth $832,106.
[92] Mr. Bradshaw did not give further evidence on this matter at trial. In light of the fact that there is no independent evidence supporting the $832,106 amount, and Mr. Bradshaw’s sworn admission in February 2001 that he held a CIBC term deposit in the amount of $1.5 million, I find the best evidence of the value of that asset is Mr. Bradshaw’s – $1.5 million. To the earlier savings amount, therefore, must be added $1.5 million for a total savings of $2,656,683.
[93] Based on my interpretation of Justice Horkins’ judgment, Ms. Langley is entitled to equalization in connection with Mr. Bradshaw’s business interests, including the sale of Mr. Bradshaw’s interest in Zircatec/Benshar. Excluding the bonuses, Mr. Bradshaw realized a gross amount of $65,141,734 from the sale of Zircatec in 2006. From this must be deducted debts and liabilities (again excluding those associated with the bonuses) of $15,870,278 for a net total value for business interests of $49,271,456.
[94] Thus, I find, subject to the issue of bonuses, that Mr. Bradshaw’s total NFP for equalization purposes is $52,045,289.
Zircatec Bonuses
[95] It is common ground that Mr. Bradshaw received $39,629,122 in bonus payments from Zircatec in the years 1999 to 2005. These payments had an associated tax liability of $18,555,108 for a total net amount received of $21,074,014.
[96] It is also common ground that these payments were received in two ways:
(i) regular bi-weekly payments (totaling $10,305,628 before tax); and
(ii) extraordinary “balloon” payments (totaling $29,323,494 before tax).
Mr. Bradshaw’s Role in Zircatec
[97] Mr. Bradshaw came from a military family. He obtained an engineering degree from the Royal Military College. He became a fighter pilot in the RCAF. An eye injury brought that career to a close. He entered the public service in procurement. In the course of a long public service career, Mr. Bradshaw negotiated many of the largest Canadian government procurement contracts ever signed.
[98] When he left the public service, Mr. Bradshaw became the project manager of a large oil and gas project. Mr. Bradshaw later became involved with a leveraged buyout firm acquiring companies for turnaround purposes. After some success with the Joy-Davidson group, he went out on his own and, by the mid-1980s, had acquired a number of shareholdings in corporations around the world. He developed, among other things, banking contacts and had a particularly close relationship with the Bank of Boston.
[99] One such acquisition, Nutech, was in the nuclear fuels business. Through that business, he got to know Lisanne Hill, Douglas Kneebone and George Wilson. It was as a result of the Nutech acquisition that Mr. Bradshaw became aware that Westinghouse was interested in selling its nuclear fuel manufacturing division. He incorporated Zircatec to pursue the acquisition of that business.
[100] There is ample evidence to support the conclusion that Mr. Bradshaw was a fully engaged senior manager of Zircatec whose services were critical to the company’s success.
[101] Mr. Bradshaw, Mr. Kneebone and Mr. Jones all testified that Mr. Bradshaw was the founder of the Zircatec enterprise and the senior Zircatec executive. He negotiated the purchase of Zircatec from Westinghouse in 1988. He had the entrepreneurial skills, the leveraged buyout experience and the business and financial connections in the leveraged buy-out field. He assembled the senior management team for Zircatec. He negotiated the 102% unsecured financing for the acquisition with the Bank of Boston.
[102] By all accounts, Mr. Bradshaw had enormous persuasive powers. Ontario Hydro had to approve any transfer of Westinghouse’s fuel supply contract. Ontario Hydro was leery of a small, undercapitalized company taking on the role of supplying fuel to its nuclear reactors. It was Mr. Bradshaw who convinced Ontario Hydro that Zircatec was up to the job.
[103] Ontario Hydro was essentially Zircatec’s sole customer. Ontario Hydro had one other supplier, General Electric, competing against Zircatec for the business. Zircatec’s future, indeed very existence, depended upon keeping Ontario Hydro happy. Mr. Bradshaw was fully involved doing so on an ongoing basis. It was also Mr. Bradshaw who was responsible for developing and overseeing the implementation of Zircatec’s critical annual price bids (base load and top up) for the sale of nuclear fuel rods to Ontario Hydro.
[104] All major issues went to Mr. Bradshaw and he was deeply involved in the resolution of all serious problems. The rest of the senior management team included Lisanne Hill, Douglas Kneebone, George Wilson and Lloyd Jones. Lisanne Hill was the hands-on, day-to-day manager. Mr. Bradshaw was the big picture, strategic leader of the senior management team.
[105] In addition, Mr. Bradshaw spearheaded efforts to minimize environmental exposure and to ensure regulatory compliance. He led the negotiations (ultimately unsuccessful) to acquire General Electric’s nuclear fuel manufacturing capability. When Ontario Hydro decided to divest its nuclear generation facilities on the Bruce Peninsula, Mr. Bradshaw led Zircatec’s efforts (again, ultimately unsuccessful) to combine with the Power Workers Union to acquire those assets. When Ontario Hydro decided, in about 2000, not to renew its fuel supply contract with Zircatec, Mr. Bradshaw led the successful negotiations with Bruce Power to obtain an exclusive contract to supply Bruce Power with nuclear fuel. This contract saved the company. Later, Mr. Bradshaw led the successful efforts to reestablish a fuel supply relationship with Ontario Hydro.
[106] Mr. Bradshaw explored and concluded the development of additional business, including the acquisition of a calandria tube business and technology transfers to other countries with CANDU reactors.
[107] Finally, it was, Mr. Bradshaw who led and concluded negotiations for the sale of Zircatec to Cameco in 2006 for over $109 million.
[108] None of these things, Mr. Kneebone testified, would have been possible without Mr. Bradshaw.
Executive Compensation
[109] Zircatec was created to acquire the nuclear fuel manufacturing assets of Westinghouse. It was capitalized with only $100 of equity. The Bank of Boston financed 102% of the purchase price. Zircatec’s shares were held by a holding company, Benshar Holdings Limited. The shareholders of Benshar were the Zircatec senior management team: Mr. Bradshaw, Ms. Hill, Mr. Kneebone, Mr. Wilson and Mr. Jones. They put up no money to acquire their shares.
[110] Instead, Mr. Bradshaw proposed, and the remaining members of the senior management team agreed, that shareholdings would be allocated in Benshar in accordance with anticipated contribution and importance to the success of the enterprise. Thus, the senior managers agreed that the Benshar shares would be allocated as follows:
Mr. Bradshaw 53.3%
Ms. Hill 26.7%
Mr. Jones 13.4%
Mr. Kneebone 3.4%
Mr. Wilson 3.4%
[111] The acquisition of the nuclear fuel business was entirely debt leveraged and the bank took no security over the physical assets (on account of potential environmental liabilities). As a result, the bank covenants required that every spare dollar earned be devoted to the reduction of the bank’s loan. Mr. Kneebone testified that the bank required a “granular level of control” over salary and profit distribution to the senior managers. Mr. Jones, the manager of one of the two plants, earned a modest salary. Mr. Bradshaw and Ms. Hill were required, also as part of the bank’s terms, to take modest compensation through a management company, Contor Industries Limited.
[112] The evidence was that management fees paid to Mr. Bradshaw and Ms. Hill were “a small number” for a big job. It was a big job because all of the head office functions and administrative support formerly supplied by the large administrative infrastructure available to Westinghouse now had to be entirely supplied by the Zircatec founders. Those services were primarily supplied by Mr. Bradshaw and Ms. Hill through Contor.
[113] The terms of the bank’s financing prohibited payment of profits as bonus or dividends in priority to repayment of the bank’s loan. According to Mr. Kneebone, in the early years following the 1988 purchase, their shares were “treated as academic.”
[114] Led by Mr. Bradshaw and Ms. Hill, Zircatec embarked on a program of cost cutting and efficiency, combined with a skillful and strategic bidding strategy designed to generate cash flow for the company. Management salaries were modest. There was hard bargaining with the employees’ union, the United Steelworkers, including a seven-week strike.
[115] This frugality paid off. The first year was a “narrow squeak”, according to Mr. Kneebone, but from about 1990 on, Zircatec was always profitable. The bank debt was substantially paid down within two or three years. The remaining debt was simply carried as backup for certain performance bonds and letters of credit needed to run the business day-to-day.
[116] Once the bank’s debt was substantially reduced, Zircatec was permitted by its bank covenants to pay out profits. It distributed profits as bonuses to the senior managers, which were declared and taxed as income, rather than dividends to shareholders. Only one senior manager, Mr. Brian Walker, the CFO, was not a Benshar shareholder. He received a flat rate bonus from Zircatec of $120,000 per year. The remaining senior managers were Benshar shareholders and received their bonuses from Zircatec on the basis of an allocation which matched their shareholdings in Benshar.
[117] In cross-examination, Mr. Jones was asked whether the specific amounts of the bonuses were linked to individual performance criteria. Mr. Jones replied that while they were not linked on an individual basis, they were linked on “a general basis that the key people in the operation were to receive those bonuses, unless there were reasons that they would not because of performance.” There were no performance issues, as far as Mr. Jones knew.
[118] Mr. Bradshaw, Ms. Hill and Mr. Jones were the most “hands on” of the senior managers and the most directly involved in the operations of the company. Mr. Kneebone and Mr. Wilson were both lawyers with Gowlings, which acted as Zircatec’s corporate counsel. For legal services, they billed and were paid through their firm. However, both Mr. Kneebone and Mr. Wilson provided other services for which they were not acting as lawyers but drawing on their business and negotiating experience. Mr. Kneebone, for example, was well-versed in bank financing and had dealt extensively with unions. He participated actively in financial matters involving Zircatec and was the lead negotiator with Zircatec’s union, the United Steelworkers, at one point seeing the company through a seven-week strike. Mr. Wilson was the eminence grise, providing sage business advice based on his long experience practising corporate and commercial law. It was these services, not those they provided as lawyers, for which they were each allotted 3.4% of the Benshar shares and, once the payment of bonuses became possible, were paid 3.4% of the bonus allocations.
The Estate’s Argument for Equalization of the Bonuses
[119] The Estate's argument that the Zircatec bonuses constitute assets in Mr. Bradshaw’s hands which ought to be included in his net family property relies essentially on two foundations:
(i) Mr. Low’s opinion that the bonuses were in the nature of shareholder distributions, not compensation for services rendered; and
(ii) Mr. Bradshaw’s alleged admissions in the course of his negotiations with Mr. Ward towards a final settlement of property issues arising out of the dissolution of his marriage with Ms. Langley.
[120] There is mention of the issue of bonuses in Ms. Langley's November 23, 2000 Answer and Counter-petition but it is pleaded under “other issues” (i.e., not under “equalization” or “support”). There, the claim is made that Mr. Bradshaw had been taking very large bonuses out of Zircatec “without giving the wife any, let alone the half to which she is entitled. The wife seeks a full accounting of all bonuses taken by the husband as well as any director’s fees taken from any companies.” This reference is ambiguous, in part because, at the time, Ms. Langley was explicitly claiming spousal support in the amount of $250,000 per month. This is a figure which Mr. Bradshaw claimed, at one stage of these proceedings, was “absolutely ridiculous” but, in any event, could only be viewed as being intelligible by treating Mr. Bradshaw’s bonus payments as income.
[121] The full articulation of the Estate’s claim that the Zircatec bonuses were shareholder assets half owned by Ms. Langley first surfaced in Mr. Low’s report filed in preparation for trial.
[122] Mr. Low notes in his report that bonuses were paid by Zircatec to the Benshar shareholders in the same proportion as their ownership in Benshar. Mr. Low observes that the bonuses were in an amount sufficient to reduce Zircatec’s annual taxable income to a level at which its income would be taxed at the small business rate.
[123] This, he says, is a common practice in many privately-held corporations as the overall taxes paid on the bonus income by the recipients is lower than if the company were to retain the funds, pay a higher level of corporate income taxes on the funds, and then distribute the remaining amounts as taxable dividends to the shareholders.
[124] Mr. Low expresses the opinion that “the bonuses are shareholder distributions paid in the form of bonuses for tax planning purposes.” Accordingly, he includes these bonus payments in his analysis of assets held by Mr. Bradshaw “as the amounts paid out are akin to distributions to the shareholders, which reduce the value of the company, and is therefore consistent with our treatment of dividends.”
[125] He claimed in oral testimony that the price paid by Cameco for Zircatec, about $109 million, made no sense unless one assumed that the amounts paid as “bonuses” to the senior managers were regarded as dividends available to the purchasing shareholder post-sale.
[126] He also claimed that the Contor payments to Mr. Bradshaw alone represented appropriate compensation for a chief executive officer of a company like Zircatec, although this is nowhere mentioned in his report and is completely unsupported by any compensation study, metadata or any evidence at all.
[127] Mr. Low also performs an analysis (at Ex. 8, Tab 8) which shows that there was a direct correlation between the timing of the bi-weekly bonuses paid to Mr. Bradshaw, and Mr. Bradshaw’s payment of half the net amount of those bonuses to Ms. Langley – usually the next day.
[128] This is a highly unusual case in many ways. Although family lawyers were involved in the preparation of initial pleadings and initial discussions for both sides, they quickly dropped out of the picture for many, many years. It was Mr. Bradshaw himself, senior corporate lawyers (Mr. Wilson from Gowlings for Mr. Bradshaw and Mr. Kerwin from McCarthys for Ms. Langley) and Mr. Ward, a senior accountant with PWC representing Ms. Langley, who had most of the dealings and conducted most of the discussions and negotiations. Almost all of these communications fell within the category of what would normally be considered “without prejudice settlement discussions.” However, whatever privilege may have been associated with such communications appears to have been waived by Mr. Bradshaw who, in his affidavit responding to the Estate’s motion for summary judgment, exhaustively canvassed all of these communications in his (partially successful) effort to show that no final agreement had ever been reached prior to Ms. Langley’s death.
[129] From the outset, Mr. Bradshaw provided what can only be described as generously for his estranged wife. Indeed, many years after separation, not long before Ms. Langley’s death, Mr. Sadvari, Ms. Langley’s family law lawyer, in a letter of June 4, 2010, described Mr. Bradshaw as having behaved as the “consummate gentleman,” having “honored all his commitments to Ms. Langley since their separation.”
[130] Mr. Bradshaw also regularly communicated with Mr. Ward about his financial circumstances without the benefit of counsel. In the spirit of transparency, Mr. Ward was, in addition, permitted to attend all Zircatec’s board meetings and was kept fully apprised of all business successes and setbacks affecting Mr. Bradshaw’s income and assets.
[131] In an October 27, 1999 letter, Mr. Bradshaw wrote to Ms. Langley with a proposal for interim arrangements pending a final separation agreement. That proposal contained a commitment to pay Ms. Langley one half of his bi-weekly income (over 80% of which was from regular bonus payments). The letter also provides that Mr. Bradshaw “shall be entitled to retain any bonus monies paid by Zircatec until such time as there has been an equalization (after-tax) of the aggregate assets registered in our respective names.”
[132] A year later, Mr. Bradshaw, through his family law counsel, followed up on his earlier proposal confirming that the “corporate assets of the marriage would continue to be owned 50-50 and that all income and capital proceeds would be shared 50-50 once the original discrepancy of personal asset distribution has been made up.”
[133] There was additional correspondence between the family lawyers in 2000 in which equal sharing of Zircatec bonuses was discussed. There was thereafter what would charitably be described as “sporadic” additional correspondence in 2001 and 2002. By 2003, the family lawyers ceased to have any involvement and there were direct dealings between Mr. Bradshaw and Mr. Ward, and between both parties’ corporate lawyers.
[134] Almost nothing happened until 2005, when a possible sale of Zircatec began to loom on the horizon. Even after the sale, because a significant portion of the eventual purchase price was subject to a clawback for several years, discussions again went on the back burner until final, confirmed numbers were known. The discussions in 2006 did not consider the subject of bonuses at all but were entirely focused on the purchase price of Zircatec and Mr. Bradshaw’s ultimate share of those proceeds.
[135] In one of several discussions with Mr. Ward in 2007, Mr. Bradshaw presented a handwritten accounting (Ex. 6, Tab 2) of the proceeds of sale of Zircatec, the relative cash positions of the parties as a result and a proposal for a transfer of about $17 million to Ms. Langley. Again, absent from this proposal and discussion was any accounting of bonuses paid prior to 2006. The issue of pre-2006 bonuses came up in subsequent discussions but neither side appears to have taken a firm stand on the issue one way or another prior to Ms. Langley’s death and the resumption of the litigation.
[136] By 2009, the holdback period had expired and final numbers were known. Mr. Bradshaw and Mr. Ward continued discussions toward a final settlement. The Estate relies heavily on a December 17, 2009 e-mail from Mr. Bradshaw to Mr. Ward. In that e-mail, Mr. Bradshaw attempted to explain his position on the relative balancing of asset values between he and Ms. Langley to show that he had fulfilled his obligations to her. He said:
Excluding the business assets, it was determined that Trisha had 7.2 million more than me. As I indicated in my first e-mail, I took the first 7.2 million in bonus payments. However, this did not make us equal as I was entitled to half the bonus payment anyway. Thus the statement that Trisha still owes me 3.5 million to balance the domestic asset split, which is why I said if we go to battle, I will go back to 1999 evaluations which would mean, business assets were valued at 20 million (by PW) with Trisha’s share at 10 million, less the 7.2 million owed on the domestic assets for a net 3 million which you have confirmed I have more than paid.
[137] Mr. Ward testified that in January 2010, he thought they were close to a deal involving either a $12 million or $14 million payment by Mr. Bradshaw, depending on the treatment of a gift given to Mr. Bradshaw’s daughter from a prior marriage. Mr. Bradshaw denied they were close to a deal and denied offering $12 million or $14 million by way of an equalization payment. This particular dispute, however, is not material to the ultimate disposition of this case because Mr. Ward agreed in cross-examination that whatever happened, their discussions were subject to approval by Ms. Langley, which was never received. In addition, on the motion for summary judgment, Justice Horkins found that no final agreement was ever reached.
[138] The family lawyers became involved again in 2010. Little progress was made in moving the ball forward. Mr. Bradshaw, through counsel, made clear his position that he had never agreed to anything. Ms. Langley, through counsel, finally offered to settle in October 2010 for $12.3 million, failing which she would proceed with the litigation. Before anything else happened, Ms. Langley died in January 2011.
Analysis
[139] It is important context for the proper analysis of this issue to understand the basis for the allowed deductibility of the bonuses that were paid. The tax deduction of bonuses arises out of s. 67 of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) (ITA). A bonus payment may be deducted from the income of a qualifying corporation when it is “reasonable” to do so. What is reasonable is explained in an Income Tax Technical News publication from January 11, 2002 (introduced as Ex. 12 during the cross-examination of Mr. Low). While the News is informational and “does not replace the law” (emphasis added), it is published by the Policy and Legislation Branch of the Canada Revenue Agency (CRA) as guidance to the taxpaying public.
[140] In the section referred to as Shareholder/Manager Remuneration, the News notes that for over 20 years Canadian controlled private corporations (CCPCs) have followed a practice of paying salaries and bonuses to shareholder/managers in amounts sufficient to reduce taxable income of the corporation to or below the limits that qualify for the small business deduction.
[141] The News reiterates that, in general, the reasonableness of salaries and bonuses paid to principal shareholder/managers of a corporation will not be challenged when either:
(a) the general practice of the corporation is to distribute the profits of the company to its shareholders/managers in the form of bonuses or additional salaries; or
(b) the company has adopted a policy of declaring bonuses to the shareholders to remunerate them for the profits the company has earned that are attributable to the special know-how, connections or entrepreneurial skills of the shareholders.
[142] At a conference preceding the News publication, the CRA was asked to outline the criteria that must be met in relation to the ownership and management structure of a corporation to enjoy the benefit of the bonus deduction. The CRA’s consistent response was that the resident Canadian recipients “must be active in the operating business and contribute to the income-producing activities from which the remuneration is paid.”
[143] The evidence of Mr. Bradshaw, Mr. Kneebone and Mr. Jones was not challenged on these points. The bonuses in this case met both categories of allowable bonus. From long before the date of separation, it was the general practice of Zircatec to distribute profits to shareholder/managers in the form of bonuses or additional salary. Mr. Bradshaw was the key contributor to the success of the business. He chose the management team. The senior management was, collectively, possessed of special know-how, connections and entrepreneurial skills which were critical to the success of Zircatec following its acquisition of Westinghouse’s nuclear fuel business. None of the senior management team contributed any equity for their shares. They had to “earn” those shares through their direct participation in the operations of Zircatec and their contribution to its income-producing activities. It was from that income that the remuneration, in the form of bonuses, was paid. There was no contrary evidence. I accept the evidence of Mr. Bradshaw, Mr. Kneebone and Mr. Jones on this issue.
[144] I also note that Cameco required, as a condition of purchase, that Contor’s management agreement with Zircatec be terminated and that Mr. Bradshaw enter into a non-solicitation agreement which prohibited Mr. Bradshaw from soliciting Zircatec employees or customers for two years.
[145] I find that the bonuses represented remuneration for senior management’s active contribution to the income-producing activities of Zircatec, not shareholder distributions akin to dividends.
[146] Other factors which contribute to my conclusion that the bonuses were remuneration for active contribution to Zircatec’s business and not shareholder distributions include the following.
[147] Benshar was the shareholder of Zircatec. The recipients of the bonuses were Benshar shareholders, not Zircatec shareholders. The bonuses were, nevertheless, paid by Zircatec directly to the actively engaged senior managers, not to their holding company.
[148] In every instance, the bonuses were paid as income and income tax was withheld and paid at source. There were dividends paid, ultimately, following the sale. Those dividends have been accounted for as part of Mr. Bradshaw’s net family property. The bonuses, however, were not treated, or taxed, as dividends.
[149] In every case, the bonuses paid as income in remuneration for active contributions to the success of the business were approved by Zircatec’s board. In every case the bonuses were reflected as such in Zircatec’s audited financial statements, prepared by Ernst & Young, without concern or adverse comment.
[150] Post-separation, Mr. Ward, as Ms. Langley’s representative, sat in on virtually every board meeting. He was fully apprised of the basis upon which the bonuses were paid and taxed. He never challenged these payments or the way they were being made.
[151] Further, the income nature of the bonuses was never challenged by the CRA, although Zircatec was audited several times.
[152] Mr. Walker, the CFO of Zircatec, was not a shareholder. He too, however, was paid a bonus.
[153] It is true that the bonuses were, with the exception of Mr. Walker, paid in proportion to the Benshar shareholdings of the shareholder/managers. However, as I have found above, the shareholding structure was based on the contribution the shareholder/managers were expected to make to the success of the income-producing activities of Zircatec. These shareholders put in no equity. Their equity was their day-to-day work for the corporation.
[154] I agree that the label attached to the payment by the corporation or Mr. Bradshaw is not dispositive. This is clear from the judicial authorities. However, in both Belman v. Belman [1997] O.J. No. 4071 (S.C.J.) and Geddes v. Silvestri Holdings Inc., 2014 ABQB 416, relied on by the Estate, the court expressly found that there was no evidence that the bonuses were paid as remuneration for services as opposed to shareholder distributions. Similarly, in Waxman v. Waxman, 2002 CanLII 20932 (ON SC), [2002] O.J. No. 3533 (S.C.J.), Sanderson J. made a finding of fact that bonus payments were not due to the contributions of the payees to the income-producing activities of the corporation. For this reason she found the payments were shareholder distributions, not remuneration for services.
[155] These examples, are however, totally unlike this case, where there is a good deal of evidence, which I accept and find as a fact, that Mr. Bradshaw and the other senior managers were huge, direct contributors to the success of Zircatec and that the bonuses were paid in recognition of those contributions to the income-producing activities of the corporation.
[156] I do not accept Mr. Low’s analysis on this point for several reasons. First, the issue addressed by Mr. Low, whether bonuses were payments for contributions to income earning activities or shareholder distributions, is an issue of fact which is for the court, not an expert, to decide.
[157] Second, Mr. Low’s essential argument, that the amounts were largely paid in proportion to shareholdings, and were not discretionary bonuses based on annual performance, ignores the central fact that the share allocations themselves were made based on anticipated contributions in order to incent the senior managers to work hard to improve the profitability of the business. The shareholders were not passive investors. The bonuses were paid because the work of the senior management was successful in making the business profitable.
[158] Third, Mr. Low’s argument also ignores the central feature of the tax deduction available to CCPCs; that is, that the shareholder be an owner/manager. Ms. Langley was in no way involved in the operations or income-producing activities of Zircatec. Even if she had been a registered shareholder of half of Mr. Bradshaw’s shares, therefore, she would not have been entitled to the payment of the bonuses in issue, which were made pursuant to s. 67 of the ITA.
[159] Finally, Mr. Low argued that the purchase price paid by Cameco in 2006 appears to assume that the amounts historically paid as bonuses to the shareholder/managers would be available to the new shareholder as dividends going forward. I do not think any credence can be placed upon this argument for a number of reasons. First, it is highly speculative. There was no evidence about what Cameco did or did not consider or how it arrived at its determination of a price it was prepared to pay. Second, I do not think the proposition was proved by Mr. Low in his report or during his evidence. There is no analysis. It is a conclusory statement at best. Finally, the new owner was, of course, entitled to organize the business in any way it deemed appropriate, in the new shareholder’s interests. This is equally true whether the prior owners may have paid exorbitant salaries or made excessive dividend declarations.
[160] I also find that Mr. Bradshaw did not, through words or conduct, ever agree to or concede that Ms. Langley was entitled, for NFP calculation purposes, to half of all bonuses paid to him between 1999 and 2006. For this entire period, Ms. Langley had outstanding against Mr. Bradshaw a spousal support claim. Is clear from the evidence that Mr. Bradshaw paid, and Ms. Langley continued to accept until her death, sufficient funds that she did not want for anything. That, of course, is one of the purposes of spousal support.
[161] The mere fact that Mr. Bradshaw used some of his bonus income to make payments (payments which, at the time, were undifferentiated as between support or equalization of NFP) says nothing about Ms. Langley’s equalization entitlements. Ms. Langley never abandoned her claims to spousal support and her Estate did not do so until 2013. Thus, from 1999 to 2006 and beyond, Mr. Bradshaw’s income was at least relevant and had to be disclosed. The bonuses were part of that income. Because all the spousal support claims have now been abandoned, his income, as such, is no longer relevant. The Estate now concedes that all of Mr. Bradshaw’s payments to Ms. Langley, totaling $10.3 million, are to be credited against his equalization payment obligations.
[162] Finally, Mr. Bradshaw made it abundantly clear in his correspondence with Mr. Ward that if the matter were not resolved, he would return to a more formal, legalistic position and stand on his strict rights under the FLA. Thus, any concession he may have been prepared to make was in the context of a possible final resolution in 2008 or 2009 (i.e., settlement discussions) and ought not to be taken as some form of admission from which he cannot now resile.
[163] For all these reasons, I find that the bonus payments were not paid as shareholder distributions but as compensation for services rendered which contributed to the highly successful income-producing activities of Zircatec. As such, neither Ms. Langley nor her Estate has any claim qua holder of a half interest in Mr. Bradshaw’s Benshar shares to half of the annual bonus payments.
Issue #3: Who Owes What to Whom?
[164] Based on these findings, Ms. Langley’s NFP is $15,579,994 (half of which is $7,789,997). Mr. Bradshaw’s NFP is $52,045,289 (half of which is $26,022,644.50). Half of the total NFP, to which each party is prima facie entitled, is $33,812,641.50. Since Ms. Langley in fact retained assets worth $15,579,994 and was paid another $10.3 million, she has already received $25,879,994. The difference, $7,932,647.50, is owed by Mr. Bradshaw to the Estate.
[165] Judgment is therefore granted against Mr. Bradshaw for $7,932,647.50.
[166] The Estate’s claim for a share of Mr. Bradshaw’s bonus payments is dismissed.
[167] The arithmetic for these calculations was not specifically contemplated at the trial because I have not entirely adopted the submissions of either party in these Reasons. If the parties cannot understand, or find fault with, my arithmetic they may address the issue at a 9:30 a.m. appointment on a mutually convenient date when I am sitting.
Costs
[168] I encourage the parties to seek an accommodation on the question of costs. Absent agreement, anyone seeking costs shall do so by submitting a written brief (not to exceed five typed, double-spaced pages) supported by a Bill of Costs and any other relevant documentary material within three weeks of the release of these Reasons. Anyone wishing to respond to a request for costs shall do so by filing a written brief, subject to the same page limit, within a further two weeks.
Penny J.
Released: August 26, 2015
COURT FILE NO.: 00-FP-257671
DATE: 20150826
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Robert James Bradshaw
Applicant
-and-
Patricia Anne Langley, by her Estate Trustees, Kathryin Edith Hope, Lancelyn Rayman-Watters, Judith Clarkson and Edward P Kerwin
Respondents
REASONS FOR JUDGMENT
Penny J.
Released: August 26, 2015