COURT FILE NO.: FS-13-04839 (Walkerton)
DATE: 20210423
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Amy Pamela Batte
M.A. Cummings, for the Applicant
Applicant
- and -
Murray Allan Batte
G.E. Oldfield, for the Respondent
Respondent
HEARD: April 7, 8, 9 and 12, 2021
REASONS FOR JUDGMENT
Sproat J.
INTRODUCTION
[1] The parties separated in June, 2012. On July 24, 2013 the parties agreed to an interim order that required Mr. Batte to pay child support of $438 per month and 50 percent of s.7 expenses for his two daughters. This was based on an imputed income of $30,000. That is the child support that Mr. Batte has paid to date. He has not paid any spousal support.
[2] When the parties settled the equalization of property Ms. Batte agreed to not claim arrears prior to January 1, 2016. The central issue at trial was to determine Mr. Batte’s income for child and spousal support from January 1, 2017 to date.
[3] Ms. Batte testified and also presented expert evidence from Joseph Hilton. Mr. Batte testified and called no other evidence.
OVERVIEW OF EVIDENCE
[4] Mr. Batte’s father and grandfather were farmers. He followed in their footsteps and started farming after Grade 12. After he got married in 2012, he purchased a 100-acre farm from his uncle. He was able to do this with a loan of $140,000 from his parents and a Farm Credit Corporation loan. He started out by raising beef cows and growing cash crops. The parties separated in 2012. In 2014 Mr. Batte effectively took over the dairy farm operation that his father had carried on. Mr. Batte also grows cash crops on the farm he rents from his father. Mr. Batte financed this as follows:
a) he rented his father’s farm of approximately 576 acres, at an agreed annual rent of $72,000 although he has not always paid this full amount. Mr. Batte said this rent was below market value.
b) he was allowed to use his father’s machinery and, while this may have been recorded as a purchase, he did not actually make any payment.
c) he obtained a BMO loan of approximately $800,000 to purchase his father’s dairy quota. That loan has been paid down to about $599,000.
[5] Mr. Batte works hard. He works 365 days a year. Always 50 hours a week. At planting and harvesting time, he works over 100 hours a week. His new partner Corinne works hard doing farm work and handling the accounting and administrative work. Corinne is not paid for her work.
[6] Ms. Batte also works hard. She works for an insurance broker and has additional part-time employment to generate the income she and her daughters need.
[7] Both parties gave evidence that they lead a modest lifestyle and at times have difficulty making ends meet. While I accept that evidence, I will not review it in any detail as it does not bear directly on the proper calculation of Mr. Batte’s income.
[8] What I do find telling is the situation each party is in 9 years post-separation. In 2018 Ms. Batte received a $162,500 payment on account of equalization and a number of incidental claims. Her net worth is now $75,092. According to Mr. Batte’s April 8, 2013 Financial Statement his net worth at separation was approximately $100,000, Mr. Batte’s net worth is now $1,641,652.
THE LAW
[9] In Szitas v. Szitas, 2012 ONSC 1548, Chappel J. provided a helpful summary of the law concerning the unreasonable deduction of business expenses from income:
[59] The Respondent argues that he should be permitted to deduct a number of business expenses as well as business-use-of-home expenses from his total income from 2010 onward for the purposes of calculating his child support obligation. The most significant of these business expense claims is for capital cost allowance in relation to his 2007 Volvo XC 90. It is therefore necessary to consider section 19(1)(g) of the Guidelines, which specifically provides that imputing income to a parent may be appropriate where a spouse unreasonably deducts business expenses from their income. As section 19(2) clarifies, the fact that an expense may be deducted from income for income tax purposes is not determinative of whether the deduction is reasonable for the purposes of income calculation in child support cases.
[60] Where it is claimed that business expenses are being unreasonably deducted from income, the burden of proof is on the party claiming that expenses are unreasonable. However, the parent who seeks to deduct business expenses from his income for child support purposes cannot simply put forth numbers for alleged business expenses with no justification or evidence to support those numbers, and then put the other party to the expense of disclosure motions and questioning in an effort to prove that the expenses are unreasonable. The party claiming the deductions as against income has an obligation to explain the reasons for the expenses and how they were calculated, and must provide documentary proof of the expenses in an organized manner so that the court can make a proper determination as to the reasonableness of the expense from the standpoint of the child support calculation. This obligation flows from the party’s general obligation to provide relevant information respecting their case, and to make full and frank disclosure of their financial situation in the context of a child support case. If the party seeking to deduct business expenses from income fails to provide meaningful supporting documentation or other evidence in respect of those deductions, an adverse inference may be drawn by the court in making the income determination.
[61] In order to impute claimed business expenses back into a parent’s income pursuant to section 19(1)(g) of the Guidelines, it is not necessary to establish that the party who has claimed the deductions has acted improperly or outside the norm for claiming expenses in the income tax context. Rather, the issue is whether the full deduction of the expense results in a fair representation of the actual disposable income that is available to the party for personal expenses. In determining whether business expenses claimed by a party are unreasonable, the court must balance the business necessity of the expense against the alternative of using those monies for the purposes of child support. In carrying out this analysis, the court must keep in mind that principle which the Supreme Court of Canada established in D.B.S. that payor parents should not be permitted to manipulate their financial affairs so as to prefer their own interests over those of their children.
Mr. Batte’s income for support purposes
Introduction
[10] Mr. Hilton is a Chartered Professional Accountant and Chartered Business Valuator with extensive experience in valuing businesses and income for family law and other purposes. The fact that he only devotes 5 to 10 percent of his time to valuing farming operations and income did not, in my view, significantly diminish the strength of his evidence.
[11] Mr. Hilton’s conclusion was that Mr. Batte’s income for support purposes was:
2016 $64,162
2017 $144,602
2018 $51,782
2019 [see discussion below]
2020 $182,258
[12] Mr. Hilton started with financial information provided by Mr. Verbeek who was Mr. Batte’s tax accountant. Mr. Hilton then made several adjustments which I will now review.
Depreciation Expense
[13] Mr. Verbeek prepared an analysis in which he deducted as an expense the full amount of Capital Cost Allowance (“CCA”) that Mr. Batte was allowed to claim for tax purposes. In effect, he assumed that this was the actual amount by which Mr. Batte’s equipment declined in value. Mr. Hilton disagreed for three reasons.
[14] First, in Mr. Hilton’s experience, equipment does not in fact depreciate at the CCA rate allowed for tax purposes. In his opinion, a reasonable assumption is that the actual depreciation is 50 percent of the CCA rate.
[15] Secondly, Mr. Batte served a report by Mr. DeBrincat who is a Chartered Accountant and Chartered Business Valuator. In his October 19, 2018 report Mr. DeBrincat came to the same conclusion as Mr. Hilton, stating:
Per Batte, the capital cost allowance (“CCA”) rates stipulated by the Income Tax Act are not considered to be representative of the actual useful life of the farming capital assets. Estimated that the useful life of capital assets is double that calculated based on the Income Tax Act. Therefore, adjusted CCA to represent 50% expense. [footnotes omitted]
[16] Thirdly, while Mr. Hilton could only conduct a cursory review of the 2020 working papers of Mr. Verbeek, which were only produced a week before trial, he noted several examples of equipment depreciating at less than the rate permitted for tax purposes. Mr. Batte purchased a tractor in 2015 for $153,000 and traded it in in 2020 and was credited with a trade-in value of $110,000. This equates to depreciation of 7.5 percent per annum, far short of the 30 percent CCA permissible for tax purposes.
[17] A further example was that Mr. Batte’s Financial Statement dated November 9, 2020 indicates that the actual value of his equipment is $788,900. The December 30, 2020 working papers of his accountant indicate that the depreciated value of the equipment for tax purposes is $315,410.
[18] While I will not review them, Mr. Hilton gave a number of further examples of equipment which either declined in value at a rate far less than the CCA permitted for tax purposes or that appreciated in value.
[19] Mr. Hilton also explained that that historically taxpayers could deduct 50 percent of allowable CCA in the year of acquisition but in 2018 this was changed to allow 150 percent of the allowable CCA rate in the first year. This change obviously reflected a policy decision, perhaps to encourage equipment purchases, that had nothing to do with the rate at which the equipment in fact declined in value. This further illustrates the point that permissible CCA does not reflect actual depreciation.
[20] Both parties cited Tidball v. Tidball, [1999] O.J. No.904 (S.C.J.) in which Heeney J. reasoned that the actual depreciation of a capital asset is a real expense which should be deducted in calculating the income of self-employed persons for support purposes.
[21] I conclude that Mr. Hilton, consistent with Tidball, has accounted for what in his opinion, supported by the evidence I have cited, is the actual depreciation of the farm equipment. I accept his opinion and find that depreciation has been properly accounted for in his analysis and that Mr. Batte had income for support purposes as set out above.
Should Income be Imputed for 2019?
[22] For 2019 Mr. Hilton calculated that Mr. Batte had a negative income of $26,098 which in his words was not “an appropriate conclusion in accordance with the Guidelines”. Mr. Hilton, therefore, proposed that income be imputed to Mr. Batte for 2019.
[23] It was common ground that Mr. Batte’s farm income varies widely because of factors beyond his control, the primary factor being the weather. It would be unfair to Mr. Batte to ignore a negative income year. To take a simple hypothetical, a support payor could earn $300,000 over a three-year period; $200,000 in year one, $150,000 in year two and a $50,000 loss in year three. If a positive amount was imputed for year three, assume $60,000, the payor would earn $300,000 over three years but pay support based on having $410,000 in income ($200,000 + $150,000 +$60,000 = $410,000). This does not make sense.
[24] I appreciate that if we were looking at 2019 in isolation, and determining income only for 2019, a positive number would have to be imputed. I do not, however, think it is reasonable to take account of spikes in Mr. Batte’s income, to on the order of $200,000 in 2020, without also taking into account the down years such as 2019. As such, I find that for support purposes Mr. Batte’s income for 2019 is negative $26,098.
Personal Benefits to Mr. Batte
[25] Mr. Hilton calculated that Mr. Batte received certain benefits from the farming operation that should be included in income. Mr. Hilton estimated that beef and milk that were consumed by Mr. Batte’s household amounted to a $1,500 annual benefit. Mr. Batte agreed that was reasonable. Mr. Hilton also concluded that Mr. Batte received a benefit by his personal use of the Ford F150 which was primarily used for farm purposes. Mr. Hilton calculated the personal benefit assuming that it equated to the cost of driving a modest vehicle 10,000 km a year. I accept that this is reasonable and that the tax gross-up used by Mr. Hilton for these personal benefits is appropriate.
[26] Mr. Hilton also noted that it may be appropriate to recognize that Mr. Batte receives a personal benefit as he does not pay rent for the house that he lives in. Mr. Batte has at all times since marriage lived in a house on his father’s farm, being the farm he now rents. Mr. Batte’s evidence was that during his marriage he did some work on his father’s farm and in return the family lived in the house rent free. Mr. Batte testified that when he took over his father’s farm, he began to pay rent which included the dairy barn. I think it reasonable to infer, and I find, that the rent also included the house. It makes the most sense that Mr. Batte always effectively paid to live in the house, first by doing work on the farm, and when he took it over, by paying rent.
[27] Mr. Batte, therefore, derived a personal benefit by virtue of the rent, all of which was treated as a business expense. It is similar to the other personal benefits I have reviewed. While admittedly a rough and ready estimate, I find that Mr. Batte received a benefit of $9,600 per year by being able to live in the house. This amount must be grossed up in the same manner as the other personal benefits and added to Mr. Batte’s income.
Lifestyle Evidence – Ability to Pay
[28] Mr. Batte presented evidence suggesting an inability to pay. I am satisfied that Mr. Batte has the ability to pay support based upon the income calculated by Mr. Hilton. I will provide a few comments and examples.
[29] Mr. Batte pays $728 a month for life insurance. He has personal life insurance of which $250,000 is to benefit his two daughters. He also maintains a policy on his father’s life which is to provide funds which would help Mr. Batte, who has four siblings, be able to purchase the family farm on the death of his father.
[30] Certainly, paying proper child support today is more important than life insurance for estate planning which may become relevant 10 or 20 years from now.
[31] Since 2014 Mr. Batte has paid down the BMO loan, he used to purchase his milk quota by approximately $200,000.
[32] Mr. Batte leases a new Ford F150, a $45,000 vehicle, every four years. There are less expensive vehicles and they can be driven for more than four years. When Mr. Batte leased a new vehicle in 2018, he made a $6,700 down payment.
[33] Further, Mr. Batte does not fully utilize his milk quota. If he sold 10% of it he could raise about $76,000.
[34] Finally, given the extent to which Mr. Batte has paid down his loans, and given the rapid appreciation in the land value of his farm, I don’t see why he could not borrow the additional amount necessary to pay proper support.
[35] While not material to reaching my conclusion, I do note that in Mr. Batte’s first Financial Statement dated April 8, 2013, he swore or affirmed that his monthly income was $5,664.92, which is an annual income of $69,979. When Mr. Batte leased a Ford F150 on November 27, 2014, his credit application stated that his gross income was $76,000. Mr. Batte certainly did not regard himself as having an annual income of $30,000, or even the annual income of $40-$45,000 that he now argues is appropriate.
[36] In brief, I see no merit in the argument that Mr. Batte would suffer any undue hardship in paying support based on the income calculated by Mr. Hilton.
SUMMARY AND CONCLUSION
[37] Ms. Cummings submitted that I should go beyond the 50 percent of CCA that Mr. Hilton deducted in his report given that Mr. Hilton had found examples in the working papers that suggested actual depreciation was less than 50 percent of the CCA permitted for tax purposes. Mr. Hilton based his use of 50 percent of CCA on extensive experience in valuing equipment. I would rely upon this general experience rather than extrapolate from a few examples of Mr. Batte’s equipment.
[38] Mr. Oldfield cited R. v. Mohan, [1994] 2 S.C.R. 9 for the proposition that experts should not be permitted to usurp the functions of the trier of fact. He, therefore argued that despite the fact Mr. Hilton was the only expert witness, and that Mr. Hilton calculated Mr. Batte’s income using the actual rate of depreciation in accordance with Tidball, I should find that a much lower income is appropriate. Mr. Oldfield suggests that I depart from what I regard as Mr. Hilton’s fair and reasonable calculation of Mr. Batte’s actual income and instead impute to him an annual income of $40 - $45,000. This is primarily on the basis that this better represents Mr. Batte’s disposable income. I do not agree. As previously discussed, I reject the submission that Mr. Batte has an inability to pay.
[39] Stepping back from the income analysis, I think that the income levels I arrive at for Mr. Batte strike a far better balance between providing support for Ms. Batte and his children and having a successful farming operation which will benefit him and his new partner. I also appreciate that a significant amount of Mr. Batte’s net worth is no doubt due to the incredibly long hours that he works. It is only fair that he be rewarded for the time he spends beyond what might be regarded as a normal work week.
[40] Given the fluctuations in Mr. Batte’s income I find, pursuant to s.17 of the Guidelines, that it would be fair and reasonable for him to pay support based on the following incomes:
a) for the years 2016 to 2020 the amounts calculated by Mr. Hilton plus $9,600 plus the appropriate tax gross-up.
b) for the year commencing January 1, 2021, on the basis of the average of Mr. Batte’s income for 2018, 2019 and 2020, as calculated above.
c) for the year commencing January 1, 2022, on the basis of his average income for the preceding three years.
[41] Income shall be calculated by a professional accountant such as Mr. Verbeek, who shall certify that the income has been calculated on a basis consistent with prior years and provide detailed calculations and a copy of the working papers for the year. Depreciation and personal benefits shall be calculated in accordance with these reasons. Mr. Batte shall deliver the materials from his accountant, certifying his income for the prior year, by April 30 of each year commencing in 2022.
[42] Ms. Cummings submitted that if I determined that Mr. Batte had income that, pursuant to the Spousal Support Advisory Guidelines, required him to pay support it should be calculated based on the middle of the range. Mr. Oldfield did not take issue with that. I agree that is appropriate.
[43] Going forward Section 7 expenses shall be shared in proportion to the parties’ respective average incomes for the three preceding years. I agree with the draft life insurance provision as set out in paragraphs 6 – 8 of Ms. Cumming’s draft final order.
[44] As discussed, counsel are to consult and attempt to agree on the proper calculation of child and spousal support, if any, based on the income levels that I have determined. I will remain seized to deal with this and any other matter required to make necessary calculations and implement these reasons. If counsel cannot agree, they may agree to make written submissions or arrange for a further hearing by contacting the Trial Coordinator.
[45] Ms. Cummings shall provide a costs outline and written cost submission within 20 days. Ms. Cummings please include the chronology you provided in opening and closing submissions as to what you allege were failures by Mr. Batte to make full and timely disclosure and to comply with court orders. Mr. Oldfield shall respond within 20 days of receiving Ms. Cummings’ submissions. Reply, if any, by Ms. Cummings within a further 7 days.
Sproat J.
Released: April 23, 2021
COURT FILE NO.: FS-13-04839
DATE: 20210423
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Amy Pamela Batte
Applicant
- and -
Murray Allan Batte
Respondent
REASONS FOR JUDGMENT
Sproat J.
Released: April 23, 2021