Ontario Superior Court of Justice
Oshawa Court File No.: FC-07-506-03 Date: 20160712
Between
JOHN AQUILINA Applicant
— and —
MONICA WINN Respondent
Counsel: George R. Vella, for the Applicant Russell Alexander, for the Respondent
Heard: June 2, 3, and 6, 2016
Timms J.
Reasons for Judgment
[1] The parties hereto married on April 1, 2000. They have one child, Mason, born August 8, 2002. They separated on June 1, 2005. They were divorced on April 30, 2007. Both parties have since remarried.
[2] The applicant has a Grade 12 education followed by one year at the Career School of Hairstyling. He started working as a hairstylist in 1998. In 2001, he opened his own salon under the name of Aquilibrium Salon and Spa (Aquilibrium). He took over a space previously occupied by another hairstylist. In 2005 the business was relocated to a leased two-unit commercial space at 1383 Wilson Road North in Oshawa. It still operates at that address. At some point, probably in 2007 according to the applicant, the business leased an additional unit. Because that proved unsuccessful, and because he needed to cut costs, he downsized back to only two units. He continues to lease all three units, but sublets the third one to another business.
[3] The parties entered into a separation agreement on January 26, 2006. That agreement has been amended several times over the course of the years. The formula that the parties used for calculating the amount of child support was the applicant’s line 150 income on his personal tax return for the prior year, plus the net income from his limited companies for the same period.
[4] The applicant is the sole shareholder of a holding company which in turn owns three companies. [1] The main company is 1628790 Ontario Inc., operating as Aquilibrium, 2244624 Ontario Ltd (624), and 2251492 Ontario Ltd operating as BOLA. The applicant testified that the existence of the holding company makes no difference to the bottom line of the other three companies. That evidence was not contradicted.
[5] The original separation agreement, and the last amending agreement of November 7, 2012, were filed pursuant to s. 35 of the Family Law Act, R.S.O. 1990, c. F.3 (FLA), and thus became orders of this court for the purpose of variation. To that extent therefore, this proceeding really amounts to a motion to change brought by the applicant with respect to his child support obligations. The applicant was presumably only allowed to start his claim by way of an application because he also sought a restraining order against the respondent.
[6] On January 23, 2015, the parties consented to a mutual restraining order. On June 6, 2015, on the record in front of me, they consented to a continuation of that order for a further ten years. I made an endorsement to the effect.
[7] As per the amending agreement of November 7, 2012, the applicant is to pay the sum of $1,362 per month for basic child support, $100 towards an education fund for the child, and 50% of special expenses. This agreement did not set out the earnings upon which the amount of support was based. Using the Child Support Guidelines, O. Reg. 391/97 (Guidelines) the applicant’s earnings should have been $163,350 for 2011. If I add the applicant’s line 150 income for that year to his companies’ net earnings, plus the amount of child support that his company paid to the respondent, I reach the sum of $158,910, which is very close to $163,350.
[8] In his application dated August 20, 2014, the applicant sought to vary his basic child support obligation down to $565 per month, starting June 1, 2013. That would be based on a 2012 line 150 income of $107,704, minus a loss of $66,659 in Aquilibrium. The applicant did not seek to deduct a further loss of $32,673 in BOLA, or a loss of $1,383 in 624.
[9] For the year starting June 1, 2014, the applicant sought to vary his child support payment to $1,081 per month. That would be based on a 2013 line 150 income of $134,868, plus net income of $38,786 from Aquilibrium, and losses of $39,537 from 624 and $8,490 from BOLA.
[10] As I wrote above, the parties appear to be ad idem as to how to calculate the applicant’s income for the purposes of determining child support: the total of his line 150 income, plus the income from his corporate endeavours. However, they differ with respect to what his companies’ incomes should be determined to be.
[11] The respondent retained a forensic accountant, John Douglas, to prepare an analysis of the applicant’s income. His report became part of Exhibit 10(A). [2]
[12] The respondent wants the applicant’s income increased well beyond that used by him historically to determine child support. Mainly based on Mr. Douglas’s report, the respondent argued that a number of items needed to be added the applicant’s income. For the most part they are deductions taken by Aquilibrium as against income. They include:
- the full amounts deducted as payments to her as a subcontractor by Aquilibrium,
- one-half of the amount deducted for Highway 407 tolls by Aquilibrium,
- one-half of the amount deducted for vehicle fuel by Aquilibrium,
- the full amounts deducted for automotive expenses by Aquilibrium,
- the full amounts deducted for amortisation, including of leasehold improvements by Aquilibrium, and
- the full amounts for a salary paid to a non-arm’s length individual by Aquilibrium.
[13] Again based on Mr. Douglas’ report, the respondent wants to impute income to the applicant for hypothetical interest on inter-company loans.
[14] Additionally, the respondent argues that the applicant fails to report significant tip income and, since the applicant’s income goes up and down, that the court should use an averaging approach.
[15] The applicant admits that he should not have deducted the amounts that he paid to the respondent for child support as a company expense. He testified that he started to do that when he ran short of personal cheques, and that he kept on doing so even though he had been told by his accountant that it was wrong. He had no good explanation as to why he kept doing it. Obviously, it has to be added back in.
[16] Mr. Douglas wrote in his report that he added back in one-half of the amounts for Highway 407 tolls and vehicle fuel, because the applicant and his accountant, Mr. Manery, needed to provide details of the vehicle activities and to clarify whose vehicle the 407 transponder was in. He did not seek clarification before he wrote his report. When he testified in chief, he said that having listened to Mr. Manery testify, he was satisfied that those particular expenses were already included in the line item “vehicle expenses”, and that he accepted that he had made a mistake. That mistake of course meant that Mr. Douglas was adding back in more than 100% of the total automotive expenses.
[17] Mr. Manery testified that, in accordance with Canadian Revenue Agency (CRA) rules, he adds a portion (close to 50%) of the total vehicle expense claimed by Aquilibrium to the applicant’s personal income. Mr. Douglas did not disagree with the propriety of doing that. However, even though he heard that as well testimony before he testified, he refused to admit that it was also a mistake to add back in 100% of the vehicle expenses claimed by Aquilibrium. Mr. Douglas’ explanation, if it can be called that, for his refusal to do so, was opaque at best.
[18] When I questioned Mr. Douglas with respect to the above, he said that he had always (my emphasis) known that the 407 transponder expense and the fuel expense were already included in the vehicle expense. When I asked why then he would have included them in the items to be added back into income, he repeated that was a mistake. The court was thus left with the conclusion that Mr. Douglas knowingly included a mistake in his report, or that he lied to the court when he said that he knew it all along. I tend to agree with counsel for the applicant who said in his argument that it was likely the latter.
[19] All sums that Mr. Douglas added back to Aquilibrium’s income relating to automotive expenses of any kind are to be removed.
[20] Mr. Douglas never provided an explanation in his written report as to why he had added back in the amount claimed by Aquilibrium for depreciation, including amortisation of leasehold improvements. When questioned about that during cross-examination, he said that he had done that before, and that he had asked the respondent’s previous counsel whether she wanted him to do that. Because she said “yes”, he did. Counsel for the applicant cross-examined Mr. Douglas with respect to his knowledge of the Guidelines and in particular Schedule III thereof. It became obvious to the court that Mr. Douglas knew next to nothing about either the Guidelines or Schedule III.
[21] The applicant was required to completely equip and pay for the leasehold improvements when he opened his business in 2001. On his evidence, and the evidence of his accountant, he continued to make leasehold improvements over the years. When the applicant attempted to expand his business to a third unit, he affected improvements there. I have no reason not to accept the evidence proffered by the applicant as to how much he spent over the years for leasehold improvements, including in the period for the fiscal years 2012 to 2015, as reflected in Exhibit 2. Equally, I have no reason not to accept the evidence of his accountant that the amortization of those leasehold improvements was completely in keeping with the CRA rules in regard thereto.
[22] Counsel for the respondent cited three cases for the alleged proposition that amortising the leasehold improvements should not be allowed. [3] In my view, none of these cases supports the respondent’s position.
[23] In Persaud, Justice Seppi wrote in para. [26]:
Accordingly, having regard to the receipts and benefits derived from RPM to the respondent, tax savings on account of deductions for depreciation and amortization, vehicle and housing deductions, the inclusion of $24,000 of the monies paid to Savitri Singh Persaud and one half of the undistributed profit in fiscal 2007 and one quarter in 2008, as reviewed above, the respondent’s annual income is conservatively assessed as follows:
For 2004 $85,000 For 2005 $65,000 For 2006 $75,000 For 2007 $110,000 For 2008 $120,000
Justice Seppi provides no explanation for what she did.
[24] In Orser v. Grant, 2000 CarswellOnt 1354 (S.C.), I cannot find where Benotto J. (as she then was), even used the words “depreciation” or “amortisation”. In Wilson v. Wilson, 2011 ONCJ 103, Justice Masse said that a capital cost allowance for depreciation of an automobile used for business, and deducted as a business expense by the payor, was reasonable. That conclusion completely contradicts the position taken by the respondent herein.
[25] The amortisation charges taken by Aquilibrium will be allowed.
[26] The applicant testified that the non-arm’s length person is his son from a prior relationship. That individual helps out at Aquilibrium by doing cleaning and other small jobs. Mr. Douglas did not take issue with the fact that the applicant actually pays his son, or with “value for money” of the services provided. His view was simply that it had to be disallowed because it was a salary paid to a non-arm’s length person. Counsel for the respondent provided the court with no case law to support this position.
[27] The amounts that Aquilibrium pays the applicant’s son will be allowed.
[28] That leaves only the issue of hypothetical interest income from 624 and BOLA. Aquilibrium has loaned significant amounts of money to both companies. As per Mr. Douglas’ report, those loans totalled over $375,000 as of September 30, 2014. Mr. Douglas’ report did not set out why he felt that interest income should be attributed to Aquilibrium, even though none was being paid, or why he picked 5% as a rate of interest.
[29] When he was being examined in chief, Mr. Manery was asked whether the CRA had an accepted loan rate for loans between non-arm’s length companies. His answer was 1%, except for one quarter of 2013, when it was 2%. He was not asked why no interest was paid. He was not cross-examined on this issue at all.
[30] When he testified in chief, Mr. Douglas said that he felt that since the applicant owned 624 and BOLA, he got the benefit of the loans. Therefore, hypothetical interest should be attributed at what he thought was a fair rate of 5%. When he was cross-examined, Mr. Douglas agreed that he had been retained to look at the applicant’s personal income, and his income from Aquilibrium, 624, and BOLA. To facilitate that, he had been provided with the corporate tax returns, the financial statements, and the general ledgers for all three companies. He was aware of the losses and profits made by 624 in various years, but did not include those in his calculations in his report. He testified that if BOLA had made a significant profit operating the business on Simcoe Street, or if 624 had made a profit for any reason, he would not have adjusted the applicant’s income up. His justification for ignoring any profits or losses in 624 and BOLA was that the applicant was not as much inter-related with 624 and BOLA as he was with Aquilibrium. This appears to me to contradict his reason for including the hypothetical interest.
[31] Further when being cross-examined, Mr. Douglas agreed that if interest income were to be attributed to Aquilibrium, then equally that same interest would have to be shown as an expense to both 624 and BOLA, thereby reducing their respective incomes. Because he did not consider the incomes from those two companies in his report, he did not make those hypothetical adjustments.
[32] I do not believe that there was any evidence as to when 624 and BOLA came into existence. The applicant testified that 624 owned the real estate at 20 Simcoe Street North in Oshawa, out of which BOLA originally operated. That property was purchased in 2011 from a company operating as Tribal Voices. Through 624 the applicant also bought the inventory of Tribal Voices. The applicant said that his original intention was to take over the business, make some money, and then eventually open a second salon location.
[33] The applicant (through BOLA) operated the business at Simcoe Street North for “one to two years”. It operated at a loss throughout, so the applicant decided to sell the real estate. The losses appear in the financial statements for 624 for the fiscal years 2011 and 2012. [4] When the real estate was sold in 2015, 624 realised a profit which was reflected in its financial statement for that fiscal year. The applicant never claimed a capital cost allowance regarding that property.
[34] BOLA now owns and operates 94 Tulloch Drive, Ajax, and 624 owns and operates 96 Tulloch Drive Ajax. Both are residential units and both were rented out at the time of the trial. The applicant testified that he bought the properties as an investment and to create a positive cash flow. There is now a positive cash flow. The applicant has not taken any capital cost allowance regarding either property.
[35] Mr. Douglas’ retainer was to look at all three companies. Instead, he ignored the profit and losses incurred in 624 and BOLA, for questionable reasons. Yet, he included hypothetical interest income from 624 and BOLA to Aquilibrium while neglecting to consider how that would affect the bottom line of 624 and BOLA. That defies logic.
[36] It is far more reasonable for the applicant to include all of his income (and losses) from all three companies owned by him through his holding company.
[37] For those reasons, I decline to add any hypothetical interest income from 624 and BOLA to Aquilibrium.
[38] With respect to possible adjustments to income, that only leaves matter of cash income from tips.
[39] As I wrote above, the parties separated over 11 years ago. Therefore any observations by the respondent as to what tip income the applicant used to make have limited value. That is especially true given the applicant’s testimony as to how what he personally does now, as opposed to what he used to do, affects his tip income. Both in examination-in-chief and in cross-examination, the applicant gave reasonably coherent and logical evidence as to how tips are handled in the business and what he does with any tips that he is given. I accept his evidence that he pockets about $2,000 per year. That needs to be added and grossed up.
[40] Counsel for the respondent cited three cases regarding averaging, and referenced s. 19 of the Guidelines. [5] Section 17 of the Guidelines of course is the one dealing with “patterns of income”.
[41] Although Justice Sachs in Sarafinchin v. Sarafinchin, 2000 ONSC 22639, referred to s. 17 of the Guidelines, as I read her judgment, she did not rely upon the discretion of the court found in that section to fairly determine the payor’s income. Instead, she determined that the payor had failed to satisfactorily demonstrate why his net income for the current fiscal year had gone down as compared to the prior three years, even though his gross sales remained the same. In effect, she used s. 19 to effectively impute income to the payor.
[42] In Moran v. Cook, 2000 ONSC 22542, both parties had agreed that the court should employ a “pattern of income” approach. There is no such agreement herein.
[43] With respect to Caterini v. Zaccaria, 2010 ONSC 6473, there is no mention whatsoever of s. 17 or of a “pattern of income”.
[44] Counsel for the applicant provided no case law on this issue. I have looked at the cases cited Ontario Family Law Practice under s. 17. [6] There does not appear to be any single principle that can be drawn from those cases. However, there is one case that very much supports the applicant’s position herein. [7] As was the case in this matter, the parties in Miner v. Miner, 2004 ONCA 6661, with the assistance of experienced counsel, agreed upon a reasonable mechanism for adjusting child support, whereby the amount of child support varied according to what the applicant earned personally and through his business. The parties had followed this mechanism for many years and it was appropriate for the court not to alter their method of calculating income changes. Counsel for the respondent was less than persuasive as to why the court should depart from that.
[45] Based on my above findings and conclusions, the only adjustments to the applicant’s income to the amounts used by him to determine child support are the removal of the respondent as a subcontractor from Aquilibrium’s expenses and his tip income of $2,000 which must be grossed up as it is not reported to the CRA.
[46] As I set out in paragraph [8] above, the applicant did not, in his application, seek to deduct the losses in 624 and BOLA in 2012 when it came to determining his child support obligation effective June 1, 2013. There was never an amendment to that pleading. His counsel’s written opening statement set out that the applicant had paid $565 per month starting June 1, 2013, in the “firm belief that this correctly reflected his child support obligation.” This amount was based on an income of $62,041. In his argument, counsel sought to include all losses from all three companies for all pertinent years which would take his income down to only $6,898. In my view that would not be fair or appropriate based on the pleadings and the opening statement.
[47] Therefore, I start with $62,041. To that figure I am adding back in the amount paid to the respondent as a subcontractor: $16,531. Then I am adding another $2,920 for the grossed up tip amount of $2,000. The applicant’s income therefore for the period June 1, 2012 to May 31, 2013 was $81,942. That makes his monthly child support payments $735 starting June 1, 2103.
[48] With respect to the period starting June 1, 2013, the applicant in his pleadings sought to include his line 150 income, plus all income and losses for all of his companies for 2013. That comes to $125,628. I agree with that figure. To that must be added the amount paid to the respondent as a subcontractor: $14,604, plus another $2,920 for the grossed up tip amount of $2,000. The applicant’s income therefore for the period June 1, 2013 to May 31, 2014 was $143,152. That makes his monthly child support payments $1,212 starting June 1, 2014.
[49] For the period starting June 1, 2015, adding all of the applicant’s line 150 income for 2014, plus the net income from all companies, plus the amount paid to the respondent as a subcontractor, plus a tip amount grossed up to $2,920, brings his income to $136,466 for the purpose of determining child support. That makes the monthly child support payments $1,162 starting June 1, 2015.
[50] The court does not have the correct figures in order to calculate the monthly payments starting June 1, 2016. The parties will have to do that calculation themselves using the same formula employed by me in the above three paragraphs: the applicant's 2015 line 150 income, plus any amount deducted from Aquilibrium’s earnings for amounts paid to the respondent as a subcontractor (I do not believe that there were any that year), plus the net amount of earnings from all three companies, plus $2,920 for tips of $2,000 grossed up. Equally, the parties themselves will have to do the calculation as to what credit, if any, the applicant has as a result of my findings, or alternatively, what the arrears are.
[51] On the morning that counsel presented their arguments, they advised the court that they had reached an agreement that the respondent’s income would be deemed to be $40,000 per annum. Counsel for the applicant nonetheless argued that for the purposes of determining the parties’ contributions to section 7 expenses, the split should continue to be 50/50, based on the terms of the separation agreement. When cross-examined, the respondent acknowledged that the agreed-upon the split of section 7 expenses in the original separation agreement, and in every amendment thereto dealing with child support, was 50/50. The respondent’s answer/claim did not seek to readjust the parties’ contributions to section 7 expenses either retroactively or prospectively. She has never sought to amend her pleadings in that regard. I will not order otherwise.
[52] Counsel for the applicant may serve and file cost submissions, restricted to five pages, exclusive of a bill of costs, by forwarding same to my secretary within ten days of the release of this judgment. Counsel for the respondent may serve and file their response, restricted to five pages, within seven days thereafter and counsel for the applicant may serve and file their reply, restricted to five pages, within four days thereafter.
Footnotes
[1] Initially the applicant had said that he was the sole shareholder of all three companies. Nothing actually turns on this.
[2] Mr. Douglas’ testimony proved to be quite problematic regarding some crucial issues, to the point that I began to wonder whether the court should have accepted him as a qualified expert. At times he appeared biased, incompetent, or both.
[3] Persaud v. Persaud, 2009 ONSC 26605; Orser v. Grant, 2000 CarswellOnt 1354 (S.C.); Wilson v. Wilson, 2011 ONCJ 103.
[4] Those losses incurred by 624 for the fiscal years 2011 and 2012 are what triggered the applicant’s request to reduce in his child support payments starting June 1, 2013.
[5] Sarafinchin v. Sarafinchin, 2000 ONSC 22639; Moran v. Cook, 2000 ONSC 22542; Caterini v. Zaccaria, 2010 ONSC 6473.
[6] David M. Steinberg et al., Ontario Family Law Practice 2016, (Toronto: LexisNexis, 2015), at pp. 287-289.
[7] Miner v. Miner, 2004 ONCA 6661.
The Honourable Mr. Justice Roger Timms