Q. v. S.

CITATION: Q. v. S., 2016 ONSC 7447

COURT FILE NO.: FS-11-368627

DATE: 2016-12-02

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Q. v. S.

BEFORE: Senior Family Justice Czutrin

COUNSEL: Natacha Reis Leite, for Ms. S, Respondent Fareen L. Jamal, for Mr. Q, Appellant Rebecca Hall-McGuire, for D. J. and N… Inc., Non-Parties

HEARD: October 28, 2016

For reasons that follow this endorsement is initialized and a limited publication ban is ordered pursuant to my discretion under s. 70 of the Children’s Law Reform Act. No person shall publish or make public any information that has or could have the effect of identifying the parties, the non-parties, or the children. Any person who has gained, or gains in the future, access to the court file is prohibited from communicating to any other person the identity of the parties, the non-parties, the children, or any information that has the effect or could have the effect of identifying the parties, non-parties, or the children. I stress the importance of not communicating or publishing even seemingly innocuous information such as the name of the companies or the hospital given that this information could have the effect of identifying the non-parties, the parties and their children.

ENDORSEMENT

OVERVIEW

This endorsement addresses income disclosure requirements where a party’s source of income is self-employment from businesses, through corporations in which the individual has an interest.

The Respondent mother (“RM”) has brought a motion seeking financial disclosure from the Applicant father (“AF”) and the non-party, D. J., in order to determine the AF’s income for support. The RM asserts that disclosure regarding the businesses is required to properly determine the AF’s true income, and that the little disclosure provided contradicts the AF’s stated income.

The AF is self-employed and is the 100% shareholder of a numbered company, 8…2 Canada Inc. (the “numbered company”). The numbered company owns 50% of N... Inc. The other 50% of N… Inc. is owned by the non-party, D. J. The AF’s income appears to come fully from N...Inc., either directly or through the numbered company.

The RM seeks the following disclosure from the AF and/or the non-party, D. J., relating to N…Inc.:

• Corporate tax returns with all schedules and attachments for the years 2013-2015,
• Notices of Assessment for the years 2013-2015,
• Corporate financial statements from 2013-2015,
• Full and complete business ledgers from January 1, 2013 to date,
• Invoices from January 1, 2013 to date,
• All cancelled cheques (front and back), received or provided, from January 1, 2013 to date,
• Receipts in support of all business expenses stated in corporate returns and financial statements from January 1, 2013 to date,
• Bank statements of all business accounts from January 1, 2013 to date, and
• A written statement confirming the names of all shareholders owning D. J. and their respective interests.

The RM also requests that the AF provide:

• Copies of receipts in support of all business expenses claimed in the AF’s personal tax returns and in the numbered company’s tax returns from January 1, 2013 to date,
• Documentary evidence detailing when the AF’s numbered company acquired the shares and voting rights of N… Inc., and
• Letters from the Royal Bank of Canada, Bank of Montreal, TD Bank Group (which includes all affiliates through TD Canada Trust), ScotiaBank, CIBC, Tangerine (formerly known as ING), PC Financial, Laurentian Bank, National Bank, HSBC confirming all of the AF’s accounts since January 1, 2013 to date.

The AF, and the non-party, D. J., as 50% shareholders of N… Inc., oppose the RM’s disclosure request. The AF argues that the disclosure provided is sufficient and that the principle of proportionality must be paramount in determining the disclosure that he must produce.

Counsel for the non-parties oppose the motion on the grounds that the information in the company documents is confidential and too revealing. The non-parties argue that the requested documents are not in either shareholder’s control. They also assert that the RM has not met the onus of establishing that it would unfair for her to proceed without the documents requested, and that the request is disproportionate. If the disclosure request is granted, the non-parties also request a confidentiality order and damages in the event of a breach.

BACKGROUND

The parties have two children who are dependents and the issue of their support is disputed. The RM also maintains her claim for spousal support.

The parties previously resolved support on September 12, 2014. The consent order recognized that the parties compromised and assumed their respective incomes for 2014 – $180,000 for the AF and $93,000 for the RM. The parties agreed to a review of the support in May 2016. They also agreed that commencing June 1, 2015, they would exchange income tax returns and other required documents under the Federal Child Support Guidelines (“Guidelines”)[^1] (and, I add on the facts of this case, may extend to Schedule III of the Guidelines).

At the May 24, 2016 conference, when this case returned on support and parenting issues, I endorsed that I required financial disclosure when the matter was to return before me on June 17, 2016.

The AF provided income tax returns for 2013 through 2015 that appeared to have been drafts all prepared at the same time.

The RM’s counsel advised the AF’s counsel, by way of letter dated June 13, 2016, that since the AF was self-employed, she required additional disclosure. In particular, she sought the disclosure outlined above as well as income slips and receipts to support the AF’s income tax returns, credit applications from January 2013 to date, and details of any other self-employment income or benefits collected by the AF since January 2014.

While the AF provided some disclosure, I ordered the AF to provide, by affidavit, confirmation of all of his business interests and the names of any businesses that he has an interest in, or is a shareholder, officer, or director.

The AF’s July 12, 2016 affidavit confirmed ownership of the numbered company and the shareholders of N… Inc. The AF also confirmed that he is the President of N… Inc.

The same affidavit confirmed that he had requested disclosure from the other shareholder of N… Inc., D. J., and that the request was denied.

The exhibits to the affidavit include the articles of incorporation of the numbered company as of July 16, 2013 and a June 21, 2016 letter on N… Inc. letterhead addressed to “Whom It May concern Re: payment to partners of N… Inc.”

The letter, signed by the AF as President and partner at N… Inc., G. K. as VP Finance and partner at N… Inc. and C. H., VP Content and Coverage and partner at N… Inc., also provided the following information:

• N… Inc. provided a list of all payments to partners in the company.
• N… Inc. was seeking independent legal counsel regarding its very specific and serious concerns around disclosure of any further information to the RM.
• N… Inc. was concerned about the mother’s use of any disclosure.
• Any further disclosure requests would only be addressed once the company reviewed the situation and received guidance from legal counsel.

The same affidavit provides information, in a June 10, 2016 letter signed by the AF and Ms. G.K. that $15,000 payments are made to the partners each month when funds are available. A list of all payments to partners from August 2013 through May 2016 was attached, with payments made to D. J., the AF, or the numbered company. The information provided asserts that N… Inc. runs at a loss from its early years of operation and that this is not unusual for a self-funded start-up. The company is allegedly at a deficit in excess of $200,000 to date.

Due to the non-parties’ objection to the RM’s disclosure request pursuant to Rule 19(11) of the Family Law Rules, I ordered that the RM’s motion be served on D. J. and set October 28, 2016 for the motion. At the motion, counsel for D. J. appeared and objected to the disclosure on the grounds set out above.

ANALYSIS

In addition to the support issue, the parties have also revisited parenting issues and I have again conferenced and managed their case. I will not deal with the substantive issues but as the issue of disclosure is a procedural matter and the parties and counsel took no issue, I will address disclosure and make efforts at resolution. If no resolution is reached, another judge will address support.

The parties each have an obligation to satisfy the court as to their income given that child support is in issue. Case after case at the appellate and trial levels has confirmed the critical importance of disclosure: see Chernyakhovsky v. Chernyakhovsky, 2005 6048 (ON SC), [2005] O.J. No. 944, at para. 6; Roberts v. Roberts, 2015 ONCA 450, at paras. 11–13. In Manchanda v. Thethi, 2016 ONSC 3776, at para. 1, Myers J. noted: “It has been clear for over 15 years that financial disclosure - early, voluntary, and complete financial disclosure - provides the factual foundation for the resolution of financial issues in family law proceedings.”

This obligation applies equally to individuals who are self-employed, whether through corporations or otherwise: Blaney v. Blaney, 2012 ONSC 1777, at para. 5; Whelan v. O’Connor, 2006 13554 (ON SC), [2006] O.J. No. 1660, at para. 13.

The Child Support Guidelines and the Family Law Rules (e.g., Rule 13) also speak to disclosure requirements. Rule 19(11) of the Family Law Rules specifically references non-parties:

If a document is in a non-party’s control, or is available only to the non-party, and is not protected by a legal privilege, and it would be unfair to a party to go on with the case without the document, the court may, on motion with notice served on every party and served on the non-party by special service,

(a) order the non-party to let the party examine the document and to supply the party with a copy at the legal aid rate.

For the reasons that follow, D. J., N… Inc., and the numbered company shall make the disclosure set out in the order below by no later than December 12, 2016, to the extent that the disclosure exists, and provide a timetable for compliance otherwise.

I will consider the AF’s motion for disclosure of the RM and any other disclosure issues related to the parties on a further motion date that the parties are to arrange through my assistant. The motion shall be no more than one hour. At that time, I will also hear submissions from the AF as to the RM’s request for letters from the Royal Bank of Canada, Bank of Montreal, TD Bank Group (which includes all affiliates through TD Canada Trust), ScotiaBank, CIBC, Tangerine (formerly known as ING), PC Financial, Laurentian Bank, National Bank, HSBC confirming all of the AF’s accounts since January 1, 2013 to date.

The order I now make reflects the request made by the RM. Subject to what the disclosure reveals, a further request may be considered at a later date.

The AF is in business and I remain somewhat unclear by the disclosure he has made to date what his income sources are as will be briefly described below. As I noted in G.V.G. v. M.L.Q., 2012 ONSC 4250, A.C.W.S. (3d) 373, at para. 142, self-employed individuals “must recognize their obligations and that they have the onus to establish to the court’s satisfaction their income for support by the Child Support Guidelines.”

The AF has known or should have known of his obligations since at least 2014, when the issue of his income and N… Inc. was being addressed as part of the support order now under review.

As I noted above, the AF provided draft personal tax returns and other disclosure, but his obligations go beyond this – especially given that his income sources are corporations in which he is a shareholder, an officer, or a director. He should now provide the actual filed returns and Notices of Assessments received personally or for his numbered company.

On a quick review of the payments made to partners, as earlier described, from January 1, 2015 to and including December 1, 2015, it appears that a total of $221,000 was paid to the AF’s numbered company. I note that on May 5, 2015, a further sum of $12,000 was paid directly to the AF. N… Inc. and/or D. J. has to provide better disclosure to explain why these payments were made and how they are reflected on the various financial statements of the various corporations.

The AF’s June 15, 2016 financial statement, while identifying real estate and personal bank accounts, discloses no interests in any business.

The 2015 return shows gross business income of $85,840, in addition to T4 income of $2,978 and net business income of $55,465.04.

While in response to this motion for disclosure, a letter was provided from the VP Finance of N… Inc. regarding payments made to the partners of N… Inc. for the period ending May 2016, it also advised that N… Inc. had not yet filed corporate tax returns but that “this is underway.” These returns are still outstanding.

I will not review, for the purposes of this motion, any more of the returns. However, the returns raise questions about how funds are distributed through either the numbered company or other companies that are involved in businesses that the AF has an interest in. These questions can only be answered by ordering further disclosure.

I am unable to accept the argument that the documents are in neither shareholder’s control. While Himel v. Greenberg, 2010 ONSC 2325 made a distinction between documents in the individual’s possession or control in his personal capacity as opposed to his capacity as shareholder and President, the presence of confidentiality clauses in a shareholder’s agreement appeared to have been a key distinguishing factor. No evidence of such an agreement was put before me. In any case, Spies J. ultimately granted the disclosure motion with regard to the non-party corporation.

A review of the disclosure jurisprudence indicates corporate tax returns, assessments, and financial statements have been ordered when an individual has an interest in a company: Gordon v. Guimont, 2016 ONSC 4569, [2016] W.D.F.L. 4777, [2016] W.D.F.L. 4788, 268 A.C.W.S. (3d) 611, at para. 7, and that non-party document disclosure has been ordered relating to determining interest and ownership interests in a company: Marcoccia v. Marcoccia, 2009 ONCA 162, [2009] W.D.F.L. 1237, [2009] O.J. No. 729, 175 A.C.W.S. (3d) 481, corporate credit card benefits and business ledgers: Burton v. Burton, 2016 ONSC 62, 262 A.C.W.S. (3d) 328, and bank account statements: Ahmed v. Ghuman, 2013 ONSC 4244, [2013] W.D.F.L. 4735, 229 A.C.W.S. (3d) 366. As previously mentioned, other relevant documents are also required under the Child Support Guidelines.

I have also considered the Dagenais/Mentuck test, as articulated in Sierra Club of Canada v. Canada (Minister of Finance), 2002 SCC 41, 113 A.C.W.S. (3d) 36. I am unable to accept the non-parties’ arguments regarding the necessity of a sealing order in this case. Mere economic harm alone is not sufficient to override the open court principle: Himel, at para. 52. Further, in addition to the restrictions under Family Law Rules 20(24) and 20(25) that the RM is bound by, she is prepared to sign a mutually agreeable confidentiality agreement and is agreeable to redacting client names of the involved companies. I am satisfied that a confidentiality agreement and redaction of client names adequately addresses the concerns relating to confidential client information and are reasonable alternative measures to a sealing order in the circumstances. While the RM and her counsel, and potentially an expert, must still be able to see the originals, they are not to remove or copy them.

Despite not accepting the non-parties’ submissions, pursuant to s. 70 of the Children’s Law Reform Act, I have initialized this endorsement and, subject to further order, I have ordered a limited publication ban. Given the allegations and the current serious health issues of one of the children, there is no doubt that it is in their best interests and a value of superordinate importance that they not be identified. However, any restriction on the open court principle should be limited to what is necessary. I do not believe that a sealing order is necessary or appropriate in this case as a publication ban adequately protects the children’s interests. I am also of the view that the salutary effect of protecting the children’s privacy outweighs the deleterious effect that the publication ban will have in the circumstances.

CONCLUSION

The AF’s disclosure obligations cannot be defeated on the grounds advanced by him and the non-parties.

1. The requested disclosure is consistent with the Child Support Guidelines and the Family Law Rules.

2. It would be unfair to the RM to proceed without the documents. The disclosure is consistent with the previous agreement reached as to disclosure, the agreed to review and compromises on income, and the father’s disclosure obligations. It is not at all disproportionate based on the AF’s stated source of income and obligations not only under the Guidelines, but corporate and personal tax filing requirements as well.

3. As the AF owns 100% of the numbered company that owns 50% of N… Inc. and the other 50% is owned by D. J., all relevant parties are before the court. I am satisfied that Rule 19(11) of the Family Law Rules applies here and I order that the AF provide the disclosure set out below.

4. The argument that by owning only 50% of N… Inc., neither shareholder has control as contemplated by Rule 19(11) is without merit. The AF has described himself as President of N… Inc. The individual shareholders are entitled to ask for the disclosure requested. In any case, I am dispensing with any consent as it would be unfair to the RM to proceed without the following disclosure:

Disclosure from the non-parties (D. J., N… Inc., and the numbered company):

• Corporate tax returns with all schedules and attachments for the years 2013-2015,
• Notices of Assessment for the years 2013-2015,
• Corporate financial statements from 2013-2015,
• Full and complete business ledgers from January 1, 2013 to date,
• Invoices from January 1, 2013 to date,
• Cheques received by the AF from N… Inc., D. J., or the numbered company from January 1, 2013 to date,
• Receipts in support of all business expenses stated in corporate returns and financial statements from January 1, 2013 to date,
• Bank statements of all business accounts from January 1, 2013 to date, and
• A written statement confirming the names of all shareholders owning D. J. and their respective interests.

Disclosure from the AF:

• Documentary evidence detailing when the AF’s numbered company acquired the shares and voting rights of N… Inc.,
• His personal tax returns, as filed, and received notices of assessment, and
• Documentation of business expenses as claimed on personal tax returns.

Any additional issues may be addressed on return of the motion for disclosure from the parties personally.

5. The RM’s counsel and an expert she may retain shall be entitled to examine all the original documents ordered disclosed. All documents are to be copied and these copies are to be used for all purposes of the case instead of the originals. Only after the originals are examined and copies are made can the names of clients be redacted from the copies.

6. The originals and one set of the copies, numbered to coincide with the redacted copies, are to be kept together for any future examination.

7. A confidentiality agreement may be signed by the mother and any dispute may be resolved by me. However, Rule 20 should be sufficient protection as all parties are bound and there shall be no delay in making the disclosure.

8. It is premature, and would encourage further litigation, to consider damages on an allegation of breach of the restrictions placed by this order and Rule 20 or any confidentiality agreement that may be signed.

9. The endorsement is to be initialized and a limited publication ban is ordered pursuant to my discretion under s. 70 of the Children’s Law Reform Act. No person shall publish or make public any information that has or could have the effect of identifying the parties, the non-parties, or the children. Any person who has gained, or gains in the future, access to the court file is prohibited from communicating to any other person the identity of the parties, the non-parties, the children, or any information that has the effect or could have the effect of identifying the parties, non-parties, or the children. I stress the importance of not communicating or publishing even seemingly innocuous information such as the name of the companies or the hospital given that this information could have the effect of identifying the non-parties, the parties and their children.

10. Costs and any issues arising from this endorsement may be addressed, if requested, by written submissions from each party and non-party. Costs outlines and written submissions are restricted to three pages each. The RM shall serve her material within ten days of receipt of this endorsement, and the non-party and the AF shall have ten days thereafter to make their written submissions and costs outline with the same restrictions.

Czutrin SFJ.

Released: December 2, 2016

[^1]: 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 situations 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.

(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.

19 (1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:

(a) the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse;

(b) the spouse is exempt from paying federal or provincial income tax;

(c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada;

(d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines;

(e) the spouse’s property is not reasonably utilized to generate income;

(f) the spouse has failed to provide income information when under a legal obligation to do so;

(g) the spouse unreasonably deducts expenses from income;

(h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax; and

(i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust.

(2) For the purpose of paragraph (1)(g), the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.

21 (1) A spouse who is applying for a child support order and whose income information is necessary to determine the amount of the order must include the following with the application:

(a) a copy of every personal income tax return filed by the spouse for each of the three most recent taxation years;

(b) a copy of every notice of assessment and reassessment issued to the spouse for each of the three most recent taxation years;

(c) where the spouse is an employee, the most recent statement of earnings indicating the total earnings paid in the year to date, including overtime or, where such a statement is not provided by the employer, a letter from the spouse’s employer setting out that information including the spouse’s rate of annual salary or remuneration;

(d) where the spouse is self-employed, for the three most recent taxation years

(i) the financial statements of the spouse’s business or professional practice, other than a partnership, and

(ii) a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the spouse does not deal at arm’s length;

(e) where the spouse is a partner in a partnership, confirmation of the spouse’s income and draw from, and capital in, the partnership for its three most recent taxation years;

(f) where the spouse controls a corporation, for its three most recent taxation years

(i) the financial statements of the corporation and its subsidiaries, and

(ii) a statement showing a breakdown of all salaries, wages, management fees or other payments or benefits paid to, or on behalf of, persons or corporations with whom the corporation, and every related corporation, does not deal at arm’s length;

(g) where the spouse is a beneficiary under a trust, a copy of the trust settlement agreement and copies of the trust’s three most recent financial statements; and

(h) in addition to any income information that must be included under paragraphs (c) to (g), where the spouse receives income from employment insurance, social assistance, a pension, workers compensation, disability payments or any other source, the most recent statement of income indicating the total amount of income from the applicable source during the current year, or if such a statement is not provided, a letter from the appropriate authority stating the required information.