Court File and Parties

COURT FILE NO.: F714-16 DATE: 2017-06-23 ONTARIO SUPERIOR COURT OF JUSTICE FAMILY COURT

BETWEEN:

MARJORY ANNE GOODMAN Applicant – and – ROBERT LESLIE GOODMAN Respondent

Counsel: William R. Clayton, for the Respondent

HEARD: May 26, 2017 at London

HEENEY J.:

Endorsement

[1] This is an application under ss. 18 and 19 of the Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.), as amended, to confirm a provisional order made by Mr. Justice R. W. Danyliuk of the Court of Queen’s Bench for Saskatchewan (Family Law Division) dated January 7, 2016. The Applicant had brought an application to vary the spousal support order that was originally made under the Divorce Act by Currie J. of the same court dated March 22, 2006. The Respondent, who is resident in Ontario, invoked s. 18(2) of the Act, and a provisional variation order was made, in the absence of the Respondent or his counsel. The hearing before this court similarly took place in the absence of the Applicant or her counsel.

[2] By way of background, the parties were married in 1981 in Saskatchewan and separated in 2000. They entered into a Separation Agreement executed on February 8 and 13, 2006, which provided for the payment of spousal support from the Respondent to the Applicant. The Respondent had, by that point in time, moved to Ontario, where he practiced medicine. He continues to do so, as a Cardiac Surgical Assistant.

[3] The terms of the Separation Agreement relating to spousal support were incorporated into the order of Currie J. dated March 22, 2006. The order provided for the payment of $3,000 per month commencing January 1, 2006 until May 2007. Support thereafter was dealt with by para. 3 of the order, which reads as follows:

In May, 2007, the Respondent will provide to the Petitioner a copy of his 2006 Income Tax Return and the monthly spousal support payments shall thereupon be adjusted so that they equal 2.5% of the Respondent’s 2006 income as disclosed at Line 150 of his Income Tax Return less withdrawals from Registered Retirement Savings Plans or similar forms of income which are not new money.

[4] Similar adjustments were to be made on an annual basis thereafter, such that the Applicant would receive spousal support equivalent to 2.5% of the Respondent’s Line 150 income. The Respondent was required to provide annual disclosure of his Notices of Assessment and Reassessment. Spousal support was to be payable until the death of either party, or the Applicant attaining the age of 65 years.

[5] Spousal support payable in 2006 was based on the Respondent’s annual income of $116,466.36. In the years that followed, the Respondent continued to pay spousal support at roughly the same rate. His Line 150 income varied little from year to year, and had only increased to $121,394 as of 2014.

[6] Unbeknownst to the Applicant, the Respondent had incorporated a professional corporation within months of the support order being made. R. Goodman Medicine Professional Corporation was incorporated on July 13, 2006. The sole source of income for that corporation was the billings earned by the Respondent from practicing medicine. The Respondent’s Line 150 income thereafter was the salary that he chose to have his corporation pay to him, and was not dependent on the amount of income he actually earned from practicing medicine.

[7] The Applicant apparently became curious as to why the Respondent’s income had changed so little over the years, and retained counsel in 2015 to pursue the matter and obtain his corporate income tax returns. She suspected that his real income was considerably higher than the amount reflected on Line 150 of his tax return. She was right.

[8] A Financial Statement was sworn January 29, 2017 by the Respondent, for purposes of this hearing. Included as an attachment is a Statement of Income and Retained Earnings for the corporation, for the year ended March 31, 2015. It shows income from professional fees of $326,813. Net income from operations, after expenses and after payment of the Respondent’s salary of $120,000, is $54,506. Significantly, the statement shows retained earnings of $592,833 at the end of that fiscal year. This represents professional income from the Respondent’s billings over the years that he chose to leave in the corporation, rather than paying out to himself by way of salary.

[9] The Applicant commenced these variation proceedings on November 18, 2015, and the matter came before Danyliuk J. on January 7, 2016. Based on the material before him, he made an order varying the order of Currie J. dated March 22, 2006, so as to include the Respondent’s corporate pre-tax earnings in the calculation of spousal support, in addition to his Line 150 income. He ordered that the Respondent provide full disclosure as to the financial affairs of the corporation from 2006 to 2015 for the purpose of calculating arrears, and ordered that any arrears would be payable within 120 days. Any dispute as to the amount of arrears owing would be dealt with before him at the instance of either party, on 14 days’ notice. He also awarded costs of $1,000.

[10] No reasons for judgment were included with the package of material received from the Attorney General for Saskatchewan, but one may infer that Danyliuk J. concluded that the professional corporation was being used by the Respondent as a means to artificially reduce his Line 150 income, and thereby reduce the amount of spousal support that he was required to pay to the Applicant. In order to ensure that spousal support would be payable based on the Respondent’s professional earnings (net of expenses), the pre-tax income of the corporation was to be added to the Respondent’s declared Line 150 income for the purpose of calculating support.

[11] It is significant that the professional corporation did not exist when the original spousal support order was made. As at the date of that order, all of the Respondent’s professional net income from practicing medicine would have been reflected in his Line 150 income. It is clear that the subsequent incorporation of the professional corporation represents a material change in circumstances that justifies a variation of that order.

[12] The Applicant is clear in her affidavit, sworn November 18, 2015, that it was not contemplated at the time of the order that the Respondent would incorporate. She attested that it was certainly not the intention of the parties that the Respondent could at some point incorporate, and thereafter unilaterally decide how much his Line 150 income should be for the purposes of calculating spousal support.

[13] The Respondent’s Response to Motion to Change, sworn July 8, 2016, addresses this point. In stating that it was within the contemplation of the parties that Line 150 income might not include all of his income, he states that the incorporation of medical professional corporations for tax planning purposes was well understood and established as a practice at the time the parties negotiated their agreement. He states that he never agreed that the formula for ongoing spousal support would include 2.5% of all of his income.

[14] He is correct that the formula was not intended to include all of his income. RRSP withdrawals, and any other income that was not “new money” was to be excluded. However, his professional billings are clearly “new money”, and those billings, in their entirety (net of expenses), were the basis for the spousal support payable at the time the order was made. I reject the suggestion that the Applicant would have agreed to a formula that allowed the Respondent to unilaterally determine how much his Line 150 income would be, and hence how much spousal support he would pay, regardless of how much professional income he was actually earning.

[15] The Respondent argues that if a variation order is to be made, it should not be retroactive to 2006. He also argues that there should be a complete re-examination of the means, needs and other circumstances of the parties before making any such order. He points to the fact that the Applicant received an inheritance upon the death of her father, and has purchased a horse ranch of substantial acreage. He relies on Bremer v. Bremer, [2005] O.J. No. 608 (C.A.), where the court said this, at para. 9:

The considerations governing an award of retroactive spousal support include: i) the extent to which the claimant established past need (including any requirement to encroach on capital) and the payor's ability to pay; ii) the underlying basis for the ongoing support obligation; iii) the requirement that there be a reason for awarding retroactive support; iv) the impact of a retroactive award on the payor and, in particular, whether a retroactive order will create an undue burden on the payor or effect a redistribution of capital; v) the presence of blameworthy conduct on the part of the payor such as incomplete or misleading financial disclosure; vi) notice of an intention to seek support and negotiations to that end; vii) delay in proceeding and any explanation for the delay; and viii) the appropriateness of a retroactive order pre-dating the date on which the application for divorce was issued: see Horner v. Horner, [2004] O.J. No. 4268 (C.A.); Marinangeli v. Marinangeli (2003), 66 O.R. (3d) 40 (C.A.) and Price v. Price, [2002] O.J. No. 2386 (C.A.).

[16] In my view, the most important of these factors is blameworthy conduct on the part of the Respondent. I conclude that he used his professional corporation as a means to deliberately misrepresent the amount of his real professional income, in order to minimize his spousal support obligation. It was only when his corporate financial statements were finally disclosed that it became evident what his real income had been. There is a compelling reason for ordering retroactive support, in that such an order will merely require the Respondent to pay the quantum of spousal support that he should have been paying all along.

[17] It can hardly be argued that a retroactive order will create an undue burden on the payor. As already noted, he has built up almost $600,000 in retained earnings in his professional corporation, as at March 2015. It is almost certainly much greater at this point in time. This money represents professional income that has been left in the corporation, and is available to him to satisfy any arrears that will be payable.

[18] As to the suggestion that there must be a complete re-examination of the means and needs of the parties, I first must consider s. 17(4.1) of the Divorce Act. It states that, before the court makes a variation order in respect of a spousal support order, the court shall satisfy itself that a change in the condition, means, needs or other circumstances has occurred since the making of the order and, in making the variation order, “the court shall take that change into consideration”. Here, the only relevant change of circumstances disclosed by the materials filed is the incorporation of the Respondent’s professional corporation in 2006. The order made by Danyliuk J. squarely addresses that change.

[19] The Respondent relies on Willick v. Willick, [1994] 3 S.C.R. 670 to argue for a complete re-examination of the means and needs and other circumstances of the parties before making a variation order. However, L’Heureux-Dubé J., speaking for herself, and for Gonthier and McLachlin JJ., stated the following, at para. 121:

According to ss. 17(4) and 17(8) of the Act, once variation is in order, a fresh examination of the entire circumstances of the parties and their children at the time of variation may be warranted in order to determine the quantum of such variation. The scope of this examination depends on the nature and the magnitude of the change as well as the interplay of potentially fact-specific factors.

[20] Note that L’Heureux-Dubé J. indicated that a fresh examination of the entire circumstances “may”, not “must”, be warranted. Here, the nature of the change has nothing to do with the means, needs and other circumstances of the parties, but relates only to the fact that the Respondent, through the use of a professional corporation, has understated his annual income. An examination of the entire circumstances of the parties is not warranted on these facts.

[21] Pursuant to s. 19(7) of the Act, this court may confirm the provisional order without variation, or confirm the provisional order with variation, or refuse confirmation of the provisional order. I am satisfied that the provisional order is correct, and should be confirmed. There are, however, two variations that are necessary.

[22] The first is that para. 3 of the order, which requires the Respondent to provide financial disclosure regarding the financial affairs of the corporation from 2006 up to and including 2015 for the purpose of calculating arrears, should be changed such that the Respondent is required to provide such disclosure up to and including 2017.

[23] The second relates to the income tax implications of a retroactive spousal support order going back to 2007. Spousal support is taxable income in the hands of the recipient, and is tax deductible by the payor. The Separation Agreement and the spousal support order that incorporated that agreement would have been based on this premise. However, while I have not been provided with the benefit of any legal research on this point, there may be rules that limit the ability of the parties to re-file their income tax returns as far back as 2007 in order that the Applicant can claim the additional spousal support as income and the Respondent can receive his income tax deduction.

[24] This issue can be dealt with in the following manner. In the event that the Respondent is unable to claim his arrears of spousal support for any given year as a tax deduction, he shall pay to the Applicant, for that particular year, the amount of additional spousal support owing, after making a notional deduction for the income tax that the Applicant would have paid on that support.

[25] This approach will ensure that the Applicant will receive the full net amount of additional spousal support to which she is entitled. The deduction to be made from that support will give the Respondent some measure of relief, although the deduction will, almost certainly, not be as high as it would have been had he been able to claim a tax deduction from his own income. Given that the Respondent is responsible for the current state of affairs, though, it is he who should suffer any adverse consequences that may result from the inability to re-file income tax returns.

[26] Finally, it is appropriate to remit the matter back to Danyliuk J. to consider the new financial disclosure and resolve any disputes as to the arrears owing, as provided for in para. 4 of his order. This matter has dragged on for far too long, and finality is called for. Pursuant to s. 18(2)(b) of the Act, I am not satisfied that any remaining issues can adequately be dealt with by continuing this proceeding under ss. 18 and 19. Any dispute as to the amount owing should be dealt with in one hearing, before one judge, with both sides present and represented.

[27] Accordingly, an order will go confirming the provisional order of Danyliuk J. dated January 7, 2016, with the following variations:

1. The year “2015” in line 2 of para. 3 shall be changed to “2017”;
2. In the event that the Respondent is unable to claim his arrears of spousal support for any given year as a tax deduction, he shall pay to the Applicant, for that particular year, the amount of additional spousal support owing, after making a notional deduction for the income tax that the Applicant would have paid on that support;
3. The matter is remitted back to Danyliuk J. to consider the new financial disclosure and resolve any disputes as to the amount of arrears owing, on 14 days’ notice. Both parties, and/or their counsel, shall appear and be prepared to make representations at that hearing, with a view to arriving at a final order.

“Justice T. A. Heeney”

T. Heeney J.

Released: June 23, 2017

COURT FILE NO.: F714-16 ONTARIO SUPERIOR COURT OF JUSTICE FAMILY COURT BETWEEN: MARJORY ANNE GOODMAN Applicant – and – ROBERT LESLIE GOODMAN Respondent REASONS FOR JUDGMENT T. Heeney J.

Released: June 23, 2017