Court File and Parties
COURT FILE NO.: FS-12-011-0000 DATE: 20160722 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: Carolina Froehlich-Fivey Applicant – and – Jeffrey Richard Fivey Respondent
COUNSEL: D. Andrew Thomson, for the Applicant Bonnie C. Oldham, for the Respondent
HEARD: December 14, 16, 2015; January 7;8, 2016; February 1;2;3, 2016; March 23;24, 2016; April 27;28, 2016
BEFORE: E.J. Koke SCJ
BACKGROUND
[1] The parties commenced co-habitation in February, 1992 and were married on February 23, 1993.
[2] They entered into a marriage contract in which they acknowledged that Carolina had $30,000 as of the date of marriage and Jeffrey had $1,000.
[3] They bought their first home in Brampton in or around June 1992.
[4] Jeffrey worked at Consumer’s Distributing when the parties met. He later trained to become an HVAC technician and obtained employment in that field in the Greater Toronto Area. Carolina, who had a university degree in computer science, worked at what is now known as the Workplace and Safety Insurance Board (“WSIB”) where she earned a salary of approximately $50,000 per year plus overtime pay.
[5] Jeffrey and Carolina have two children. Christine was born on November 21, 1993 (presently 22 years old) and Stephanie was born on August 31, 1996 (20 years old this year).
[6] Around 2000 Jeffrey decided he wanted to move to the Parry Sound area where he had spent many summers at his family’s cottage. The WSIB was undergoing some changes and restructuring at the time and in 2000 Carolina accepted a severance offer which was available to her from the WSIB and they moved to Parry Sound.
[7] After moving to Parry Sound the parties started a heating and air conditioning business which they named Canadian Environmental Air Systems Inc. (“CEASI”). They were equal owners in the business.
[8] Jeffrey and Carolina separated on August 16, 2011 after eighteen and a half years of marriage. Carolina was 49 years old and Jeffrey was 42 at the time they separated. Christine was 17 years old and Stephanie was about to turn 15. Several weeks after the separation Christine moved to St. Catharines, Ontario to attend university. Stephanie continued to live in the matrimonial home with her mother.
ISSUES
[9] The following issues were raised in these proceedings:
a. Divorce; b. Entitlement to spousal support; c. Entitlement to child support; d. Determination of income for each party; e. Pro-rata sharing of extra-ordinary expenses; f. Valuation of the Business, Canadian Environmental Air Systems Inc. (“CEASI”) g. Equalization of the family property; and h. Adjustments for money paid/taken by Carolina from date of separation to date of trial.
DISCUSSION OF ISSUES
A. Divorce
[10] The parties have been separated for five years. The two children of the marriage are now adults. There is no reason why the request for a divorce should not be granted and accordingly this order is granted.
B. Entitlement by Carolina to Spousal Support
a) Carolina’s Role in the Home and in the Business prior to Separation
[11] Initially, the HVAC business was carried out from home. Carolina divided her time between caring for the children (age 4 and 7 at the time) and answering the phone, preparing billings, and taking care of banking and miscellaneous paperwork for the business. Jeffrey was responsible for sales, installation and service work.
[12] Eventually, they moved the business out of their home and into a separate location. The business employed a bookkeeper and Carolina’s role in the business diminished.
[13] The business was financed in a rather unconventional manner. In addition to bank financing, a number of credit cards were used by the business to make purchases and pay bills so that the parties could collect “travel points”. Some of these credit cards were in the party’s personal names and some were in the business name. The parties frequently failed to distinguish between business purchases and purchases for items and services which were clearly for personal use.
[14] Carolina explained that eventually it became her responsibility to attend at the business on a regular basis to “move the money around”. By “moving the money around” she ensured that the various credit cards and bank accounts did not exceed their credit limits and that there was sufficient money available to pay suppliers, employees and other creditors.
[15] In 2003 Carolina decided to attend university in North Bay, Ontario and obtain her teaching certificate. During this time Jeffrey’s responsibilities in the home increased. Carolina graduated with her teaching degree in April, 2004.
[16] Following her graduation Carolina was unable to obtain a full time teaching position but obtained temporary teaching assignments as a supply teacher with the local school board. She continued to attend at the business to “move the money around” but was not otherwise actively participating in the day to day operations.
[17] In 2011 the business paid Carolina a weekly income of $875.00…her T-4 from the company for that year indicated that after adjustments she earned $43,825.00.
[18] At the time of separation Jeffrey was receiving a weekly draw of $1605.00 ($83,460.00 per annum from the business. To this was added the value of benefits, additional draws and personal non business related expenses. His reported income for the years 2008 through 2011 was as follows:
2008: $52,849.94 2009: $78,440.00 2010: $87,960.00 2011: $92,833.28
[19] Jeffrey submits that his income was artificially inflated by $7,193.29 in 2011. Although Carolina no longer worked in the business following separation she retained on-line access to the bank accounts and to the books and records. Carolina calculated that Jeffrey was owed the sum of $7,193.29 for accumulated vacation pay and following the separation she attributed this as income to him but deposited this sum in her bank account. This had the effect of increasing his income for 2011 by $7,193.29. This money was later applied to Christine’s university costs.
[20] It is clear that the parties lived well beyond their means prior to separation. They purchased a number of expensive boats and personal watercraft, ATV’s, snowmobiles, and vehicles and they travelled regularly. Many of the purchases were made using funds and credit from the business. As will be seen below, they had accumulated substantial debt at the time of separation.
b) The Parties’ Circumstances Following Separation and Prior to Trial
Carolina
[21] Carolina has a degree and extensive experience working in computer technology as well as experience in bookkeeping. She also obtained her teaching licence in 2004. It would appear that the only work she pursued with any intention following the separation was teaching.
[22] Following the separation Carolina used her on-line access to the company accounts to withdraw funds and pay personal expenses and expenses on behalf of her children. She received the following amounts during the first 10 months:
a. August 2011: $5,422.81 b. September 2011: $36,660.06 c. October 2011: $10,670.80 d. November 2011: $8,177.97 e. December 2011: $6,812.57 f. January 2012: $13,113.57 g. February 2012: $11,911.69 h. March 2012: $7,444.88 i. April 2012: $7,289.91 j. May 2012: $6,721.19 $114,225.45
[23] The expenses which she paid using these funds included payment of legal fees and paying down her personal credit cards. As discussed below, Carolina eventually received a court order from a motions court judge requiring Jeffery to pay her spousal and child support retroactive to September, 2011. In making this order these payments were not fully recognized or accounted for, which resulted in Carolina effectively receiving a significant premium or duplication of benefits.
[24] In June 2012 (ten months after the separation) monthly payments to Carolina started to normalize around $4,000 per month which were inclusive of payments for spousal and child support.
[25] Jeffrey’s attempts to restrict Carolina’s access to company accounts resulted in an application for an order for spousal and child support by Carolina. In December, 2012 Jeffrey was ordered to pay $2,258 per month for spousal support and $1,287.00 for child support ($3,545.00 for combined spousal and child support), on an interim basis ($42,540.00 per annum). These payments were based on what the motions court judge determined was an annual income for Jeffrey of $123,567. These payments continued from December 1, 2012 to December, 2015, a period of 3 years. During this time Carolina continued to accept teaching assignments which supplemented her income. A motions court order made on September, 30, 2013 resulted in this order being made retroactive to September 1, 2011. On December 16, 2015 the court made an order reducing Jeffrey’s monthly support obligations to $1,500 per month.
[26] In addition to the above payments to Carolina, Jeffrey took over payment of the joint debts (a total of $80,564.86), including the 2nd mortgage on the matrimonial home in which Carolina was living. He also maintained the business and the other credit card debts which were in his name. Specifically, post separation, Jeffrey assumed payment of $181,720.63 in debt itemized as follows:
a. The 2nd mortgage ($38,581); b. Joint LOC with BMO ($33,871.24); c. Joint CIBC LOC ($8,112.62); d. Canadian Tire MasterCard ($8,624.93); e. BMO MasterCard ($9,054.90); f. Business account ($59,854.29) and g. Wells Fargo ($23,621.65).
[27] Post separation Carolina was responsible for paying debts totalling $56,524.04, excluding the 1st mortgage on the home. Specifically, Carolina took over the following:
a. Her CIBC LOC ($7,895.20); b. The Joint CIBC LOC ($8,112.62); c. Sears Card ($6,575.76); d. CIBC Visa ($23,689.17); e. TD Visa ($10,251.29).
[28] The sum $12,628.43 was owing on a CIBC Citi Gold card and shortly following the separation Carolina arranged to pay this account through the business account, and in so doing, this sum was arguably transferred to Jeffrey;
[29] While Carolina retained responsibility for paying the 1st mortgage in the amount of $187,712.55, she also lived in the home which is valued at $294,000.00.
Jeffrey
[30] After the separation Jeffrey continued to operate CEASI. Responsibility for maintaining the books and records and preparing the year end for CEASI was transferred to Gilbert and Larkin LLP, a professional accounting firm. Gilbert and Larkin introduced a much needed element of fiscal discipline to the business. The parties were no longer free to use the business accounts for personal use, as was the case when they were together; any exceptions resulted in such expenses being credited as income.
[31] Ms. Christine Larkin, a partner with Gilbert and Larkin filed an expert report in which she provided her opinion as to the income available to Jeffrey for support purposes. She testified that the business was struggling. She calculated that the business sustained a pre-tax loss of $107,418 for the year 2012 and a loss of $140,019 for the year 2013.
[32] In 2013 the bank froze the business account after Carolina insisted that she be permitted continued access over the company’s business accounts and Jeffrey objected. Jeffrey then started a new company to continue the operations of CEASI (2364939 Ontario Inc.) Ms. Larkin calculated that this new company sustained a loss of $20,266 in 2013 and a loss of $94,193 in 2014.
[33] Ms. Larkin testified that during the years following the separation the business not only lost a number of major commercial clients but was also struggling to repay accumulated debt. She calculated that Jeffrey’s income available for support purposes was $75, 887 for the year 2015. She qualified her report by stating that “Jeffrey Fivey has only been able to take the salary that he has taken in the last 3 years because his mother, Carol Fivey, continues to advance funds to the company to support this salary and other business operations.”
[34] Carol Fivey testified that since his separation she has loaned her son and the business a total of $279,070 and that this was provided to assist Jeffrey in meeting his financial obligations, including his spousal and child support payments. She and Jeffrey’s father also assist Jeffrey by permitting him to live in a house owned by them for which Jeffrey is not required to pay rent.
[35] As noted, spousal and child support was initially set at $3,545.00 per month ($42,540 per annum) by the motions court judge commencing December, 2012. This was based on an income attributed to Jeffrey of $123,567 per annum. This means that Carolina has received spousal and child support from September 1, 2011 until December 2016 (4 years and 4 months) in the amount of $3,545.00 per month and spousal support of $1500 per month from January 1, 2016, to the present (another 8 months as of August 1, 2016), for a total of 5 years.
[36] Based on the fact that his post separation earnings were only made possible through the accumulation of a substantial debt to his parents Jeffrey submits that this level of support represents a significant premium to Carolina.
[37] Jeffrey remains optimistic that the business will turn around, notwithstanding that it has been operating at a loss for the past number of years. He is prepared to pay support based on an income of $75,887.00 going forward for a limited period of time but acknowledges that this will require continued contributions by his parents.
c) Carolina’s Capacity to earn an Income
[38] Carolina’s options to work as a teacher came from the Parry Sound High School Principal, Mr. Douglas who confirmed that Carolina could apply to be on both the high school and elementary rosters, if she wanted. He acknowledged that changes in the system meant that she needed to apply to both lists separately. Carolina’s evidence was that she was no longer eligible to teach at an elementary level, which is inconsistent with the evidence of Mr. Douglas. It appears that she should be able to teach at both levels if she applies to be on both rosters.
[39] Mr. Douglas’ evidence was that his school, the Parry Sound High School, alone requires approximately 2 supply teachers a day. Additional supply teachers would be required by other schools in the Near North School District.
[40] Carolina’s Income tax information confirms that she earned $27,057.04 in 2014 and $24,503.17 in 2015 from her work for the school board.
[41] Exhibit 16 at trial was a copy of Carolina’s Statement of Earnings from the school board for one pay period which supports her evidence that she is paid $40 hour for continuing education (tutoring which she does at least 2 hours per week) and $230 per day for high school supply teaching and $40 per hour with the First Nations (where she works 2 days per week).
Court’s Position on Spousal Support
[42] I do not find that Carolina has been disadvantaged by the marriage break-down on a permanent basis. Although she no longer enjoys the standard of living she enjoyed prior to her separation from Jeffrey it is clear that she and Jeffrey’s previous standard of living was based on an accumulation of debt and an allocation of personal expenses to the business, which allowed them to live well beyond their means. Jeffrey’s standard of living has also diminished considerably post separation. He lives free of rent in a house owned by his parents. His motor yacht has been in storage for the last several years. The only reason he has been able to meet his daily expenses and support payments is through the generosity of his parents.
[43] Carolina has worked and was re-educated during the marriage. She has experience and a university degree in both education and computer science and she has the ability, skills and education to become financially independent. In my view she is not entitled to compensatory support.
[44] There is some evidence to support Carolina’s claim that she now suffers from depression and/or anxiety which has resulted in a couple of brief periods of hospitalization and possibly the need for medication. However, it would appear that her condition is at least in part due to the general stress of the breakdown of the relationship and her own reduced financial situation (which in my view results in part from her refusal to come to terms with the fact that she cannot maintain her pre-separation life style and standard of living). There was no medical evidence presented during the trial that would indicate that Carolina has health issues which compromise her ability to work full time.
[45] Although Mr. Douglas testified that full time positions do become available I do not believe it is appropriate to assume that Carolina will be able to obtain a full time teaching position in the near future. However, in my view, if properly focused Carolina could earn a reasonable income as a part time or supply teacher. In the case of Sinclair v. Sinclair, 2013 ONSC 1226, [2013] OJ No 1150, 2013 CarswellOnt 2788, Parayeski J. held that the claimant “has to get on with life and support herself.” (at para 53), and he imputed an annual income to the mother of $40,000, being roughly 50% the average annual income for teachers despite the fact that she had not been working as a teacher for several years.
[46] The evidence before the court indicates that Carolina should be able to earn at least $35,000 to $40,000 per annum from teaching given her qualifications at this time. In fact, once she is relieved of her court obligations and the distractions which come from being involved in this litigation it is likely that she can make significantly more through supply teaching, tutoring and providing computer related services.
[47] I have decided that spousal support will continue for a limited period of time. During the time Carolina remains eligible for support I have decided to apply an imputed income of $35,000 per annum to her, for the purpose of calculating these support payments. This is less than the $40,000 imputed to a teacher in the Sinclair case referenced above and gives Carolina time to re-integrate more fully into the work place.
[48] For the purpose of calculating Mr. Fivey’s spousal support obligations I accept Ms. Larkin’s opinion that Jeffrey can expect to earn an annual income of $75,887 per year. I must say that given his and the company’s accumulated debt I find this estimate to be rather optimistic.
[49] A divorce mate calculation based on an assumption that Jeffrey receives an income of $75,887 per year and that Caroline earns $35,000 per year results in a low range support obligation of $971/mo., a mid range obligation of $1133/mo. and a high range obligation by Jeffrey of $1295/mo.
[50] Based on these calculations it is clear that support payments to date have represented a premium to Carolina; in other words it was fixed at a rate higher than Jeffrey’s income could justify.
[51] Given that there is strong evidence that Carolina can become financially independent, a lump sum or step down of support is appropriate. Also, given the fact that this litigation alone has likely hampered Carolina’s ability to become financially independent, and there is no basis for a compensatory award of support, a clear fixed termination of support is preferable to an obligation to return to court to re-litigate the issues.
[52] I am ordering that the existing order of $1500 per month for spousal support continue for a period of 12 months, from September 1, 2016 through August 31, 2017. Thereafter, I am ordering that support continue at the rate of $1300 per month for a period of four and a half years, through February 28, 2022.
[53] The litigation involving the issues in this case has now been ongoing for almost 5 years. It has been very contentious. For this reason, I am ordering that the support payable commencing September 1, 2017 is to be paid as a lump sum based on its present value which I calculate to be $49,968.00 (assumptions include tax rates and payments remaining constant throughout payment period). Carolina will be assuming ownership of the matrimonial home and I am also ordering that this lump sum can be set off against any money found to be owing from Carolina to Jeffrey for equalization purposes.
C. Entitlement to Child Support
[54] Both children remained in the home with Carolina following the separation. Christina was 17 years of age (turning 18 in November 2011). Stephanie was 14 years of age (turning 15 within 2 weeks).
[55] Jeffrey does not dispute his obligation to pay child support. The only issues in terms of support are the duration and the amount, which depends upon the income analysis.
[56] To date, Jeffrey has paid child support based on an imputed income of $124,567 per year. While it is Jeffrey’s position that this income was overstated, he is not looking for a retroactive adjustment to child support based on his income level, only on the basis that his payments exceeded the period of entitlement.
What is the duration of support for Christina?
[57] Christina left for university in St. Catharines in September, 2011 following the separation.
[58] After she left for university Jeffrey continued to pay “summer support” for Christina in addition to a pro-rata share of her tuition and rent.
[59] Summer support is calculated as the amount of support owing for the four months during the summer that university students may choose to live at home, but pro-rated and paid over the full 12 month period. The motions court judge ordered that the amount payable by Jeffrey for Christina was $2,220.00 per annum or $185.00 per month.
[60] Jeffrey does not dispute his responsibility to pay a pro-rata share of tuition and rent throughout Christina’s post-secondary education, but disputes the obligation to pay ongoing “summer support” beyond the summer of 2012.
[61] Jeffrey acknowledges that Christina returned home for most of the summer in 2012 and therefore is not seeking any adjustment for the first 12 months.
[62] However, as of the summer of 2013, it is Jeffrey’s position that summer support should have ended because Christina did not return home during the summer.
[63] Carolina’s evidence at trial was that Christina was home for the 1st two months of 2013 and that she then lived and worked at an Autism Camp in July and August. During the first two months, Carolina conceded that there was not too much work in Parry Sound and that Christina maintained her apartment in St. Catharines because she was unable to sublet. As a result, even during the first 2 months, she was not at home continuously.
[64] In the summer of 2014, Carolina’s evidence was that Christina was home working for Jeffrey for about 2-3 weeks and then she went to Africa and then worked at the Autism Camp in St. Catharines.
[65] Both would agree that Christina did not come home for the summer of 2015 as she was employed at a group home in St. Catharines.
[66] The case law supports a parent’s obligation to pay child support in the summer months, if the child returns to the custodial parent’s home for the summer. However, if the child does not return home, there cannot be any obligation to pay support to the custodial parent. In this case, Jeffrey took on the responsibility of paying Christina’s rent during the summer months (which should have been shared on a pro-rata basis) and her tuition (which also should have been shared on a pro-rata basis).
[67] In my view, Jeffrey was obligated to pay summer support for Christina through to the end of June, 2013. He continued to pay child support to Carolina for Christina at the rate of $185 per month from July, 2013 through to the end of December, 2015 and he is entitled to a credit for this overpayment which I calculate to be $5550 (30 mo. x $185).
[68] Jeffrey has paid 100% of Christina’s rent in St. Catharines since 2011. For the first three years, until February 2014, he allocated 31.5% to Carolina by deductions to her support payments. As of March 2014, he has not been able to recoup her share, and he is therefore entitled to a credit for the overpayment which arose after March, 2014.
[69] Similarly, with Christina’s tuition, Jeffrey allocated amounts up to the spring of 2014 to Carolina. However, since September 2015, he has paid 100% and he is entitled to an offset as calculated below. This offset includes an additional offset with respect to the sum of $3, 326.00 which he paid following the adjournment of the trial in December, 2015.
[70] Christina has now graduated and at this point, it appears that she will be working abroad next year. Any further support obligations by Jeffrey should be voluntary and between him and his daughter.
What is the duration of support for Stephanie?
[71] Stephanie was living with Carolina at the date of separation and was entering into Grade 10 in September 2011. The amount of support allocated to her by the motions court judge was $1073 per month.
[72] There is no dispute that Stephanie completed her 2011/2012 school year and that Carolina was entitled to support for that full year.
[73] Stephanie re-enrolled for 2012/2013 school year, but only received 5 credits by June 2013, less than full time course load which is typically 4 credits per semester.
[74] For the 2013/2014 school year Stephanie did not receive any credits towards her high school diploma. She transferred over to Almaguin Highlands high school for a period of time, but withdrew before completing any credits.
[75] In September 2014, Stephanie enrolled in the Alternative Program and worked for Esso as a co-op student. Although she was able to obtain credits for her co-op program, it is clear that she did not engage in any in-class studies.
[76] Stephanie continued to work at Esso during the summer of 2015.
[77] There does not seem to be any dispute that Stephanie did not enroll in school in September, 2015 for the 2015/2016 year. She was 19 years old at the time.
[78] While there is some suggestion that Stephanie had a difficult time with stress and was unable to attend school for periods of time, there is no medical evidence to prove that she is dependent on her parents as a result of some medical condition. Carolina claims that Stephanie suffers from agoraphobia whereas Jeffrey testified that she has attended family functions with him and that she exhibits no signs of inability or difficulty in managing that environment.
[79] Jeffrey questions whether he had any obligation to support Stephanie beyond the spring of 2012 which was the last time that she was enrolled in a full time program; however, he has decided not to claim any repayment of child support for Stephanie until July 1, 2015. She was 18 years old at that time and she has not returned to school after that date.
[80] Stephanie still needs two credits to complete her high school diploma. Jeffrey maintains that he will assist Stephanie financially if she wants to go onto continue her high school diploma, or any post-secondary degree, but he is not prepared to pay support unless she is enrolled in a full time educational program.
[81] In my view, Jeffrey’s agreement not to contest the payment of support for Stephanie through July 1, 2015 represents a generous gesture on his part in view of her checkered academic history. I have confidence that he will provide her with some form of support if she decides to complete her education. He is entitled to a credit of support paid after July 1, 2015. I calculate this credit as follows: $1,073 per month for six months (July 1, 2015 until December, 2015) = $6,438.
D. Pro-rata Sharing of Extra-Ordinary Expenses
[82] The Child Support Guidelines provide that each parent will be responsible for a pro-rata share of any section 7 extra-ordinary expenses.
[83] There does not seem to be much dispute by the parties that the following are proper extra-ordinary expenses:
a. Christina’s tuition b. Christina’s rent; c. Christina’s massage (for medical reasons); d. Dental fees for both children;
[84] There is some dispute over the cell phone bills. Jeffrey agreed to include Christina’s cell phone as an extra-ordinary expense, but not Stephanie’s. His evidence on this point was that she did not need the phone as she was living with her mother. He felt that it was a privilege and that if she was not going to school, he was justified in making her pay for her own phone (or if her mother chose to allow her to have it, that she should pay for it).
[85] The total amount paid towards Stephanie’s cell phone over the years is nominal.
[86] I note that during much of the time Stephanie was not in school she was working at Esso. I understand she was paid for this work. I agree with Mr. Fivey that Stephanie should be responsible for her own cell phone expenses.
[87] I am attributing a pro-rata amount to extra-ordinary expenses of 31.5% with respect to Carolina which is the amount to which Jeffrey agreed. I note that this percentage was referred to by Carolina in an affidavit filed by her on October 2012 in an affidavit in which she accepted the allocation of 31.5% for certain expenses.
[88] In applying a pro-rata percentage of 31.5% I note that if I were to apply an imputed income of $35,000 per year to Carolina and $75,887 to Jeffrey, Carolina’s share of extra-ordinary expenses would be 31.5% (without spousal support), but if spousal support were ongoing, Carolina’s pro-rata share would be significantly higher.
[89] Based on the evidence at trial, I calculate that the extra-ordinary expenses for Christina’s rent and tuition for which Carolina has not paid her pro-rata share total $6,374.24. The detail of this calculation is set out as follows:
Rent paid by Jeffrey for Christina for which he has not been reimbursed: $8,945.00 Tuition paid by Jeffrey for which he has not been reimbursed……..……$ 11,290.68 Total……………………………………………………………..………. $20,235.68 Carolina’s share at 31.5%............................................................................. $6374.24
[90] Following the trial of this action counsel presented their final submissions in writing. In her final submissions Carolina listed a number of what she described as extraordinary expenses which she allegedly paid. The largest expense was an expense of “$24,000 for “living expenses i.e. groceries” which allegedly were paid during Christina’s years in university.
[91] In my view, these expenses cannot now be considered. Although she made some comments at trial about contributing to Christina’s living expenses while she was in school there was no evidence tendered at trial by Carolina to establish the amounts paid or that these expenses constituted extraordinary expenses. Also, there was no documentation filed with the closing submissions as evidence of these expenses or that they were paid.
E. Valuation of the Business
[92] The parties started the business in Parry Sound in 2000 as a sole proprietorship. It was incorporated in 2007.
[93] Each party retained an expert to provide an opinion on the valuation of the business. Christine Larkin was retained by Jeffrey and prepared her report on March 29, 2012. Mr. Mandel was retained to provide a review of Ms. Larkin’s report. His report is dated March 6, 2014.
[94] Carolina questions whether the court should accept Ms. Larkin as an expert. Although she agrees that Ms. Larkin is qualified to provide the value of a business, she points out that her association with the business disqualifies her as an expert.
[95] I do not share these concerns. Ms. Larkin filed and confirmed an Acknowledgment of Experts Evidence. She was initially hired to provide a business valuation, which she completed on March 29, 2012 and thereafter she was retained to prepare the company’s financial statements for 2011 and then performed the income analysis which was completed on November 2, 2012. Despite her subsequent association with the business, I find no basis that Ms. Larkin was not able or willing to provide the court with fair, non-partisan and objective evidence.
[96] Both experts used a going concern approach. Mr. Mandel concluded that the business was worth between $165,000 and $230,000 with the mid-point being $198,000. His valuation includes a shareholder loan of $28,713.
[97] Ms. Larkin’s report values the business at $95,000, exclusive of the shareholder loan. Her report was completed before the 2011 financial statements were completed. At the time of the report, the shareholder loan suggested a value of $13,200 owing to the shareholders as of August 15, 2011. However, upon completion of the year end, it became clear that the shareholders had removed more money from the company than previously reported and accordingly owed the company $51,503 as of the date of separation. This information and analysis is set out at Note 5 on Schedule 3 of Ms. Larkin’s Income Analysis from November 6, 2012.
[98] There were three main differences between the experts reports:
a. Ms. Larkin used a five year business cycle whereas Mr. Mandel used a four year cycle; with a focus on 2009 and 2010. Notwithstanding the fact that he had access to the actual 2011 income information, he did not use it and placed only nominal value on the 2011 interim numbers. b. Ms. Larkin used a lower multiplier of 3.0 and 2.5 whereas Mr. Mandel used a multiplier of 4 times earnings. c. Mr. Mandel applied a Tax Shield on Capital Reinvestment and on Existing Capital Assets.
Business Cycle and Hindsight
[99] Mr. Mandel refused to use 2011 actual numbers on the basis that it would be hindsight. Ms. Larkin suggested that by not using 2011 numbers, he inflated the business.
[100] While Ms. Larkin acknowledged that hindsight should not be used when it is the result of a change in course of the business, she noted that it was proper to use accurate numbers when they are available; particularly if they simply correct an inaccurate assumption.
Multiplier
[101] Ms. Larkin testified that the multiplier used is the inverse of the risk of the business. Therefore the higher the risk, the lower the multiplier because the potential purchaser will want to get his/her money back in a shorter period of time, given the high risk of the sustainability of the business.
[102] Mr. Mandel’s multiplier was based on a Business Reference Guide which uses gross income as a guide and does not consider differences in regional markets. In deciding to consider the regional market in which CEASI carries on business, Ms. Larkin submits that a business in the GTA with a $1 million gross will have greater access to replace lost business than a business in Parry Sound with $1 million gross.
[103] Ms. Larkin’s accounting firm is located in the town of Bracebridge, Ontario. It services clients in the Parry Sound and Muskoka region. Jeffrey argues that given her location and her client base Ms. Larkin is well placed to consider the local market, the risks associated with the loss of clients and long term contracts for this company.
Tax Shield Adjustments
[104] The Capital Reinvestment Value of $30,000 was the number that Ms. Larkin deemed necessary to reserve for the purposes of replacing equipment. She did not agree that a tax shield needed to be applied to this number; particularly if it was added to the existing capital assets. The value of the tax shield applied by Mr. Mandel was only $3,000 in any event (i.e., would have increased Ms. Larkin’s valuation by $3,000).
[105] Ms. Larkin did concede that a tax shield on the existing capital assets was a fair adjustment and therefore she was prepared to add $9,134 to her valuation, making the total $104,000.
Analysis of Business Valuation
[106] Carolina claims that the business is worth more than the $197,000 valuation placed on it by Mr. Mandel. Jeffrey suggests that the value of the business is even less than the $104,000 value placed on it by Ms. Larkin.
[107] The evidence is that in 2001 the parties sold their home and bought a home in Parry Sound. Jeffrey received a $50,000 inheritance; $30,000 of which went to purchase a boat and the balance for household spending. They had a first mortgage on their home.
[108] Carolina testified that by 2004 (four years into the business and three years after the sale of their Brampton home) they were doing so poorly that they had to take out a second mortgage on their home in the amount of $65,000. There is conflicting evidence as to whether the money went into the business or to support personal expenditures, but either way, the substantial increase in debt shows that the business was not generating enough income to sustain the family spending.
[109] If the second mortgage was used to support the business; that only solidifies Jeffrey’s position that the value of the business is less than analyzed by either valuator (neither of whom included this debt in their valuation of the business).
[110] Ms. Larkin was clear that if the business had more debt than its value would be lower.
[111] Ms. Larkin’s evidence was that there were not enough assets/value in 2007 to bring all of the sole proprietorship debt into the corporation because you cannot roll in more debt than the value of the assets.
[112] Consequently, there were a number of “business” debts which remained as personal debt and continued to be outside of the value of the corporation.
[113] Carolina testified that as of 2007, all of her credit cards were at zero and that she had $100,000 in her bank account. She acknowledged that some of the money was from an inheritance and Jeffrey claims that some of the money which was placed in the account was a short term deposit on a school board project. Either way, the money was gone by 2011 when they separated.
[114] Jeffrey argues that the swing from a bank account with $100,000 and zero credit card balance to debts by Carolina in excess of $83,000 (after deducting the 1st and 2nd mortgage) and a diminished bank account, within a four year period, supports his claim that the business was not as viable, or valuable as Carolina claims.
[115] Carolina submits that her credit card debts should be part of the business valuation because they were corporate debt. Carol Fivey testified that she tried to get proof from Carolina that the debts were corporate debts so that she could include them as expenses, but never did get the backup necessary to include them.
[116] Either way, both parties are responsible for the debt jointly as of the date of separation, whether in the corporation, in Jeffrey’s name alone, in Carolina’s name alone or in joint names. If all of the credit card debt that Carolina claims to be corporate debt were to be included in the valuation of the business, it would only serve to reduce the value of the business.
[117] Finally, there was also evidence of three outstanding debts/judgements which were not included in either Ms. Larkin’s valuation or Mr. Mandel’s valuation which would reduce the value of the business. Specifically, they are:
a. Eden Energy Equipment Limited - $19,108.68; b. A Judgment in the amount of $9,059.20 for legal fees incurred in 2010; and c. A Judgment in the amount of $10,720 for equipment purchased prior to 2010.
[118] Jeffrey argues that the significant debt which has accumulated to his mother Carol Fivey (in the amount of $279,070) which was used to maintain the business (paying HST, suppliers, employee payroll, etc.) further confirms that the business is not as profitable and therefore not as valuable as initially believed.
[119] In my view, Jeffrey’s position is more strongly supported by the evidence. Although the business should be valued as of the valuation date, I agree with Ms. Larkin that it is not unreasonable to use accurate numbers which become available after the date of separation, particularly if they simply correct an inaccurate assumption. I note that in this case the post separation accounting was conducted in a much more professional and objective manner than it was prior to separation. It revealed for example that the principals and shareholders owed substantial sums to the corporation.
[120] In this case, post separation developments and accounting information also confirmed the fact that there is a volatility factor associated with this business which supports Ms. Larkin’s position that a lower multiplier should be used. These developments included the fact that post separation CEASI lost a number of valuable commercial accounts. Such accounts are difficult to replace in a small market area such as Parry Sound. Also, following the separation and without any warning more than half of CEASI’s skilled service people were induced to leave CEASI and take employment with a competing business. In a small centre such as Parry Sound such skilled tradespeople are difficult to replace, and their departure has also resulted in significant damage to the business.
[121] The fact that Carol Fivey has injected substantial sums into the business further confirms that the multiplier should be the lower multiplier based on local business experience.
[122] For the purpose of establishing equalization obligations, I am placing a value of $104,000 on the business, which I suspect may in fact be an optimistic given the above information. Jeffrey can purchase Carolina’s interest for $52,000.00.
F. Equalization
[123] Most of the values were agreed to during the course of trial, with the exception of the business value, and Carolina’s claim that her debts should be included in the business valuation.
[124] Since they were equal shareholders in the business, the net result is that the equalization payment, which is owing by Carolina to Jeffrey, is almost identical.
[125] Carolina’s final position is that her net family property is $175,126.16 and Jeffrey’s is $110,034.79, a difference of $65,091.37. This valuation results in an equalization payment by Carolina to Jeffrey of $32,545.69.
[126] Jeffrey’s final position is that Carolina’s net family property should be valued at $102,917.39 and his should be valued at $37,283.47, a difference of $65,633.92. This valuation results in an equalization payment by Carolina to Jeffrey of $32,816.96.
[127] Given that the only real difference is in the business valuation, the equalization payment in both cases is that Carolina owes Jeffrey between $32,500 and $33,000.
[128] The difference in valuations does impact the amount Jeffrey is required to pay Carolina for her 50% share in the business. I have accepted Ms. Larkin’s valuation and I have accepted that the outstanding shareholders loan is $51,503 (Ms. Larkin refers to this amount as a “receivable” due to the corporation due from the parties on the valuation date). Based on a valuation of $104,000 for the business I calculate Carolina owes Jeffrey $6,297.19 after adjusting for Jeffrey’s purchase of Carolina’s share of the business and assuming her share of the shareholder loan as of the date of separation. [$52,000 - $32,545.69 less one half of shareholder’s loan ($25,751.50) = $6,297.19].
G. Adjustments
[129] The other issue on the equalization is the fact that there are three joint debts.
[130] The equalization assumes that Carolina will take on her share of the joint debts. To date she has been unwilling or unable to contribute to these debts. The concern for Jeffrey is that if she defaults, he is liable to the banks.
[131] The joint debts total $80,564.86, as set out in paragraph 25 above. These include the following:
a. The 2nd mortgage ………($38,581.00); b. Joint LOC with BMO ….($33,871.24); c. Joint CIBC LOC ……..… ($8,112.62) ; Total……………………..$80,564.86
[132] Based on the equalization calculation Carolina and Jeffrey are each responsible for payment of one half of this amount or $40,282.43 as of the valuation date.
[133] Since the separation, Jeffrey has paid the sum of $36,306.21 towards reducing this debt, which now stands at $44,258.65 (as per his financial statement of November, 2015). His remaining obligation with respect to this joint debt is $3,976.22 ($36,306.21 + $3,976.22 = $40,282.43). Carolina has not paid down her portion of the debt which remains at $40,282.43.
Spousal Support Overpayments
[134] As noted, support was initially set at $2,258 per month for spousal support and $1287.00 for child support ($3545.00 for combined spousal and child support), on an interim basis, commencing December, 2012. (This was based on an income attributed to Jeffrey by the motions court judge of $123,567 per annum). By subsequent order dated September, 30, 2013 this order was later made retroactive to September 1, 2011. These court orders entitled Carolina to spousal support from September 1, 2011 through December 15, 2016 (4 years and 4 months) for the total sum of $117,416 and to child support in the sum of $66,924. The order for support was reduced to $1500 per month for spousal support only effective January 1, 2016.
[135] Carolina and Jeffrey separated on August 16, 2011. Since the motion court order did not go into effect until December, 2012 there was no support order in place for the first 15 months following separation. During this time period Carolina retained access to the company accounts and paid many of her personal bills from the business account on a regular basis. For example, she paid the sum of $15,480.25 to her lawyer by way of a cheque from the company account in the month of September, 2011. Numerous other payments were made as well, the total amount of which substantially exceeded the amount which Jeffrey was later required to pay as a result of the court order. The amounts she received between August, 2011 and May, 2012 are set out in paragraph 22 above.
[136] To further complicate matters, following the interim order for support Jeffrey continued to pay many bills and expenses which should have been paid by Carolina, but which she was unwilling or unable to pay herself. For example, he paid the lease and insurance payments on her vehicle because the vehicle was not in her name. Similarly, the hydro and satellite charges for the matrimonial home were in his name and he therefore paid these. Also, he paid the entire monthly amount for Christine’s apartment in St. Catharines, without receiving any contribution from Carolina. Initially, he reduced his support payments by the amount of expenses he paid on behalf of Carolina but Carolina responded by notifying FRO that Jeffrey had not complied with his support obligations, which resulted in an order requiring him to pay approximately $13,000 to Carolina.
[137] Considerable time was devoted at trial confirming that these various amounts were paid by Jeffrey. There was very little dispute from Carolina that these amounts were in fact paid on her behalf. The main objection from Carolina was that they were paid for by the corporation and not by Jeffrey and so they should not have been considered as support payments.
[138] In my view, Carolina’s position that these payments should not be credited against Jeffrey’s support payments cannot be supported for a couple of reasons.
[139] Firstly, there is no proof that many of the expenses were paid by the company, with the exception of some of the 407 bills and cell phones. Where there was evidence to suggest that items may have been paid for by the corporation prior to separation, Jeffrey, his mother and Ms. Larkin confirmed that these items were now being tracked as personal expenditures and even if paid by the company initially were pulled out into a shareholder account;
[140] Secondly, whether or not the expenses where paid by the corporation, this does not diminish the fact that Carolina received the benefit. Where the expense was paid for through the company, the corporate accountant grossed up Jeffrey’s income.
[141] Accordingly, it is Jeffrey’s position that no further adjustments need to be made on his behalf, the only adjustment is to calculate the total amount paid to Carolina, deduct the amount of child and spousal support owing and the net is owed to Jeffrey.
[142] Jeffrey carefully itemized (with supporting documentation) the amounts he has paid on behalf of Carolina from August, 2011 through December, 2015. At trial, Carolina only took issue with small amounts but otherwise adopted Jeffrey’s position. For example she questioned whether a dental bill of $300 was hers or the children’s (only 31.5% was attributed to her in any event). She questioned an e-transfer of $464.67; she questioned the Ikea bill of $224.87for Christine’s furniture; other payments to Christina attributed to her; the vet bill of $386; the storage fees of which only 31.5% (i.e. $55.70) was attributed to her. Accordingly, even if all of the amounts challenged by Carolina were deducted from the overpayment claim of $97,838.09, it would be less than $5,000; bringing the total owing, to Jeffrey, to about $92,838.09.
Adjustment for Shareholder Loans
[143] The revised financial statements for the business year ending 2011 indicate that there was a joint shareholder loan (“receivable”) owing to the business in the sum of $51,503 at the time of separation in August, 2011). Since the loan was joint, each of them has a responsibility to pay one half or $25,750 of this amount. However, by the end of the year this receivable had increased by $51,741 to $103,244. Ms. Larkin has calculated that $45,040 of this increase was attributable to Caroline who continued to have access to the company accounts and the parties’ joint accounts.
[144] It is clear that a number of the items on the shareholder loan attributed to Carolina are the same expenses as those included in the expenses which Carolina arranged to pay directly from the company bank accounts following the separation (see par.22). To avoid duplication, Jeffrey proposes that rather than reduce the sum of $97,838.09 by $45,040 and have Caroline pay $52,798.09 to him for the overpayment and $45,040 to the shareholder loan account, she simply pay him $97,838.09. In fact, in his final submissions he indicates that he is prepared to accept the sum of $92,838 which gives her the benefit of any discrepancy in the amounts in dispute.
[145] In making this proposal Jeffrey points out that by doing so he will be assuming the tax liability on the full shareholder loan, because he expects that he will not be in a position to repay the amount owing on the shareholder loan before it becomes taxable. This is a benefit to Carolina because she was able to utilize the funds without tax consequences.
[146] The shareholder loan owing to the date of separation does not represent a duplication of any kind and therefore is properly included on the NFP as a reduction in the value of the business.
Summary of Position and Calculation of all Adjustments
[147] Attached as Appendix “A”, is a summary of the total amount owing by Carolina after equalization and all adjustments are made. The total claim is for $164,266.22. I have deducted the present value of the support payable by Jeffrey commencing January 1, 2017, which reduces the amount owing to $114,298.22.
[148] I have assigned responsibility for payment of the joint debts, including the shareholder loan to Jeffrey, and included Carolina’s portion of these in the amount owing. I have chosen to do so because Carolina has not demonstrated a willingness to assume responsibility for paying any of these debts to date. Also, in the event she defaults on her obligation to pay her share of such debts, the obligation will fall on Jeffrey and accordingly I am including her share in the debt owed to Jeffrey.
[149] While the amount payable by Carolina may seem significant, it is important to remember that much of the debt accumulated by Carolina’s own actions (i.e. taking over $36,000 from the joint bank accounts to pay for her lawyer and other personal expenses; refusing to acknowledge the deductions from her support payments by Jeffrey for expenses she was obligated to pay and then applying to FRO to seek enforcement against Jeffrey for the total amount owing, even though she had received that benefit from Jeffrey).
[150] It is also important to remember that the parties have agreed that Carolina can retain the home, assuming she continues to make the payments on the first mortgage, and that Jeffrey still faces significant financial volatility. He will be taking on Carolina’s shareholder loans totalling $70,790 ($25,750.00 at date of separation and a further $45,040.00 between date of separation and December 31, 2011). This means that he either has to repay that money to the company, or pay taxes on it. He has also assumed responsibility to pay Carolina’s share of the joint debts owing at the time of separation ($40,125.00) and he owes his mother $279,070. Finally, Carolina has received the benefit of receiving spousal and child support payments based on a guideline support calculation which attributed a much higher income to Jeffrey than he actually received from the business.
[151] If Carolina is unable to pay the amount owing forthwith, the amount owing is to be secured against the matrimonial home in some tangible manner. Also, as already stated, Carolina’s debt to Jeffrey (and any balance above what can be secured against the home) should be offset by any spousal support payment that may be owing from Jeffrey to Carolina as lump sum support.
Costs
[152] If parties cannot agree on costs they can make submissions in writing in relation thereto within 15 days from the date this judgment is released. Submissions are to be no more than 5 pages in length, exclusive of attachments. Thereafter, they have 10 days within which to reply to each other’s submissions.
E.J. KOKE SCJ Released: July 22, 2016
APPENDIX “A”…RECONCILIATION OF AMOUNTS OWING
Carolina Pays to Jeffrey (as per Jeffrey’s Net Family Property Statement …………………………………….……. $32,816.96
Jeffrey pays to Carolina a business value of one half of $104,000……………………………………….……….. $52,000.00
Net owing by Jeffrey to Carolina…….………………..….………….. $19,183.04
Jeffrey assumes Carolina’s shareholder loan …………….…………... $25,751.50
Net owing by Carolina to Jeffrey……………………………………... $6,568.46
Carolina pays to Jeffrey payments of sums taken by Carolina from accounts following separation…………..……………………… $ 92,838.09
Net owing by Carolina to Jeffrey…….………….……….…………… $99,406.55
Jeffrey’s assumption of joint debts………………………………… $40,282.43
Net owing by Carolina to Jeffrey……..………….…………………… $139,688.98
Overpayment of Child Support by Jeffrey (Stephanie)……….…….. $6,438.00
Overpayment of Child Support by Jeffrey (Christina)…..……........... $5550.00
Net owing by Carolina to Jeffrey after considering child support ….… $151,676.98
Adjust for Extra Ordinary expenses paid by Jeffrey …...........................$6,374.24
Net owing by Carolina to Jeffrey……..………….…………………… $158, 051.22
Add amount owing re motion judge’s cost order of Jan. 22, 2013…... $6,215.00
Owing by Carolina to Jeffrey …………………………………..……… $164,266.22
Less present value of spousal support of $1300 per month for a period of four and a half years, from September 1, 2017 through February 28, 2022 (support payments and taxation rates remaining constant…………………………………………………… $49,968.00
Net owing by Carolina to Jeffrey …………….………………………$114,298.22