Court File and Parties
COURT FILE NO.: FC-16-52019-01 DATE: 20210426
SUPERIOR COURT OF JUSTICE – ONTARIO – FAMILY COURT
RE: Antonia De Pinto Cabral, Applicant AND: Paulo Rashid Cabral, Respondent
BEFORE: The Honourable Mr. Justice R.E. Charney
COUNSEL: Antonia De Pinto Cabral, Self-Represented William Doodnauth, Counsel for the Respondent
HEARD: April 14, 2021
ENDORSEMENT
1The respondent, Paulo Cabral, brings this motion to reduce the child support and spousal support payable pursuant to the terms of a consent Final Order dated June 19, 2018. That Order was based on an imputed income of $270,000 per year. The respondent alleges that since 2020 his income has been reduced to $144,121.
2The applicant, Antonia De Pinto Cabral, opposes this motion.
Facts
3The parties married on July 20, 1996 and separated on October 7, 2016. There are two children of the marriage, a son, born in 1997, and a daughter, born in 2006.
4The parties entered into final Minutes of Settlement on May 24, 2018. These Minutes became the Final Order of Jarvis J. dated June 19, 2018. Both parties were represented by counsel.
5Paragraph 17 of the Order sets the monthly child support for the two children at $3,517 per month, and spousal support at $2,976 per month, based on an imputed income of $270,000 per year. Section 7 expenses were divided on a proportionate basis, 30% to the applicant and 70% to the respondent.
6I note that the $2,976 for spousal support is much closer to the high end ($3,181) than it is to the mid range ($2,238).
7The consent order provided that child support ceases when the child is no longer enrolled in post secondary education or age 23, and that spousal support may be changed if there is a material change in circumstances, including a change in either party’s financial position.
8The respondent father brought a motion to change in August 2019 seeking a variation of his child support and spousal support based on a material change in his income.
9On October 23, 2020, Himel J. found that the parties’ son was 23 years of age and no longer enrolled in post secondary education and terminated child support for the son as of January 1, 2020. Accordingly, child support was reduced to $2,163 based on the respondent’s imputed income of $270,000.
10Himel J. dismissed the balance of the respondent’s motion to vary his spousal and remaining child support because the respondent had failed to provide full financial disclosure with his motion. He had not filed a sworn Financial Statement or year-to-date 2020 income or expenses other than a document created by the respondent without any back-up documentation. There was no financial disclosure respecting the respondent’s new business, created in March 2019. Himel J. concluded:
There is insufficient evidence to conclude that the Father’s income has materially reduced. The declared incomes are virtually the same for 2018 and 2019.
11On November 13, 2020 the respondent requested a rehearing of the motion, claiming that he had filed the relevant financial disclosure on October 22, 2020, the day before the motion was heard. That request for a rehearing was denied by Himel J.
Position of the Parties
12In the motion before me, the respondent abandoned his claim to reduce his income for support purposes for 2019, and asks that his income be reduced starting January 1, 2020.
13The respondent has an engineering degree and has been self employed as a consultant in the information technology sector for many years. He conducted his self-employed business through his corporation, Red Bird Tools Inc., which was owned 51% by the respondent, and 49% by the respondent’s son.
14In the spring of 2019 – less than one year after signing the Minutes of Settlement – the respondent reorganized the corporate structure of his business. Red Bird Tools ceased to operate as an active business from April 2019 and received no revenue after that date. The respondent’s income from Red Bird Tools and employment/shareholder interests ceased on March 31, 2019.
15As of March 1, 2019, the respondent became a joint shareholder/employee of a new company named 2685109 Ontario Incorporated (268 Ontario), along with his business partner, Alana McClure. Ms. McClure is identified as the respondent’s spouse in his Form 13 Financial Statement, sworn on June 29, 2020. The respondent lives with Ms. McClure. Each holds 50% of the shares of 268 Ontario. Ms. McClure was not a shareholder of Red Bird Tools.
16In addition to the IT software sales and consulting services formerly carried on by Red Bird Tools, 268 Ontario provides direct marketing services for skin care products and services.
17The respondent secured a new contract between 268 Ontario and IBM Canada effective June 18, 2019. The compensation rate for the IBM contract was lower than his previous contract rate with a different company. The respondent claims that his contract with IBM will be ending this month (April 2021), and, at the date of signing his affidavit in March 2021, he had not yet secured any permanent work or long term contract.
18The respondent has obtained an income report from Valuation Support Partners Ltd. (VSP), dated January 12, 2021. The VSP Report purports to calculate the respondent’s income for support purposes in accordance with the Federal Child Support Guidelines (SOR/97-175) (CSG) for calendar year 2020. The VSP Report concludes that the respondent’s income for support purposes in 2020 was $144,121 – nearly half the income imputed to him in the May 27, 2018 Minutes of Settlement and June 19, 2018 Final Order.
19The respondent argues that he agreed to an imputed income of $270,000 in 2018 because at the time his gross revenue exceeded $317,000. In contrast, his gross revenue for 2020 is only $237,194. This gross revenue includes all T4 salaries for all corporate employees and all business deductions.
20The respondent’s spouse/partner, Alana McClure, earned $36,400 from 268 Ontario in 2020. The respondent states that Ms. McClure is the lead in office support, administration, marketing, new sales/business development and skin care consulting.
21The respondent also paid his son $10,000 “for various projects”.
22The respondent is currently $31,512 in support arrears.
23Based on his claimed 2020 income of $144,121, the respondent is seeking to reduce his child support to $1,255 per month, to have the s. 7 expenses split 60/40, and to reduce his spousal support to nil, as of January 1, 2020.
24The applicant is a teacher and is currently on disability leave earning $94,416 per year.
25The applicant alleges that the respondent reorganized his corporation and employment in order to reduce his income following the signing of the May 24, 2018 Minutes of Settlement and the June 19, 2018 consent Final Order. The respondent’s business partner, Ms. McClure, is also his girlfriend, and he is splitting some of his income with her and the son in order to reduce his own income for support purposes. The applicant takes the position that there is no independent corroboration that the girlfriend and son actually worked for the income paid to them.
26The applicant has also provided voluminous affidavit evidence relating to the dispute and negotiations leading to the 2018 Minutes of Settlement and Consent Order. She alleges that several errors and/or misrepresentations were made in arriving at the terms of the Settlement and Order, that she was left with an unfair allocation of family assets, and that the agreed upon imputed income was too low. As indicated above, the applicant was represented by counsel for the purposes of the Consent Order.
27The applicant also alleges that she did not receive proper notice of the motion before Himel J. on October 23, 2020.
28The applicant has never brought a motion under Rule 25(19) of the Family Law Rules1 to have either of those orders set aside or changed, and it is not appropriate for this Court to look behind those orders for the purposes of the motion today. Accordingly, I have disregarded those portions of the applicant’s affidavit material where she attempts to reargue the merits of the 2018 Minutes of Settlement and Consent Order and the October 23, 2020 Order.
Analysis
29The legislation that applies to the support issue in this case is the Divorce Act, R.S.C. 1985, c. 3. Section 17(1) of the Act authorizes the court to vary, rescind or suspend a child support order retroactively or prospectively if, pursuant to s. 17(4) “a change of circumstances as provided for in the applicable guidelines has occurred since the making of the child support order or the last variation order made in respect of that order”.
30With respect to spousal support order, s. 17(4.1) states:
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 of either former spouse has occurred since the making of the spousal support order or the last variation order made in respect of that order, and, in making the variation order, the court shall take that change into consideration.
31A significant change in the payor’s income qualifies as a material change of circumstances for the purposes of sections 17(4) and (4.1). The onus is on the party seeking to rely on a material change in circumstances to prove that change.
32The requirement of a material change in circumstances means that a motion to change cannot be an indirect route of appeal from the original order. The court must assume the correctness of the first order and consider only the changed facts since the first order was made.
33The respondent relies primarily on the January 12, 2021 VSP Report in support of his motion.
34To calculate the respondent’s income for support purposes, VSP started with his reported income as per his T1 General personal income tax return for 2020 ($137,460) and made certain adjustments in accordance with the CSG. In particular, VSP attributed pre-tax corporate income of 268 Ontario in accordance with the CSG. VSP calculated that $9,933 was available for distribution to the shareholders, and divided this amount by 50% ($4,967) because the respondent is only a 50% shareholder of 268 Ontario.
35Accordingly, VSP calculated the respondent’s income as ($137,460 + $4,967) = $142,427.
36In preparing its Report, VSP stated that “we have not audited or sought external verification of the information provided to us in this matter”. Accordingly, to the extent that the respondent is the source of the information, the VSP Report does not provide independent verification of the information provided.
37In addition, the VSP Report states that it relied upon:
A letter of representation obtained from Mr. Cabral, whereby he confirmed certain representations made to us including a general representation that he has no information or knowledge of any facts or material information not specifically noted in this Report, which in his view, would reasonably be expected to affect the conclusions expressed herein.
38VSP based its Report on the understanding that:
Mr. Cabral, Ms. McClure and Mr. Cabral’s son… were the only employees of 2685109. Mr. Cabral works on a full-time basis providing IT Consulting services. Ms. McClure works on a part-time basis to develop and promote the direct marketing of skin care products and services. Robert works on a part-time hourly basis providing software testing, technical support and administrative assistance.
39The VSP Report states that VSP was informed by the respondent that Ms. McClure “is an unrelated party”. As indicated above, this is not correct. Ms. McClure is the respondent’s spouse.
40VSP was also informed by the respondent that his son’s wages ($10,000) were paid for actual services rendered as a part-time assistant, and “as such no related party wages have been attributed to” the respondent.
41The VSP Report states that it should be read in conjunction with the income Reports prepared by VSP dated July 11, 2017 and July 17, 2017, which contain assessments of Mr. Cabral’s income for 2013 to 2016.
42I have reviewed the prior VSP Reports, and they do raise certain red flags that support the applicant’s position on this motion.
43For example, the July 11, 2017 VSP Report reviews the respondent’s income for 2013 -2015. That Report notes that dividends were paid to the respondent’s son and wages paid to the respondent’s wife (at that time, the applicant) for income splitting purposes which did not represent compensation for actual services rendered.
44Similar observations were made with respect to dividends paid by Red Bird Tools to the son in 2016. The July 17, 2017 VSP Report concluded that the respondent’s income for support purposes was $259,000.
45In both the July 11, 2017 and the July 17, 2017 VSP Reports, related party salaries/dividends paid by Red Bird Tools to the respondent’s family members were added to the respondent’s income for support purposes.
46The addition of these amounts was consistent with s.18(2) of the CSG, which provides:
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.
47Pursuant to s. 18(2), the onus is on the spouse seeking to deduct salaries and other payments to non-arms length persons to establish that the deductions were reasonable in the circumstances.
48In Yovcheva v. Hristov, 2019 ONSC 1007, Doyle J. summarized the onus on a self-employed person seeking to deduct expenses from gross income, at para. 40-42:
A self-employed person has the onus of clearly demonstrating the basis of his or her net income. This includes demonstrating that the deductions from gross income should be taken into account in the calculation of income for support purposes. See Whelan v. O’Connor (2006), 2006 CanLII 13554 (ON SC), 28 R.F.L. (6th) 433 (Ont. S.C.). This principle also applies where the person’s employment income is derived from a corporation that he or she fully controls. See: MacKenzie v. Flynn, 2010 ONCJ 184.
The self-employed person has an inherent obligation to put forward not only adequate, but comprehensive records of income and expenses, from which the recipient can draw conclusions and the amount of child support can be established. See: Meade v. Meade (2002), 2002 CanLII 2806 (ON SC), 31 R.F.L. (5th) 88 (Ont. S.C.). This includes the obligation to present information in a user-friendly fashion. A recipient should not have to incur the expense to understand it. See: Reyes v. Rollo (2001), 2001 CanLII 28260 (ON SC), 24 R.F.L. (5th) 120 (Ont. S.C.).
The onus rests upon the parent seeking to deduct expenses from income to provide meaningful supporting documentation in respect to those deductions, failing which an adverse inference may be drawn. See: Orser v. Grant, [2000] O.J. No. 1429 (S.C.)
49Although the two 2017 VSP Reports did add non-arms length payments back into the respondent’s income for support purposes for the years 2013 – 2016, no such additions to the respondent’s income were made in the January 12, 2021 VSP Report. VSP’s calculation in this regard was based on the unverified information provided to VSP from the respondent.
50The income reported on the respondent’s income tax return for 2020 is approximately $2,000 more than the figures proffered in the VSP Report. He reports his employment income as $138,270, and his “other income” as $5,850, for a total of $144,121. There is no explanation provided for this slight divergence, although it does not appear to be significant for the purposes of this analysis.
51In determining the respondent’s income for support purposes for 2020, the following factors are relevant to my analysis:
i. On May 24, 2018, the respondent agreed to Minutes of Settlement that set his imputed income for support purposes at $270,000.
ii. On that date, the respondent’s self-employed income was derived from his corporation, Red Bird Tools.
iii. The respondent owned 51% of Red Bird Tools, the other 49% was owned by the parties’ son.
iv. The respondent paid salary and dividends from Red Bird Tools to his family members (his son and then spouse) in order to reduce his income for tax purposes. Pursuant to the CSG Guidelines, VSP added these salaries and income back to the respondent’s income in order to determine his income for support purposes.
v. In March 2019, only ten months after signing the Minutes of Settlement, the respondent ceased doing business through Red Bird Tools, and incorporated a new company, 268 Ontario, for his self-employed income. The respondent’s new spouse, Ms. McClure, was made a 50% owner of this new company.
vi. This timing raises a red flag, and supports the applicant’s position that the purpose of the corporate reorganization was to reduce the respondent’s imputed income, agreed to in May, 2018, by splitting some of his self-employment income with his new spouse.
vii. The respondent paid $47,400 in salary to family members (his spouse and his son). While these salaries are alleged to have been paid for services provided, the respondent is the sole source of this information, and VSP did not seek external verification of this information.
viii. The respondent informed VSP that Ms. McClure “is an unrelated party”, and VSP’s analysis was based on that information. Contrary to the information provided to VSP by the respondent, Ms. McClure is the respondent’s current spouse, with whom he lives.
ix. Pursuant to s. 18(2) of the CSG, the onus is on the respondent to establish that these payments to non-arms length parties “were reasonable in the circumstances”.
52There is no independent verification that the salaries paid by 268 Ontario to the respondent’s spouse and son represented compensation for actual services rendered. For example, the information provided indicates that 268 Ontario provides both IT financial services and direct marketing services for skin care products. Ms. McClure is responsible for the marketing of skin care products, but there is no disclosure to indicate what, if any, portion of 268 Ontario’s revenue is attributable to the marketing of skin care products.
53In my view, the information provided by the respondent on this motion is insufficient to meet his onus under s. 18(2) of the CSG to establish that the salaries and dividends paid to family members “were reasonable in the circumstances”. Even if these deductions are valid for tax purposes, it does not follow that they are legitimate for the purposes of determining income for support purposes: Psavka v. Kroll, 2017 ONSC 1087, at para. 30.
54Section 19 of the CSG authorizes the Court to impute income to a party “as it considers appropriate”, including circumstances where it appears that income has been diverted (s. 19(1) (d)). The test for imputing income for child support purposes applies equally to spousal support: Yovcheva , at para. 45.
55I am of the view that it is appropriate to add related parties’ salaries and dividends to the respondent’s income for support purposes. These additions include the salaries paid to Ms. McClure ($36,400) and to the respondent’s son ($10,000) and Ms. McClure’s 50% share of the corporate income ($4,967), for a total of $51,367. This amount will be added to the respondent’s reported income of $144,121, for a total of $195,488.
56The Minutes of Settlement provide that the respondent’s child and spousal support may be reassessed on an annual basis, based on the parties’ income. Accordingly, I will adjust the respondent’s support obligations based on his 2020 imputed income of $195,488.
57I do not agree, however, that the respondent’s support payments should be adjusted retroactively to January 2020. My reasons for this are two-fold.
58The first is that, generally, support payments are based on the payor’s previous year’s income rather than the current year’s income. The support payments for 2020, for example, were based on the payor’s income in 2019. The support payments for 2021 will be based on the payor’s income for 2020. That is because the court cannot know with certainty what the payor’s current year’s income will be until the year ends. That is particularly true when the payor is self-employed, and his 2021 income will be based on consulting contracts that may not yet have been signed.
59The second reason is that the respondent has already brought a motion seeking to decrease his support payments for the year 2020. That motion was dealt with by Himel J. on October 23, 2020. Himel J. reduced the respondent’s child support payments for one child as of January 1, 2020. She dismissed the balance of the respondent’s motion to reduce his child support and spousal support because there was insufficient financial disclosure respecting the respondent’s new business.
60Himel J. denied the respondent’s request for a rehearing on November 13, 2020.
61The respondent is now asking this Court to essentially revisit Himel J.’s decisions and make further reductions to his support obligations as of January 1, 2020.
62Once his motion before Himel J. was dismissed for failure to provide full financial disclosure, he does not get a second (or in this case, third) kick at the can: Gray v. Rizzi, 2016 ONCA 152, at paras. 34-37.
63Himel J. did not address the respondent’s support payments for January 1, 2021 onwards, and I will confine my Order to that period.
64As indicated above at para. 6, the spousal support set out in the Minutes of Settlement was close to the high end. In my view, given the length of the marriage, the age of the parties, and the fact that the applicant is currently on a reduced income because she is on disability leave, it is appropriate to continue to use high end spousal support for these adjustments.
65In my view, the relative incomes of the parties do not merit an adjustment to the parties’ proportionate share of s. 7 expenses, and there will be no change to the 30/70 division agreed to in the Minutes of Settlement.
Conclusion
66Based on the respondent’s imputed income of $195,488 for the year 2020, and the applicant’s income of $94,416 per year, CSG child support for one child is $1,627, and spousal support is $2,102. These changes are retroactive to January 1, 2021.
67Order to go:
i. Commencing January 1, 2021, child support for Stephanie Cabral is payable by the respondent in the amount of $1,627 per month.
ii. Commencing January 1, 2021, spousal support for the applicant, Antonia De Pinto Cabral, is payable by the respondent in the amount of $2,102 per month.
iii. SDO to issue.
68This was a case of divided success. If the parties are not able to agree on costs, and either party seeks costs for the motion, the party seeking costs may file submissions of not more that 3 pages plus costs outline and any offers to settle within 20 days of the release of this endorsement, and the responding party may file responding submissions on the same terms within a further 15 days.
Justice R.E. Charney
Date: April 26, 2021