SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: FS-15-401094

DATE: 20151203

RE: Diane Plese, Applicant

AND:

Robert Herjavec, Respondent

BEFORE: Kiteley J.

COUNSEL: Stephen Grant and Erin K. Crawford, for the Applicant

Bryan Smith and Sarah Conlin, for the Respondent

HEARD: November 10, 2015

ENDORSEMENT

[1] The parties married in 1990 and have children born in 1993 (a son who has completed his undergraduate degree), in June 1996 (a daughter who attends university in Los Angeles), and in February 1998 (a daughter who lives with the Applicant and attends a private school in Toronto). The spouses separated in July 2014 when the Respondent left the matrimonial home in which the Applicant continues to reside with the younger daughter. This application was launched on March 3, 2015.

[2] The Applicant brought a motion returnable November 3, 2015 in which she asked for temporary child support and temporary spousal support as well as an order that the Respondent pay all outstanding invoices and expenses to bring the past-due accounts into good standing as well as pay outstanding invoices to allow the property in which she and the younger daughter lived to be re-insured. She also asked for the accounting of distribution of assets and/or income of the Herjavec Family Trust from inception to current.

[3] The Respondent brought a cross-motion asking that paragraphs 73-76 of the Applicant’s affidavit sworn October 22, 2015 be struck; he asks for an order dispensing with the Applicant’s consent to the sale of a property in Florida and a property in Muskoka as well as an order that the Applicant deliver up a motor vehicle that was in her possession. The Respondent also asked for an order that the Applicant disclose all bank accounts held by her or administered by her on behalf of the children. As for support, the Respondent acknowledged that the Applicant is entitled to spousal support but he asked that the Applicant be responsible for 50% of the costs of the Florida property and that the amount of spousal support be reduced by $18,333 per month if the Respondent is to be responsible for those expenses. He also asked that the claims for corollary relief be severed.

[4] These motions were placed on the regular motions list to be heard on November 10, 2015. When I reviewed the list, counsel advised that the parties had agreed to sell the properties in Florida, Muskoka and Toronto and had agreed to sever the divorce from the corollary relief. Counsel agreed that they would make submissions on the issues of spousal support and child support in the one hour available to them on the regular list. That proved to be impossible. Even without transcripts because questioning has not taken place, counsel’s submissions occupied approximately 2.5 hours, finishing at 3:55 at which point, there was still another contested motion on the list. As I pointed out to counsel, unrealistic estimates of time for motions result in unfairness to other parties on the list and invariably leads to the judge having to take the decision under reserve. As a general observation, when a motion is joined with a cross-motion, both cannot be heard on the regular list. Furthermore, when the central issue is the income of the Respondent, (which is often the case with high earners), the motion cannot be heard within 1 hour. Motions are for temporary support orders. I encourage all counsel to collaborate on temporary measures so that the hearing of the motion for temporary support can be scheduled for what is realistically a long motion to ensure that the procedure is fair to both parties and is an appropriate use of court resources. Dates for long motions are usually available in 6-8 weeks, although the availability of counsel often means they look to later dates. Motions that clearly do not belong on the regular list should not trump those that do belong on the regular list.

Positions of the parties on the motion for temporary child and spousal support

[5] The key issue is the income of the Respondent.

[6] In his submissions, Mr. Grant observed that there is a sad pattern to some cases where the payor’s income “magically drops precipitously” following separation. He took the position that he and his client did not believe for one minute that the Respondent had experienced an ostensible drop in income and that a reduction to $1.6 million from line 150 in 2013 at $4.5 million and in 2014 at $5.1 million “completely belies credibility”. He did not accept that the Respondent’s income had been reduced by the requirements ostensibly imposed by the bank. He took the position that the support order should be based on the Respondent’s line 150 income in his 2014 income tax return, namely $5,128,497. According to Divorcemate, that income yields child support in the amount of $44,992 for the younger daughter and 1/3 (i.e. the summer) for the older daughter and a range of monthly spousal support of $133,991 to $144,400 to $154,809. Mr. Grant asks that an order be made for child support in the amount of $44,992 and spousal support in the amount of $154,809.

[7] Mr. Smith observed that most of Mr. Grant’s submissions had not been contained in his factum. He submitted that, in accordance with s. 18(1) of the Child Support Guidelines it would be unfair if the court relied on line 150 of the Respondent’s tax return. He took the position that the Respondent’s estimated 2015 income of $1,625,300 resulted in a payment of child support for one child in the amount of $12,180 less a contribution by the Applicant for section 7 expenses of approximately $3,616 per month for a net amount of $8,564 per month. He noted that the range of spousal support based on that income is $39,244 to $42,712 to $46,214 per month but he advocated for the amount that reflects a 50/50 split of the NDI, namely $34,086 per month.

Evidence on the motion

[8] As is typical, the parties each delivered lengthy affidavits: the affidavit of the Applicant was sworn October 22, 2015 and consists of 97 paragraphs and 47 exhibits. The Applicant also provided a Form 13.1 sworn October 22, 2015. The affidavit of the Respondent was sworn November 3, 2015 and consists of 96 paragraphs and 16 exhibits. The Respondent also delivered two short affidavits sworn November 3, 2015: one updating his Form 13.1 financial statement sworn June 26, 2015 and the other containing brief evidence designed to support his motion to sever the divorce from the corollary relief.

[9] Counsel for the Respondent also delivered an affidavit sworn November 3, 3015 by his expert Andrew Freedman. Exhibit A is an income report dated June 26, 2015 dealing with the Respondent’s income in 2012, 2013 and 2014. Exhibit B is a report dated November 2, 2015 on the Respondent’s estimated income for 2015 which appears to deal with the recently imposed banking requirements. Those same exhibits are attached to the Respondent’s affidavit.

[10] Counsel for the Respondent also delivered an affidavit of his legal assistant on the subject of sale of the Muskoka and Florida properties.

[11] The Applicant delivered a reply affidavit sworn November 6, 2015. She gave evidence about the Respondent’s disclosure; about her inability to provide her own expert report as to the value of the business interests; about her challenges in providing an export report as to his income; about sale of the properties; as to her further explanation about the renovations to the matrimonial home; and as to her intention to list the matrimonial home for sale in the spring of 2016 but that it would take some time to find an appropriate buyer. She also indicated that she would not have an objection to the divorce proceeding once there is an order for support in place. She also dealt with the accounting from the Family Trust which is not before me on this motion.

[12] Having retained counsel in August 2014, in late June 2015, the Respondent delivered the income report referred to above and a business valuation report. A correction was required and an amended business valuation report was delivered on July 20, 2015. The Respondent said that on July 2, 2015 he had provided a two volume disclosure brief including the scope of review documents considered by the valuator. The business valuation report, which is not needed for this motion, is not included in the evidence before me because, as I understand it, the Respondent will ask that a part of it be sealed.

Income of the Respondent

[13] Because the onus is on the Respondent to establish his income, I start with his evidence.

[14] The parties have different perspectives on the extent to which each was involved in the business which I need not resolve in this motion. Suffice it to say that following the marriage, the Respondent developed a successful business and in 2000 he sold it for approximately $30 million. The Respondent said that the “sudden influx of money into our family changed our lives completely”.

[15] The Respondent said that after a few years of not looking for employment or other opportunities, he started a business providing information security services under the corporation The Herjavec Group (THG) of which he is the sole shareholder. The Respondent says that he has had “some success as a TV personality” and that that income is reported through THG.

[16] Since separation, the Respondent’s base salary of $360,000 per year has been deposited to the joint account for use by the Applicant which he argues is equivalent to $30,000 per month. In addition, THG has continued to pay for expenses for the Applicant and the children “as and when requested”. When paid, they are charged to the Respondent’s shareholder’s loan account. He deposed that those charges are not company expenses and he must repay the amounts to THG or have the amounts declared as income to him.

[17] As summarized at paragraph 23 of the factum, the Respondent asserts that the shareholder’s loan account from January 1, 2015 to September 2015 (Exhibit J to his affidavit), shows the following:

paid to the Applicant or expenses paid on her behalf
(including expenses paid to maintain real estate)

$1,070,294

paid for children’s expenses (including their credit cards,
vehicle insurance and school fees)

$ 174,600

charged for expenses for the Respondent including a payment to CRA
for 2014 personal taxes in the amount of $1,115,000 and a book entry
to allocate a notional dividend of $375,000 to the Respondent which
were not actually received by him but are accounting entries to
reduce the shareholder’s amount owed by him to the company

$1,549,508

charged to Respondent’s shareholder loan account, not including 2014
taxes and before credits for notional dividends

$1,679,402

[18] At Exhibit K to his affidavit sworn November 3, 2015, is a copy of the report of Andrew Freedman dated June 26, 2015 in which he summarized the Respondent’s income as follows:

Calendar Year

2012
2013
2014

guideline income

$3,386,700
$5,150,500
$3,615,900

less non-recurring income:
dividend income
discretionary expenses and gross-up -
private aircraft

(2,000,000)
(208,000)

(272,000)

guideline income excluding non-
recurring amounts

$3,386,700
$2,942,500
$3,343,900

[19] At Exhibit M to his November 3 affidavit, the Respondent referred to Mr. Freedman’s report in which he estimated the Respondent’s 2015 income as follows:

Estimated 2015

guideline income

$1,762,300

less non-recurring discretionary aircraft
expenses and gross-up

(137,000)

guideline income excluding non-
recurring amounts

$1,625,300

[20] According to the Respondent, 2015 has been challenging. His affidavit contains detailed information which was summarized at paragraphs 25 to 32 of the factum. It is not necessary that I extract either the details or the summary in this endorsement. The big picture is as follows. According to the Respondent the corporation breached its banking covenants during the first quarter of 2015 as a result of which the RBC contacted him early 2015 to discuss concerns about his indebtedness which concerns were enhanced when the June 30, 2015 corporate financial statement became available. As a result, the Respondent said that substantial changes had to be made and, in the October 2015 financing agreement (attached as Exhibit N to his affidavit), the Bank imposed restrictions, including the requirements that THG must not provide “financial assistance” to him and that the Respondent must repay the $1.7 million shareholder’s loan by June 2016. The Respondent said that he is focusing on growing the business in a very competitive market and is expanding to the US, the UK and Asia and to do so, he has used debt financing. In the long run the Respondent expects that the efforts to grow the business will be good for THG and will ultimately increase profits. To address the short term cash flow issues and increased expenses, the company sold assets such as an airplane and ten vehicles and laid off 32 employees.

[21] For reasons explained by Mr. Freedman in his expert report, the Respondent takes the position that at most he will have access to the following:

withdrawal of profit (assuming he is able to
renegotiate the payment of the shareholder’s loan)

$ 698,770

Salary

$ 360,000

grossed-up amount for discretionary
expenses

$ 568,825

less carrying costs

$ 2,260

TOTAL

$1,625,300

[22] In his Form 13.1 financial statement sworn June 26, 2015 the Respondent indicated that his line 150 income for 2014 was $5,128,497. Under “current income”, he indicated it was $278,658 per month or a total of $3,343,899 annualized. A note indicated that his expert had calculated his income for 2014 at $3,343,900 and he expected his 2015 income would decrease by approximately 50% from his 2014 income due to challenges within the business and the requirement to maintain cash in the business. His expenses totaled $250,074 monthly or $3,000,894 annualized. That list of monthly expenses included the following:

income tax

$136,000

expenditures on 6 properties
(although only 5 listed)

$ 63,342

Clothing

$ 20,000

school fees and supplies; clothing for
children and children’s activities

$ 15,000

[23] In that Form 13.1 the list of expenses did not include any amounts paid directly to or to the benefit of the Applicant.

[24] In her affidavit sworn October 22, 2015, the Applicant described how she has tried to maintain the pre-separation financial status quo but that accounts she had used are now often overdrawn and when she submits invoices to the Respondent’s staff for payment, as she had done during the marriage, the staff are not always receptive or responsive and sometimes outright refuse to pay accounts. As the exhibits to her affidavit indicated, creditors have contacted her, accounts are overdrawn, credit cards are being declined and cancelled without notice.

[25] The Applicant described the complications and the conflict around maintaining insurance on the Toronto property because she had to deal with the Respondent’s staff (including his CEO and an administrator). She understood that replacement of windows and doors was a pre-requisite to insurability and she had provided quotes for replacement of windows and doors in the amounts of almost $400,000 and almost $300,000. At a critical point, the Respondent refused to pay for those repairs because he insisted on the matrimonial lawyers dealing with it. At the date of her affidavit on October 22, she said that the issue was unresolved and she expected the insurance would be cancelled.

[26] In his affidavit sworn November 3, the Respondent takes issue with much of her evidence by pointing out that her capital has increased since separation from about $1.8 million to about $2 million; that the delays in payment for the older daughter were because the Applicant did not provide the information or the daughter did not provide it because she refuses to communicate with her father; that the necessary repairs were very expensive and not all were required as a condition of the insurance renewal; and that the insurance policy was in full force as indicated in an email dated October 21, 2015 (the day before the Applicant’s affidavit).

[27] In her November 6 affidavit, the Applicant said that she never said that he had not provided any money but that she was “forced to essentially ask permission any time an expense came up that was out of the ordinary, and was often refused by Robert’s staff. The property tax was just one example.” She also commented on what she described as the “flawed” analysis in Exhibit J to his affidavit in which the Respondent allocated $1,070,294 from his shareholder advances as having been paid to her and she listed more than 10 examples where that was not the case. Instead she observed that Exhibit J:

. . . shows that Robert continues to use the company as his personal bank account, charging over $2,500,000 to his shareholder account up to the end of September 2015 alone with the balance of 2015 unaccounted for. In the meantime, the [Florida condo] accounts still remain in arrears.

[28] Without weighing the details of the transactions, it is clear that they agree that the pre-separation method of financing the needs of the household is fraught with conflict. Indeed, it seems that both parties agree that the certainty of a court order for temporary child support and spousal support is required.

[29] In her affidavit, the Applicant provided evidence on which she relied to challenge the Respondent’s credibility on the key issue as to the income available to him for purposes of paying child and spousal support. I will refer to two aspects of her evidence.

[30] The first relates to the net worth and income of the Respondent. In her affidavit sworn October 22, 2015, the Applicant referred to the valuation reports that the Respondent had provided in June 2015 which estimate the total value of his companies in a range of $11 million to $15 million, which was amended in July, 2015 to a range from $14 million to $19 million. The Applicant said that “to say I was shocked at Robert’s representation of the value of his business is an understatement”.

[31] In that context, in paragraphs 73-76 of her October 22 affidavit, the Applicant included three exhibits: a Wikipedia excerpt that reported the Respondent’s net worth at $200 million; other social media reports that his net worth is $160 million and “getnetworth.net” report in the amount of $100 million.

[32] The Respondent had written a book in which he had referred to the sale of his business in 2000. At paragraph 79 of that affidavit, the Applicant pointed out that the jacket cover of the book stated that he sold the company for $100 million. She observed that if that had been a misrepresentation, he would have corrected it.

[33] In his affidavit sworn November 3, the Respondent challenged the reliability of each of the social media reports; he pointed out that being popular in the media had served the business well but there was no purpose in engaging in a debate with the media whenever speculation as to his net worth appeared; he observed that value and revenue are not the same; and he explained that the book was written with the help of a ghost writer and he did not have final edit rights to the book. He assumed that the publisher would print an image that the popular media had created because it would increase book sales.

[34] In her November 6 affidavit, the Applicant explained that she had referred to those social media sources not as proof of the value of his business interests but to demonstrate “that there is serious reason to doubt the accuracy of Robert’s evidence and representations”. She went on to describe quotes from an interview he had given at a recent conference in Florida that were reported on October 23, 2015 in which he opined “in three years [that] we can quadruple the value of our business” and that he was focused on growing the current annual sales of $150 million to $250 million.

[35] The second aspect of her evidence is in respect to a loan application which she attached as Exhibit SS to her October 22, 2015 affidavit. On RBC Bank letterhead dated February 23, 2015 addressed to the Respondent, the RBC appears to confirm that the Respondent asked for a loan in the amount of $2,226,000 in respect of a property in West Hollywood, California. Under monthly income is the amount of US$213,652 and under other income, is the amount of US$356,213 for a total of US$569,865 per month. The loan application also indicated that the Respondent had acquired the property in 2014 at an original cost of $3,180,000. In response to the question in the loan application “Manner in which title will be held” the following words appear: “to be determined by legal counsel”.

[36] I note that that property in West Hollywood is not disclosed in the Respondent’s Form 13.1 sworn June 26, 2015, nor is it mentioned in his November 3, 2015 affidavit updating his Form 13.1.

[37] In his November 3 affidavit, the Respondent deposed that THG purchased the condominium in California in 2015 because the business there is growing and he travels there frequently. He said that the purchase price was approximately $3.1 million and was financed by way of a mortgage of $2.1 million. He said that the carrying costs of the property are less than the cost that would be incurred to provide rental accommodations. He did not explain the source of the down payment of $1 million and whether it came from the allegedly cash-strapped and debt laden THG or elsewhere.

[38] The Respondent deposed that the application attached as Exhibit SS to the Applicant’s affidavit was not prepared by him and was not relied on by the bank. At Exhibit Q to his affidavit he provided a copy of the application that he said was filed and relied on by the bank. It does not have a cover page addressed to the borrower (as did Exhibit SS) although the words at the top of the page indicate that it is also RBC Bank. It indicated that the property had been acquired in 2014 at an original cost of $3,180,000 and that a loan of $1,890,000 was sought. It indicated that the borrower’s income was $213,652 per month; that the borrower’s combined monthly housing expense totaled $21,423 (of which the mortgage was $20,000) and that the proposed monthly housing expense would be $13,820 (with the mortgage reduced to $9,297). In two places in that application, the borrower indicated his address was 15 Winchester Drive in Toronto (although that is the municipal address of the cottage in Muskoka) which had a present market value of $4,500,000 and a mortgage of $2,909,386 with monthly payments of $20,000. The name of the borrower does not appear on the first page or the last page, nor are there initials on the bottom corners of each page. The borrower is described as a male. One of the questions was “are you obligated to pay alimony, child support, or separate maintenance?” and the answer was “no”. The document has not been signed on behalf of the bank but has been signed by the Respondent as president of four corporations: The Herjavec Group Inc., Sentry Metrics Inc., Sysec Limited, and The Herjavec Group Corp.

[39] I note that only The Herjavec Group Inc. is mentioned in his Form 13.1 financial statement sworn June 26, 2015. Nor are the other three corporations included in his November 3, 2015 affidavit updating that financial statement.

[40] In her November 6 affidavit, the Applicant said she could not account for the discrepancies between the different versions of the loan application which were Exhibit SS to her affidavit and Exhibit Q to his affidavit but that the discrepancies raised questions about what his income truly is or how he has represented it, depending on the context.

Real Estate

[41] The Florida property is held through a corporation, the shares of which are owned equally by the parties. The Applicant describes it as a luxury home of almost 4,000 square feet in a prestigious area of Miami. The Respondent says it is valued at approximately US$7.5 million and is not encumbered. It costs approximately $220,000 per year.

[42] The Muskoka property on Winchester Drive is registered in the name of the Respondent although, according to the Applicant, it was a gift to her for Mother’s Day in May 2014. It is a 5,000 square foot cottage with 800 feet of shoreline. According to the Respondent it was purchased for $5,150,000 and is encumbered by a mortgage in the amount of approximately $2.8 million. It costs approximately $118,000 per year.

[43] The matrimonial home is owned by a corporation of which the Applicant is the sole shareholder. Under the category of “business interests” in her Form 13.1 financial statements she refers to the MPAC property assessment notice of $20 million. The Applicant describes it as a 40,000 square foot property on 2.7 acres which included a 10 car garage which was typically always full including 2 Lamborghinis, at least 4 Ferraris, a Bentley, at least one Rolls Royce, and a Porsche Cayenne.

[44] According to the Applicant, they purchased a property in Caledon in 1997. It consists of approximately 6,000 square feet on 5.3 acres. The Applicant is the registered owner, although there is a question (which need not be addressed in this motion) as to whether some of the children are beneficial owners. It is listed for sale.

[45] In his affidavit, the Respondent summarized the claims made by the Applicant as follows:

Matrimonial home

$27,214/mo

$326,568/year

Florida condo

$16,331/mo

$195,982/year

Caledon

$ 8,145/mo

$ 97,740/year

[46] The Respondent noted that the total of the yearly expenses is over $620,000 and that he had been covering most of the expenses since separation, hence the significant charges to his shareholder’s loan account.

The children

[47] The oldest child has finished university and is working full time. He may return to university but that is not an issue in this motion.

[48] The older daughter is in university in California. She lived in New York during the summer of 2015 and it is not known where she will live in the summer of 2016. The Respondent has given her a credit card for which he is responsible. He says he will continue to pay her tuition and rent expenses. According to the Applicant, it has been her responsibility to ensure that the daughter’s expenses were paid and that the Respondent was uncooperative in July and August 2015 to ensure that her tuition and rent were paid. In her October 22nd affidavit, she pointed out that a tuition payment is due in December, 2015 and, as at the date of that affidavit, there was no agreement between the parties as to how it would be made. In her November 6th affidavit she said that the suggestion that the Respondent pay tuition and other expenses for the older daughter was “alarming” because he has a history of paying late and in his own evidence, he acknowledged that he does not pay attention to the credit cards the children have and instead he relies on them to let him know if the balance is close to the limit.

[49] The younger daughter is in grade 12 and will graduate from high school in June 2016. It is currently expected that she will go to a university in the United States as of September 2016. In the current school year, the Respondent says he will continue to pay directly her school and related costs (tuition, tutoring, books, school supplies and school photos) as well as her Granite Club membership all of which have totaled approximately $54,000 annually.

[50] According to the Respondent, none of the children are speaking to him, for which he blames the Applicant. Without dealing with which of the parents is to blame, or indeed whether both of them have contributed to that situation, I agree with the Applicant that it would be inappropriate to leave the Respondent with the financial responsibility for the daughters when neither has a relationship with him at this time. The primary responsibility lies with the Applicant. Accordingly, the request for child support for the younger daughter and 1/3 of the older daughter is reasonable.

Conclusion as to the income of the Respondent for purposes of temporary support

[51] The evidence by the Applicant raises issues of credibility on the issue as to whether the Respondent ought to be believed that: his income is only $1.6 million; that the Bank has prohibited him from using corporate funds for personal expenses; that he is required to repay the $1.7 million shareholder’s loan by the end of June 2016; and that the reporting and financial restrictions will impact his ability to pay support. She insists that the Respondent continues to live the “jet set lifestyle” notwithstanding his insistence that financial restraints are being imposed on him by the financial institution.

[52] As indicated above, the record before me on this motion is hundreds of pages including dozens of exhibits. Counsel were unable to make their submissions within the hour to which they had committed. The outcome of this motion is that an order for temporary child and spousal support will be made which order is intended to be in effect for months not for years. In circumstances such as these, the court ought not to make findings of credibility on conflicting evidence. As indicated below, I have identified a number of reasons for relying on the Respondent’s 2014 Line 150 income and I have attempted to do so without making findings that his evidence is not credible.

[53] Counsel for the Respondent relies on s. 18 of the Guidelines. However that section must be considered in the context of other relevant sections including the following:

s. 1 The objectives of these Guidelines are

(a) to establish a fair standard of support for children that ensures that they continue to benefit from the financial means of both spouses after separation;

(b) to reduce conflict and tension between spouses by making the calculation of child support orders more objective;

(c) to improve the efficiency of the legal process by giving courts and spouses guidance in setting the levels of child support orders and encouraging settlement; and

(d) to ensure consistent treatment of spouses and children who are in similar circumstances.

s. 15(1) Subject to subsection (2), a spouse’s annual income is determined by the court in accordance with sections 16 to 20.

s. 16 Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.

s. 17(1) If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income or receipt of a non-recurring amount during those years.

s. 17(2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse’s annual income under section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate.

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

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

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

s. 18(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.

[54] Pursuant to s. 16, a spouse’s annual income is determined using the sources of income in the T1 General form. This has come to mean that the default income is line 150 of the tax return for the preceding year. The onus is on the Respondent to prove on a balance of probabilities that (a) line 150 does not apply; and (b) that the income he proposes fairly reflects all the money available to the spouse for the payment of child support. Although s. 18(1) refers to s. 17, counsel for the Respondent does not rely on s. 17 but focuses on s. 18(1).

[55] Mr. Smith took the position that the Child Support Guidelines deal only with income and that the evidence of debt and capital expenditures must also be addressed. At paragraph 55 of the factum he made the following submission:

In determining the amount of pre-tax corporate profit to be included in Robert’s income pursuant to s. 18(1) of the Guidelines, important considerations include: the highly competitive nature of the business; the need to grow the business to remain competitive and Robert’s ongoing efforts to do so; the use of debt to acquire new business; and banking restrictions that limit the availability of income to Robert. The Court must not kill the goose that lays the golden egg and the Court should not second-guess business decisions. Kowalewich v. Kowalewich, [2001 BCCA 450](https://www.canlii.org/en/bc/bcca/doc/2001/2001bcca450/2001bcca450.html) at paras [44 and 58] Where monies are required to remain in the company to maintain the value of the business as a going concern, they will not be considered available for support purposes and they should not be included in Robert’s income for support. Thompson v. Thompson, [2013 ONSC 5500](https://www.canlii.org/en/on/onsc/doc/2013/2013onsc5500/2013onsc5500.html) at para [92], Kowalewich supra]

[56] In Kowalewich, Drake J. had made an order dated June 5, 1997 in which he held that the income of the payor was $200,000. Following an appeal, the Court of Appeal directed a review of the child and spousal support order. The trial of the review application took 8 days. In her decision, Dorgan J. held that the income of the payor was $300,000 and she adjusted the child and spousal support orders. That decision was the subject of the appeal.

[57] The payor had developed a successful retail business. The issue was the application of s.18(1) of the Child Support Guidelines. Mr. Smith drew attention to various passages of the reasons for decision including:

44. A court’s effort to ensure fairness does not require a court to second-guess business decisions. . . what it does require is that a spouse’s allocation of pre-tax corporate income between business and family purposes be assessed for fairness by an impartial tribunal when parents cannot reach agreement on priorities as they would in an intact family and may upon separation under s. 15(2).

45. It seems to me regard should also be had to the nature of the company’s business and any evidence of legitimate calls on its corporate income for the purposes of that business. Justice Drake cautioned about not killing the goose who lays the golden eggs. Monies needed to maintain the value of the business as a viable going concern will not be available for support purposes. In my view they should not be included in determining annual income. . . Justice Dorgan recognized Mr. Kowalewich’s business expansion plan as a valid business purpose in a retail business.

46. I do not recite these factors to suggest this Court should tinker with a trial judge’s exercise of discretion, nor that a trial judge should second guess business decisions. I do say that a trial judge must have regard to the evidence of legitimate business needs in determining what portion of pre-tax corporate income to include in annual income for Guideline purposes.

[58] The Court of Appeal then reviewed the evidence from the accountants and, as indicated in paragraph 62, used the figures that the trial judge accepted to perform the analysis the court considered required by s. 18. At paragraph 65, the Court of Appeal held as follows:

This analysis persuades me the trial judge’s determination of Mr. Kowalewich’s annual income at $300,000.00 is no more fair a reflection of the money available to him for child support than is the value of his services to the companies. In my view Justice Drake’s determination of Mr. Kowalewich’s annual income at $200,000.00 reflected an allocation of the corporate income between corporate and family needs more in accord with the evidence, measured by the standard of a reasonable parent in Mr. Kowalewich’s shoes. The trial judge’s error was in undervaluing the business needs in favour of those of the family.

[59] The Court of Appeal set aside the decision of Dorgan J. and held that the income of the payor was $200,000 with adjustments to child and spousal support accordingly.

[60] Mr. Smith relies on that decision in taking the position that: in his effort to expand the business, the Respondent has recently acquired two businesses and he has incurred debt which contributed to him going off side with the bank which had imposed restrictions on the corporation and on the Respondent. He observed that in the long run the business would be more profitable but in the short term, the Respondent is subject to various financial constraints which this court must respect in establishing his income for purposes of child and spousal support. He too argued that the court ought not to “kill the goose that lays the golden egg”.

[61] In Thompson, the trial took 9 days and the reasons for decision consist of 238 paragraphs including 117 footnotes in a detailed analysis of the many issues involved, including the s. 18 issue. At paragraph 84, Chappel J. observed that s. 16 does not require the court to blindly use the previous year’s total income but the goal is to ascertain the current income based on the sources set out in the T1 form. She noted that where a party’s prior year’s income is not predictive of what s/he is likely to earn in the upcoming year, the court should determine the income for the upcoming twelve months from when the child support will be paid.

[62] At paragraph 88, Chappel J. accepted that the purpose of s. 18 is that it was “designed to address the unfairness which would result if a spouse was to artificially manipulate his income through a corporate structure for the purpose of avoiding child support obligations”.

[63] As reflected in paragraphs 90 and 91, Chappel J. assumed that typically the support recipient would rely on s. 18 to attribute corporate pre-tax income to the payor spouse and that once the party advancing the s. 18 argument has met the onus of demonstrating where and how additional money can be found from a corporation’s pre-tax income so as to increase a party’s income for the purpose of support calculations, the payor spouse has the onus of explaining why the proposal ought not to be accepted. Mr. Smith particularly noted paragraph 92 in which, after an extensive review of the case law, Chappel J. listed 12 factors that should be considered in determining whether all or a portion of a corporation’s pre-tax income should be included in a party’s income. Those on which Mr. Smith relied were: the potential for business growth or contractions; whether there are plans for expansion and growth, and whether the company has in the past funded such expansion by means of retained earnings or through financing; the level of the company’s debt; how the company obtains its financing and whether there are banking or financing restrictions.

[64] At paragraphs 124 to 157, Chappel J. examined the evidence in detail, including making findings of credibility, and arrived at her conclusions.

[65] From these decisions, I make the following observations. The trial in Kowalewich was 8 days and in Thompson it was 9 days. In each case, the trial judge heard evidence of the parties and non-parties and of accountants. In each case, the trial judge made findings of credibility and reliability on which the legal analysis was based. In each case, it was the support recipient who was using s. 18 to increase the income of the payor.

[66] In contrast, on this motion, I have no oral evidence, not even a transcript of questioning on the controversial issue as to the income of the Respondent. I have a report of an expert as to the estimated income for 2015 for the Respondent. It is the case that there is no challenge to his report (which was accompanied by a c.v. and a certificate of independence) but it was only made available to Mr. Grant and his client in the week before the hearing of the motion and consequently they would not have had the opportunity to challenge it. In this motion, the payor seeks to rely on s. 18 to decrease his income.

[67] As Chappel J. noted in paragraph 84 of her reasons (referred to at paragraph 61 above) the court must not blindly use the previous year’s total income but must consider whether a party’s prior year’s income is not predictive of the current year. For the reasons that follow, I am not persuaded that the Respondent’s line 150 income from his 2014 income tax return is not predictive of his current year’s income for purposes of establishing his obligation to pay child and spousal support.

[68] First, as the Applicant pointed out in her November 6, 2015 affidavit, the chart at Exhibit J that analyzed the transactions in the Respondent’s shareholder account demonstrated that he had not changed his spending behaviour as recently as September 2015 notwithstanding the realization no later than in June 2015 that the corporation was offside its covenants and the ostensible direction in August that stringent conditions were being opposed on the use of the shareholder account as a result of the financing.

[69] Second, the alleged significant reduction in available income is not reflected in the Respondent’s spending behavior as demonstrated in his Form 13.1 financial statement which was dated June 26, 2015. In one of his November 3rd affidavits, he updated the Form 13.1. He deposed that the only material changes to his financial statement were that the valuator had estimated his 2015 income at $1,625,300; the monthly mortgage on the Muskoka property had been reduced from $25,000 per month to $8,100 per month because he did not have the cash flow to make such large payments towards the mortgage each month and that the principal balance on that mortgage was $2,787,897; he had opened a chequing account with the Bank of America which had a current balance of approximately $25,000; the 2001 X5 had been transferred to an employee of THG and was no longer in the Respondent’s name; the value of his interest in THG as at the date of separation was: (a) $21,498,000 before taxes; (b) the taxes on his interest in THG are $5,324,000 which should be included as a debt in his financial statement; (c) the balance of the shareholder’s loan account at the date of separation was $3,922,981 which should also be reflected as a debt at separation; and that the calculation of the shareholder’s account as at September 30, 2015 net after adjustments was in the amount of $2,767,547.

[70] I note that in that affidavit, he provided details as to his liabilities and updated the value of his interest in THG all of which worked to his advantage in the calculation of the net family property. But he made no mention of how he was going to adjust his own expenditures. As indicated above, his Form 13.1 sworn June 26, 2015 included expenses that totaled $250,074 per month or $3,000,894 annualized. That statement referred to expenditures on 6 properties although only 5 were listed. Based on the loan application for the California condominium which was Exhibit Q to his affidavit, he was then paying monthly housing expense of $21,423 (of which the mortgage was $20,000) and, after the refinancing, the monthly housing expense would be $13,820. Neither the before or the after payments on the California condominium were reflected in the Form 13.1. And, as indicated above, except for $15,000 for school fees and supplies and clothing and activities, there was no allocation for any amount on account of child support or spousal support, let alone the payment his counsel proposed (as indicated in paragraph 7 above) of $34,086 per month in spousal support and $8,564 per month in child support. While he deposed in that November 3 affidavit that his income was a material change, he made no effort to change his expenses from which I infer that, as of November 3, 2015 when he delivered the updating affidavit, his expenses had not changed and would not change in the foreseeable future. His behavior is inconsistent with his evidence of constraints.

[71] Third, the evidence about that loan application creates more questions than answers. His explanation is that Exhibit SS was not the application that was signed. He offered no explanation for how there could be two loan applications and made no attempt to rationalize the inconsistencies. He did not explain how at the end of February 2015 he was applying for a significant loan with respect to the purchase of the condominium in California notwithstanding that the RBC had expressed its concern over his existing indebtedness in early 2015.

[72] Fourth, the Respondent relies on the requirement that he must pay to the bank the $1.7 million owed on his shareholder’s loan by June 2016 yet his own evidence indicates that there may be flexibility. At paragraphs 62 and 66 of his November 3 affidavit and as mentioned in paragraph 21 above, he referred to the requirement that he repay the shareholder’s loan unless he is successful in renegotiating that condition from which I infer that he intends to renegotiate. Furthermore, all of the properties are or will be listed for sale. None of them will sell overnight. But there is considerable equity in all of them. Even assuming that the agreement by the Applicant to sell each of the properties is predicated on the net proceeds being held in trust, the availability of such liquidity will likely assist him in any negotiations.

[73] Fifth, while the income calculation report by Mr. Freedman makes sense based on the analysis, I have had access to evidence which I assume was not made available to the expert such as the above.

[74] Last, the thrust of s. 18 is that as a shareholder, a support payor has access to funds, not all of which are reflected in an income tax return and are not part of the calculation of line 150 income and that the income of the support payor should be increased. I question whether the submission as to the reduction in income of the Respondent to $1.6 million can be rationalized on the basis of s. 18.

[75] For those reasons I am not persuaded that the Respondent’s 2014 Line 150 income of $5,128,497 should be disregarded in establishing the amount of his child and spousal support obligation. Those same reasons apply for not being persuaded that his proposed income of $1,625,300 would be the fairest determination.

[76] Mr. Smith also made submissions with respect to s. 15.2 of the Divorce Act and particularly s. 15(2)(4) which directs the court to take into consideration the condition, means, needs and other circumstances of each spouse. Mr. Smith provided a colour-coded analysis of the contents of the Applicant’s budget as reflected in her financial statement sworn October 22, 2015. The summary is as follows:

Housing expenses

Monthly

Yearly

Toronto total

$27,214.06

$326,568.72

Florida total

$16,331.89

$195,982.68

Caledon total

$ 8,145.07

$ 97,740.84

$620,292.24

Expenses by child

Expenses listed for all 3 children
and sometimes the Applicant

$ 6,196.33

$$74,355.96

older daughter

$ 12,104.20

$145,250.40

younger daughter

$ 4,649.01

$ 55,788.12

Son

$ 1,790.00

$ 21,480.00

[77] In addition, Mr. Smith’s summary includes a list of s. 7 expenses which totals $27,965.39 primarily for the younger daughter but including Granite Club fees for the other two children. The summary does not include expenses for the cottage in Muskoka because the Respondent looks after those expenses.

[78] On this record, I do not intend to undertake the analysis that might be required under s. 15(2)(4) for purposes of long term spousal and child support. Suffice it to say that the summary demonstrates what the Respondent said (as indicated in paragraph 14 above) that the sudden influx of money from the sale of the business in 2000 meant that their lives changed completely. It is not possible in a motion for temporary support on this record to conclude that it is justified to reduce their standard of living as markedly as would occur if the position advocated by the Respondent were upheld, particularly when the Respondent shows no indication that he expects to reduce his standard of living.

[79] Having concluded that the income of the Respondent for purposes of this motion is his line 150 income from his 2014 income tax return, I will refer to the Divorcemate calculations provided by counsel for the Applicant on the basis of which Mr. Grant asks for child support in the amount of $44,992 per month. As counsel for the Applicant observed, the burden is on the Respondent to establish that guideline child support is not appropriate. [Francis v Baker (1999) 1999 659 (SCC), 50 R.F.L. (4th) 228 S.C.C.] As indicated in the summary of the expenses in the Applicant’s budget, $44,992 is consistent with the needs of the younger daughter and 1/3 of the older daughter and accordingly the Respondent has not met that burden.

[80] My only hesitation is that the expenses with respect to the younger daughter reflect annualized expenses such as tuition and related private school expenses. Since this order is made effective November 1, 2015, it may be that it results in a slight overpayment. That is not a matter that can be resolved on this interim motion and, unless the parties agree otherwise, will have to await the decision of the trial judge.

[81] Counsel for the Applicant takes the position that I should order spousal support at the high end of the range, namely $154,809 per month. If I order the high end of the range of spousal support and the table amount of child support, that leaves the Respondent with 43% of the NDI and the Applicant with 57% of the NDI. Mr. Grant has also provided the 50/50 NDI calculation which yields $124,115 per month in spousal support and $44,992 in child support. I am not persuaded that the amount at the high end of the range is fair given the significant child support. Instead, I am satisfied that the 50/50 NDI is the most appropriate amount, particularly given the Respondent’s assertion that 50/50 NDI was the appropriate approach, albeit while advocating for a different income.

[82] Of the objectives contained in s. 1 of the Child Support Guidelines, s. 1(a) is the most relevant. I find that by relying on the Respondent’s line 150 income in his 2014 income tax return, that will establish a fair standard of support that ensures that the Applicant and daughters continue to benefit from the financial means of both spouses and particularly the historical financial means of the Respondent.

[83] The Applicant asks for an order for current and prospective spousal support. She leaves the claim for retroactive support to the trial judge.

Motion to delete paragraphs 73–76 of the Applicant’s affidavit sworn October 22, 2015

[84] I have referred above to the paragraphs of the Applicant’s affidavit to which the Respondent takes objection on the basis that that evidence does not comply with rule 14(19). Both counsel rely on Katz v Katz. [2014 ONCA 606]

[85] I agree with counsel for the Applicant that the evidence need not comply with rule 14(19). Indeed, the Applicant does not say that she believes the evidence to be true. She does not offer it as evidence of the income of the Respondent or of the value of the business. Rather, she offers it to undermine the credibility of the Respondent and argues that the court ought to conclude that there is serious reason to doubt the accuracy of the Respondent’s evidence and assertions.

[86] The motion to delete those paragraphs is dismissed. However, as indicated above, I have not relied on such evidence in coming to my conclusions with respect to the income of the Respondent.

Return of the vehicle

[87] As indicated above, the Respondent had brought a motion for an order that the Applicant be required to return the Cadillac. In her November 6 affidavit she explained that she continued to use it and would not agree to return it. Her explanation is reasonable. In addition, the evidence is that the Cadillac is owned by THG which is a not a party to this application. Although the sole shareholder and President of THG, the Respondent does not have status to seek that order in this motion.

ORDER TO GO AS FOLLOWS:

[88] On the basis of income in the amount of $5,128,497 for the duration of this order, the Respondent shall pay to the Applicant temporary spousal support in the amount of $124,115 per month commencing November 1, 2015 and on the first of each month thereafter.

[89] On the basis of income in the amount of $5,128,497 for the duration of this order, the Respondent shall pay to the Applicant child support for the younger daughter and 1/3 of the amount for the older daughter [names and birthdates to be inserted in signed order] in the table amount of $44,992 per month commencing November 1, 2015 and on the first of each month thereafter.

[90] The Applicant’s claims for spousal support and child support retroactive to the date of separation are reserved to the trial judge.

[91] The motion to delete paragraphs 73 to 76 of the affidavit of the Applicant sworn October 22, 2015 is dismissed.

[92] Order to go in accordance with consent dated November 10, 2015 with respect to sale of the Florida property and the Muskoka property and severance of the divorce from the corollary relief.

[93] The balance of the motions not addressed in this endorsement or by the consent order is adjourned to a date to be set for a long motion before me.

[94] If by December 30, 2015 the parties have not agreed as to costs of this aspect of the motion, then submissions shall be made in not more than 3 pages together with costs outline and offers to settle, if any, as follows:

(a) by January 15, 2016 by counsel for the Applicant

(b) by February 1, 2016, by counsel for the Respondent.

Kiteley J.

Date: December 3, 2015