Court File and Parties
DATE: 20181130 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N: Jana Lee Sullivan, Applicant Elliot Vine, for the Applicant
- and -
Randolph William Mahoney, Respondent Harvey A. Swartz, for the Respondent
HEARD: February 13, 2018
REASONS FOR JUDGMENT
BARNES J.
INTRODUCTION
1The Applicant (Jana Lee Sullivan) seeks an order imputing income to the Respondent (Randolph William Mahoney); an order for ongoing and retroactive child support and s. 7 expenses.
2After considering evidence and submissions after trial, an income of $73,000.00 is imputed to Mr. Mahoney. Based on this income ongoing and retroactive guideline child support is calculated and awarded. Ongoing s. 7 expenses are calculated on a proportionate basis and Mr. Mahoney shall pay s. 7 expense arrears. Details and reasons are provided below.
BACKGROUND FACTS
3Ms. Sullivan and Mr. Mahoney were married on September 17, 2005. They separated on April 15, 2014. There are two children from this union, born on May 19, 2005, and July 1, 2007. On November 7, 2014, the parties entered into a Separation Agreement.
4It is not disputed that they both signed the Separation Agreement and each party had independent legal advice. Neither party seeks to set aside the Separation Agreement.
5As part of the Agreement the parties agreed to a joint custody arrangement for the children with each parent having custody of the children 50% of the time. At the Trial Management conference, preceding this trial, the parties agreed to vary the provisions of the Separation Agreement. Pursuant to this variation, as of January 1, 2018, the children's primary residence is with Ms. Sullivan.
ISSUES
6The remaining issues for trial are:
- Should income be imputed to Mr. Mahoney?
- How much child support should Mr. Mahoney pay?
- Should Mr. Mahoney pay retroactive s. 7 expenses?
- What is the proper amount for s. 7 expenses?
Should income be imputed to Mr. Mahoney?
7I conclude that income should be imputed to Mr. Mahoney. Both parties agree that Mr. Mahoney should pay child support in accordance with the Federal Child Support Guidelines, SOR/97-175 [FCSG]. In the Separation Agreement the parties set their respective incomes at $73,000.00 per annum. Mr. Mahoney seeks to vary this Separation Agreement and calculate child support in accordance with his reported gross 2017 income of $29,795.37. He explains that he has worked less in order to spend more time with the children.
8Ms. Sullivan submits that Mr. Mahoney's annual income must be imputed to be at least $73,000.00 because he agreed to impute that income to himself in the 2014 Separation Agreement and has failed to establish any material change in circumstances to warrant a variation.
9"A court of competent jurisdiction may, on application by either or both spouses, make an order requiring a spouse to pay for the support of any or all children of the marriage": Divorce Act, R.S.C. 1985, c. 3 (2nd Supp.), s. 15.1(1). Child support shall be calculated in accordance with the applicable child support guidelines: Divorce Act, s. 15.1(3). Child support is calculated in accordance with the payer's income and the number of children under the age of majority: FCSG s. 3(1)(a). The child support amount shall be calculated in accordance with the child support guideline table for the Province where the payor resides: FCSG, s. 3(3)(a)(i). A court may award an amount different from the FCSG amount in accordance with a Separation Agreement or where it will be inequitable to award the FCSG amount: Divorce Act, s. 15.1(5).
10As a general rule, the payer's income is determined in accordance with annual income set out in the Canada Revenue Agency's T1 General Form: FCSG, s. 16. Where a court determines this is not the fairest way to determine the payer's income the court may examine the payer's pattern of income over the last three years and determine what will be fair and reasonable in accordance with set statutory parameters: FCSG, s. 17.
11In circumstances where the payor is a shareholder, director or officer of a corporation who is in a position to manipulate his or her income and the court determines that the payor's income, as calculated in accordance with FCSG s. 16, does not fairly reflect his or her income, the court may include in payor's income all or part of the corporation's pre-tax income or 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": FCSG, ss. 18(1).
12Section 19(1)(a) of the FCSG sets out the circumstances under which income may be imputed as follows:
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;
13The Ontario Court of Appeal in Drygala v. Pauli, [2002] 61 O.R. (3d) 711 (C.A.) at para. 23 set out the legal test in applying s. 19(1)(a) of the FCSG as follows:
- Is the spouse intentionally under-employed or unemployed?
- If so, is the intentional under-employment or unemployment required by virtue of his reasonable educational needs?
- If the answer to question #2 is negative, what income is appropriately imputed in the circumstances?
Intentional underemployment or unemployment?
14Mr. Mahoney is intentionally underemployed. A person is intentionally underemployed or unemployed when that person chooses not to work when he or she is capable of doing so. Bad faith is not a prerequisite or a component of a finding that a person is intentionally underemployed or unemployed: Drygala at paras. 28 and 36.
15The party seeking to impute income has the onus to establish an evidentiary basis to show that the other party is intentionally underemployed or unemployed: Homsi v. Zaya, 2009 ONCA 322 at para. 28.
16Mr. Mahoney is a contractor. He carries on business through a corporation. Ms. Sullivan testified that during their marriage Mr. Mahoney periodically received payments in cash. She said the money was used to pay various household expenses. Ms. Sullivan conceded that she has no evidence of Mr. Mahoney's practices since the couple separated. Mr. Mahoney testified that he stopped receiving cash payments after the couple separated.
17Ms. Sullivan's evidence on cash payments, when considered on its own, is insufficient to discharge her onus. This evidence has little bearing on Mr. Mahoney's practices since separation and must be considered in the context of other evidence. Other evidence suggests: 1) that Mr. Mahoney has the ability to manipulate his income in his capacity as shareholder of his corporation; 2) that there is reason to be concerned about his credibility; 3) that his income as reported in his T1 does not fairly reflect all the money available to him for the purposes of child support; and 4) he has admitted that he is intentionally underemployed because when the children were with him 50% of the time, he intentionally reduced his hours of work so that he could spend more time with the children. This admission alone is sufficient to discharge Ms. Sullivan's onus. I elaborate on the other findings below. On balance, I am satisfied that Mr. Mahoney is intentionally underemployed.
Is the intentional under-employment reasonable?
18The second step of the Drygala test is that of reasonableness. The reason proffered for the underemployment is the need to be with the children. Mr. Mahoney's underemployment is unreasonable.
19A parent has a duty to take reasonable steps to maximize his or her income in order to meet the needs of their children: Thompson v. Thompson, 2013 ONSC 5500 at para. 99. A self-imposed income reduction to reduce support obligations is unacceptable: N.L. v. B.P., [2000] O.J. No. 2574, 7 R.F.L. (5th) 335 (Sup. Ct.) at para. 27.
20Thus, once intentional underemployment has been established the onus shifts to Mr. Mahoney to demonstrate that the underemployment was reasonable. Mr. Mahoney has a number of options to maximize his working hours while also spending time with the children. It is open to Mr. Mahoney to work on weekends. He could work longer hours when the children are not with him. He could work when the children are with him but in school.
21I must also assess the reasonableness of this underemployment in relation to whether it is warranted by the special needs of the children: Thompson at para. 99. Mr. Mahoney has provided no such evidence. On this basis alone, I find that he has failed to discharge his onus and his underemployment is unreasonable.
22There are other reasons to conclude that his underemployment is unreasonable: Within the context of a payer's obligation to maximise income to meet the needs of his or her children, it is reasonable to consider the quantum of the income drop arising from the underemployment as a relevant factor in the reasonableness analysis.
23In 2014, Mr. Mahoney agreed to impute an annual income to him of $73,000.00 in the Separation Agreement. He said that he did this even though his annual income in 2013 was $93,000.00. He described 2013 as an unusual year. He described his typical income during the marriage as around $26,000 to $28,000.00 per annum. This is an income he maintained during the marriage and even after separation when he claims, he reduced his hours of work considerably. There is reason to question his credibility and good reason to conclude that his income as reported in his T1, does not fairly reflect his gross income for child support purposes. His reported 2017 income is $29,795.57. This represents a drop of $43,204.00 from $73,000.00, this drop is excessive and unrelated to special needs of the children. His underemployment is unreasonable.
What income is properly imputed?
24The main factor to consider in imputing income are the payor's age, education, skills, health, number of hours worked in light of competing obligations and hourly rate the spouse can reasonably obtain: Drygala, at para. 45. Previous income is also a consideration: Lawson v. Lawson, [2006] 81 O.R. (3d) 321 (C.A.) at para. 36; Pey v. Pey, 2016 ONSC 1909 at paras. 93-94.
25Mr. Mahoney testified that he is now 45 years old. He referred to some injuries including some broken ribs, all of which he said contribute to his inability to work as much as he ordinarily would. At 45 years old he is relatively young. He produced no medical evidence to support his decision that his injuries were caused by his employment or that his injuries hampered his future ability to work or to support the claim that he has these injuries in the first place.
26Mr. Mahoney filed a financial statement, personal and corporate income tax returns for 2014, 2015 and 2016, Notices of Assessment and Re-assessment from CRA for each of these taxation years. In addition, Mr. Mahoney provided general trust ledgers for his corporation and his personal bank accounts for the 2014, 2015 and 2016 taxation years.
27Mr. Mahoney explained that he relies on his professional accountant Steve Chivas to prepare income tax returns and financial statements. He said he found these matters to be too complicated. Mr. Mahoney said his 2017 T1 shows a gross income of $26,000.00 with additional shareholder benefits giving him a total gross annual income of $29,795.37. Mr. Chivas confirmed this.
28Mr. Mahoney filed two financial statements. The first financial statement dated September 8, 2016, was filed prior to questioning, prior to trial. In this financial statement Mr. Mahoney listed expenses of $40,800 per year. He was questioned, prior to trial on how he could meet those high expenses on an income of approximately $28,000.00.
29At trial, Mr. Mahoney filed an updated financial statement dated January 12, 2018. This statement showed an annual income of $28,440.00 and annual expenses of $28,056.00. He described his September 2016 financial statement as inaccurate. He said his January 2018 financial statement was accurate.
30In his January 2018 financial statement, his expenses had been reduced as follows: grocery from $400.00 to $200.00 per month; utilities from $370.00 to $180.00 per month; clothing from $50.00 to $5.00 per month; and entertainment from $100 to $0 per month. In cross-examination, he stated that he spends $5.00 per month on clothing; $0 per month for home maintenance; $2.00 for hair; $5.00 per month for home supplies and $0 for medical and dental expenses. He indicated $0.00 per month for home maintenance even though he had recently painted his home. However, it is unclear whether this event took place after the preparation of the January financial statement.
31In cross-examination, he explained that he used proceeds from his equalization payments to purchase his motorcycle. He has two snowmobiles. One snowmobile was bought in 2013, which he described as a good income year. He explained he paid for the snowmobile over a one- or two-year period. He said despite his monthly income of about $2300.00, he could pay $1800 monthly for mortgage, home insurance and property taxes and cover child care expenses when the children were with him 50% of the time. He explained that he did this by being frugal.
32Mr. Mahoney explained that the low expenses reflected in his January 2018 financial statement reflect the fact that he runs a "tight ship". He said he maintained the frugal approach even when the children were living with him 50% of the time. He also explained that his new partner does not pay his expenses but pays for some recreational expenses. Mr. Mahoney runs some personal expenses through his corporation. For example, his 2015 corporate financial statement lists $16,500 in vehicle expenses; $5,000 in rent expense; $2,650.00 in meal expenses and $3,000.00 in telephone expenses. His corporation pays for his internet and life insurance. Documentary evidence suggests personal use expenses through the corporation of between $20-25,000.00 per annum.
33Mr. Mahoney explained that he has purchased a 2018 Ford F-150 truck. He said this debt is financed through the corporation. He said his pays about $640.00 per month for the truck loan, $130.00 per month for the insurance and $150.00 per month for gas. Mr. Mahoney provided no corporate income information for 2016 or 2017.
34Mr. Mahoney explained his expenses by identifying a number of ways he was able to be frugal despite his low reported annual income. These include: 1) running a "tight ship"; 2) his partner paying for recreational expenses; and, 3) the corporation paying for certain expenses, all in accordance with Canada Revenue Agency Guidelines and on the advice of Mr. Chivas.
35Steve Chivas is Mr. Mahoney's accountant. He testified that Mr. Mahoney's 2017 T1 shows a gross income of $26,000.00. Mr. Mahoney received shareholder benefits of 20% of truck expenses for 2017 in the sum of $2,694.67, and meals paid for by the company in the amount of $1,100.70. This results in a total 2017 income of $29,795.37 for Mr. Mahoney.
36Mr. Chivas was a forthright witness. He ensured that Mr. Mahoney's personal and corporate tax returns were prepared in accordance with Canada Revenue Agency's guidelines. He explained that he relied on self-reports by Mr. Mahoney and documentation provided by Mr. Mahoney in preparing the tax returns and corporate financial statements. I conclude that Mr. Mahoney is in a position to manipulate his apparent income by virtue of being a shareholder, officer, and director in his corporation.
37Prior to trial, Mr. Mahoney filed an Amended Answer in which he stated that the $15,000 of personal benefits run through his business should be added to his personal income. At trial, he contradicted this statement. He said his income has always around $26,000 per annum. He relied on Mr. Chivas for the preparation of his corporate tax returns and the corporate expenses and deductions were accurate. There was no money to add to his income from his corporation. When asked why the reversal at trial, he blamed bad legal advice from former counsel.
38Prior to trial, Mr. Mahoney filed a financial statement prepared in September 2017. He swore that the contents of this financial statement was true. In this financial statement his expenses exceeded his income by $12,744.00. He was questioned on this prior to trial. At trial, he explained that he now understood that his financial statement should be accurate and thus he filed the January, 2018 financial statement. This statement slashed his expenses significantly to accord with his income. He also swore that this financial statement was accurate. The amended financial statements and amended answers indicate a propensity to modify testimony to suit his objectives. As a result, I have made adverse credibility findings against Mr. Mahoney.
39Mr. Mahoney concedes that he received cash payments during his marriage to Ms. Sullivan. She estimated that this amount was approximately $1000.00 a month. Mr. Mahoney said he stopped this practice after separation. He gave no credible explanation for this answer and considering my more general concerns about his credibility, I reject his testimony that this practice has stopped. This is not determinative that Mr. Mahoney continues to receive cash payouts, but it cannot be ruled out.
40Mr. Mahoney explained his $93,000 of income in 2013 was because he took additional money from the corporation in order to increase his income for that year. The purpose was to help eradicate a taxation debt Ms. Sullivan had incurred. Mr. Chivas explained how earnings can be retained in a corporation, either by paying additional money into the corporation or retaining tax credits in the corporation. He explained how such retained earnings can be withdrawn by the shareholder, officer or director at a later time. Mr. Mahoney explained how he utilised this option in 2013.
41I take judicial notice of the fact that just because a corporation has retained earnings does not necessarily mean that the earnings are available to be taken out by a shareholder or director. There are circumstances in which such actions may undermine the operation of the corporation and the business may have legitimate business reasons for accumulating such earnings. A court must balance legitimate business interests with the obligation for the payor to provide child support to his or her children: Halliwell v Halliwell, 2016 ONSC 182 at para. 80, aff'd 2017 ONCA 349.
42Mr. Mahoney failed to file corporate financial statements for 2016 or 2017. Mr. Chivas prepared corporate tax returns on the basis of information provided by Mr. Stovas. He did not verify the accuracy of the information provided. This is important particularly in the context of concerns about Mr. Mahoney's credibility. There is no evidence on the purpose of income retained in the corporation and impacts of shareholder withdrawal on the viability of the corporation.
43In addition the mere fact that a corporate tax return is prepared in accordance with Canada Revenue Agency guidelines does not mean that expense deductions reported are reasonable for Child Support Guideline purposes. The reasonableness of an expense deduction is not solely governed by the Canada Income Tax Act: FCSG, s. 19(2). A court must determine whether a deduction results in the "fair recognition of actual income available for child support. A self-employed person has the onus of demonstrating the basis of business deductions and that business deductions from gross income should not be included in the calculation of the payer's income for support purposes. Nawrocki v. Nawrocki, 2014 ONCJ 495 at paras. 60, 62.
44A professional business evaluation for support purposes is one way to discharge a self-employed payor's onus in this regard particularly in this case, where there is reason to believe that Mr. Mahoney has substantially underreported his income by arranging his affairs to pay substantially less tax: Riel v. Holland, [2003] 67 O.R. (3d) 417, 177 O.A.C. 162 (C.A.) at paras. 10-13. Mr. Chivas said he is not qualified to provide such evidence.
45Concerns about Mr. Mahoney's credibility lead me to reject the reason proffered for his increased 2013 income. Even if this evidence were accepted it demonstrates an ability to accumulate income in the corporation and to withdraw income as required.
46Mr. Mahoney and Ms. Sullivan testified that the reason for imputing $73,000.00 income to each other, in the Separation Agreement, was to avoid paying each other spousal support. Ms. Sullivan mentioned other unspecified reasons for this decision. Since she did not specify them, I find that the reason for imputing income of $73,000.00 each was to avoid paying spousal support. The reasonable interpretation of this sequence of events is that both parties agreed to this because it was mutually beneficial. This conclusion is supported by objective evidence as follows: 1) Both parties were represented by counsel and received independent legal advice; and, 2) in the year preceding the Separation Agreement Ms. Sullivan earned approximately $73,000.00. Mr. Mahoney earned $93,000.00. Given the nature of his employment it is reasonable to expect his income to have some fluctuation. Despite this, to conclude that Mr. Mahoney agreed to an imputed income of approximately almost $50,000 more than his average reported annual income is unreasonable in all the circumstances. I conclude that Mr. Mahoney was aware that his annual income exceeded $73,000 each year and he had the ability to reduce his annual income through his corporation.
47The cumulative effect of all of this leads me to conclude that Mr. Mahoney's T1 income for all reported taxation years does not fairly reflect his income for child support purposes. I find that he did not provide Mr. Chivas with accurate information. This engages the application of s. 18 of the FCSG.
48For all the foregoing reasons, there has been no material change in circumstances to warrant amending the Separation Agreement to impute an income to Mr. Mahoney that is less than the $73,000.00 he imputed to himself in 2014.
How much child support should Mr. Mahoney pay?
49There are two children of the marriage: J.W.D.M., born May 19, 2005, and E.D.W.M. born July 1, 2007. As of January 1, 2018, both children shall reside primarily with Ms. Sullivan. Retroactive child support shall be calculated to commence on that date. Ms. Sullivan's 2017 gross annual income is $75,000. Gross annual income imputed to Mr. Mahoney is $73,000.
50Mr. Mahoney is resident in Ontario. Therefore, Ontario Child Support Guideline Tables apply. Mr. Mahoney shall pay ongoing monthly child support of $1109 commencing January 1, 2019.
51Retroactive child support is calculated from January 1, 2018 to December 1, 2018 as follows: $1109 x 12 months = $13,308. Factors to consider to determine whether an award of retroactive support should be made are: 1) the reason for the delay in asking for support; 2) the conduct of the payor; 3) past and present circumstances of the children; and 4) whether retroactivity will cause hardship: O.B.S. v. S.R.G.; L.J.W v. T.A.R.; Henry v. Henry; Hiemstra v. Hiemstra, 2006 SCC 37, [2006] 2 S.C.R. 231 [O.B.S.] at paras. 100-116.
52The Separation Agreement specified a shared parenting arrangement. The issue of child support arose after the parties agreed to vary the Separation Agreement for primary residence of the children to be with Ms. Sullivan effective January 1, 2018. I have concluded that Mr. Mahoney has underreported his income and I am satisfied that, based on his imputed income, he will suffer no hardship from the payment of retroactive child support. It is reasonable to expect that he has been on notice since the trial that imputed income and retroactive child support was a possible decision of this court. There are no concerns raised with respect to the circumstances of the children. After considering the appropriate D.B.S. factors, I conclude that it is appropriate to make a retroactive Child support award. Mr. Mahoney shall pay retroactive child support in the amount of $13,308 in 120 days.
Should Mr. Mahoney pay retroactive s. 7 expenses?
53Section 7 of the FCSG provides that a court may include an amount in child support to cover reasonable, necessary and affordable extraordinary or special expenses in the best interests of the child. The amount of contribution is determined on a proportionate basis in accordance with the incomes of each parent after allowing for the deduction of any contributions by the child.
54Paragraphs 5.4 and 5.5 of the Separation Agreement stipulates that the proportionate share of each party is 50% of extraordinary expenses for the children. The extracurricular activity of dance for the daughter is contemplated as an extraordinary expense under the Agreement.
55Ms. Sullivan submits that since 2016, the total dance costs for which she and Mr. Mahoney are responsible is $12,555.91. Ms. Sullivan provided documentation in the form of bank statements showing the payments made. Mr. Mahoney is responsible for $6227.96, which is 50%. He explained that he has been unable to pay for dance costs because of his legal fees.
56The Separation Agreement did not place a cap on the cost of the dance lessons. Ms. Sullivan testified that their daughter spends about 11 hours a week on dance. This figure has since been reduced to 8 hours. The parties disagree on whether 8 to 11 hours per week for dance is excessive for a young child, however, they agree that the cost for dance has been increasing and is now quite expensive. When the parties were married Ms. Sullivan's mother helped the couple to pay dance expenses. At the current time, she has helped to cover Mr. Mahoney's 50% contribution.
57Mr. Mahoney's reason for failing to pay for dance fees is reasonable in all the circumstances for the following reasons: 1) it is apparent that 11 hours of dance per week and the increasing cost of the dance lessons could not have been a reasonable contemplation at the time of the Separation Agreement; 2) there is no evidence that a reduction in the dance lessons will have had, or will have, any deleterious impacts on the daughter in the past, present or future; and 3) it is apparent that neither party can afford the high frequency and high cost of the dance lessons. Therefore, I am satisfied that an order requiring Mr. Sullivan to pay 50% of the retroactive section 7 expense for dance will cause him financial hardship. Allowing for the contributions by the generous grandmother he shall pay $4,184.88. This figure represents 33.33% of the total retroactive cost of $12,555.91. This amount shall be divided over 12 months and shall be paid in addition to monthly child support at a rate of $348.74 per month. Payments shall commence January 1, 2019, and shall be due on the first of each month thereafter until the arrears are paid in full.
58The increasing cost of dance lessons is a material change not contemplated by the parties. It is apparent that that had this level of cost been contemplated a cap on each party's financial contribution would have been discussed and incorporated in the agreement. Therefore, the cost of dance shall be capped at $1000.00 per annum for each party.
59Mr. Mahoney raised concerns about whether Ms. Sullivan attaches equal importance to their son's extracurricular activities. Ms. Sullivan denied the allegations. Effective, December 1, 2018, each party's annual financial contribution to extracurricular activities for each child shall be capped at $1000.00 per annum. This includes the cost of dance lessons. Of course, each party may voluntarily increase their contributions if they wish.
60Mr. Mahoney testified that he had paid $1,200.00 for basketball and swimming lessons, but he provided no supporting documentation to support his claim. Therefore, I do not accept his evidence.
What is the proper amount for s. 7 expenses?
61Ms. Sullivan's annual income for 2017 is $75,000. Mr. Mahoney's 2017 annual income is imputed to be $73,000. Therefore, effective December 1, 2018, Ms. Sullivan's proportionate share of s. 7 expenses is 51% and Mr. Mahoney's share is 49%.
62Paragraphs 5.2, 5.3 and 5.5 of the Separation Agreement are amended accordingly.
COSTS
63Should the parties be unable to agree on costs, a cost outline shall be filed within 30 days.
Barnes J. Released: November 30, 2018
CITATION: Sullivan v. Mahoney, 2018 ONSC 7211 COURT FILE NO.: 545/16 (Guelph) DATE: 20181130 ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N: Jana Lee Sullivan, Applicant - and - Randolph William Mahoney, Respondent
REASONS FOR JUDGMENT Barnes J.
Released: November 30, 2018