NEWMARKET COURT FILE NO.: FC-20-307-00
DATE: 20210518
SUPERIOR COURT OF JUSTICE – ONTARIO – FAMILY COURT
RE: L.M.P, Applicant
AND:
M.D.P., Respondent
BEFORE: The Honourable Mr. Justice G.A. MacPherson
COUNSEL: R.M. Halpern/J. Brown, Counsel for the Applicant G.S. Joseph, Counsel for the Respondent
HEARD: May 12, 2021
ruling on motion
Relief Requested
[1] The Applicant brings a motion requesting the following relief:
(a) child support in the amount of $10,117 per month;
(b) spousal support in the amount of $17,163 per month;
(c) a determination that section 7 expenses be apportioned 70% to the Respondent and 30% to the Applicant;
(d) an interim disbursement of $250,000; and
(e) an Order for outstanding disclosure.
Background
[2] The parties were married on June 23, 2012 and separated on August 23, 2019.
[3] There are two children of the marriage, namely, V.P. born January 15, 2014 and C.P. born March 28, 2016.
[4] Following separation, the parties continued to reside in the matrimonial home, separate and apart, under the same roof.
[5] Pursuant to the Order of Bennett J. dated April 7, 2021, commencing April 31, 202 the Applicant, on consent, was granted exclusive possession of the matrimonial home. The children reside primarily with the Applicant. The Respondent has parenting time that is less than 40% of the time.
[6] At the commencement of the motion the parties indicated they had reached a consent on the issues of disclosure and on the interim disbursement requested by the Applicant.
[7] Accordingly, the motion proceeded on the balance of the relief requested: child support, spousal support and the apportionment of section 7 expenses.
[8] It is noteworthy that both parties agree, and quite correctly, that spousal entitlement is not at issue at this interim motion.
[9] The most significant issue is ascertaining the income of the parties for the purpose of establishing child support, spousal support and the apportionment of section 7 expenses.
Income of the Parties
[10] Both parties are self-employed.
Income of L.M.P.
[11] The Applicant works as a consultant.
[12] She has one contract. It is with Procom, a recruitment and contract engagement company. She performs services, as part of that contract, for Canadian Tire Corporation. She has performed services for Canadian Tire Corporation in the past.
[13] The Applicant’s contract is for six months. The contract commenced March 1, 2021 and will run until August 31, 2021. The contract can be terminated at any time without penalty.
[14] The Applicant charges an hourly rate of $78.
[15] In March 2021 the Applicant billed Procom 177 hours for a gross monthly income of $13,806.
[16] In April 2021 the Applicant billed Procom 145 hours for a gross monthly income of $11,310.
Applicant’s Position
[17] The Applicant argues that her gross income for the taxation year 2021 will be $70,356.
[18] The Applicant states that the number of hours billed in March was an outlier. She states that she anticipates a monthly gross income for the balance of the contract more in line with her billings in April 2021 in the monthly amount of $11,310.
[19] She calculates her income under the contract as follows: five months at $11,310 and one month at $13,806. During the six months of the contract, assuming it is not terminated early and not extended, the Applicant anticipates a gross income for 2021of $70,356.
[20] The Applicant incurs minimal expenses. Based on prior year expenses, she anticipates her annual expenses to be $12,450. Accordingly, she argues that her net income in 2021, for the purpose of calculating spousal support, will be $58,000. By her analysis, no income should be attributed to her for the remaining six months of the years.
Respondent’s Position
[21] The Respondent argues that the Applicant’s income for 2021 should be imputed at $153,222.
[22] The Respondent uses the Applicant’s March 2021 gross income of $13,806 to calculate her 2021 gross income.
[23] The Respondent picked the highest billing month of the two (March 2021) and he requests that the annual income be determined based on this level of earnings for 12 months.
[24] The Respondent argues that the imputation of the Applicant’s income should include January and February of 2021 when the Applicant did not work. He also argues that, despite the contract coming to an end at the end of August 2021, the gross income should be imputed to the Applicant over a 12-month period.
[25] The Respondent accepts that annual expenses will be deducted from the Applicant’s income. The Respondent accepts the annual expenses proposed by the Applicant ($12,450) and he deducts this from her gross annual income of $165,672 ($13,806 x 12 months) to determine her annual income of $153,222.
Analysis
[26] I have determined that an appropriate monthly gross income to apply to the Applicant for the duration of her contract is $12,500. It is the halfway point between the only two full months of income that have been completed in this contract.
[27] I am content to deduct from the Applicant’s gross income, monthly expenses of $1,037 (which is stated in her affidavit sworn May 4, 2021 at paragraph 49 and relied upon by the Respondent in his affidavit sworn May 6, 2021 at paragraph 9).
[28] For the six-month contract, I have concluded that the Applicant will receive net income of $11,463 for six months, or $68,778.
[29] The Applicant did not work in January and February of 2021. It is too early to predict if the Applicant’s contract will be extended. If her contract is not extended, the Applicant is expected to search for alternate and, presumably, similar income. If her contract is extended, all the better.
[30] The Applicant has worked through much of the marriage. Her 2020 earnings were interrupted by the pandemic.
[31] I have concluded that a sensible and realistic income to impute to the Applicant for 2021 is $100,000. If her contract is extended, the Applicant will receive a little more. If her contract is not extended the Applicant is expected to locate alternate employment and her income may be a little less.
Income of M.D.P.
[32] The Respondent’s income is considerably more complicated.
[33] The Respondent owns 100% of the common shares of M.P. Holdings Inc. and 100% of MLVC Holdings Inc.
[34] M.P. Holdings Inc. is an investment holding company, simply holding marketable securities and cash.
[35] MLVC holds 50% of the common shares of Abutment Inc.
[36] An unrelated European company, Medentika GMBH, owns the remaining 50 % of the common shares of Abutment Inc.
[37] Medentika GMBH is controlled by Straumann Holding AG, a publicly traded company.
[38] There is also a “P.” Family Trust that is not income producing.
Abutment Direct Inc.
[39] Abutment Direct Inc. is the income producing entity.
[40] Abutment Direct Inc. has a distributorship agreement with Medentika GMBH to distribute Medentika dental products.
[41] It is relevant to note that Abutment Direct Inc.’s directors are M.D.P. and two directors appointed by Medentika. Most issues are decided by majority vote.
[42] It is also relevant to note that the shareholders agreement contains a dividend distribution formula as follows: “It is the goal of the corporation to distribute dividends to the shareholders and allocate only the part of retained earnings that is legally required or necessary sustainably to finance the future growth of the business.”
[43] It is relevant that the working capital threshold, as defined in the shareholders agreement, is $662,882.
[44] It is also relevant that, despite the director’s voting allotment providing M.D.P. only a 1/3rd position, it has been he who decides when and if to pay a dividend.
Parties’ Position
[45] Both parties rely on income valuation reports that considered the income for M.D.P. for the tax years 2017, 2018 and 2019.
[46] The Respondent argues that his income for 2019 was $479,000.
[47] The Applicant argues that the Respondent’s income for 2019 was $820,000.
[48] The Respondent provided an income valuation report of his income completed by Joseph Hilton (hereinafter the “BDO Report”) dated October 30, 2020. BDO estimated the Respondent’s income as follows:
(a) in 2017 the Respondent’s income was $642,000;
(b) in 2018 the Respondent’s income was $545,000; and
(c) in 2019 the Respondent’s income was $479,000.
[49] The Applicant provided a ‘preliminary’ income valuation report of the Respondent’s income completed by Tim Martin dated May 3, 2021 (hereinafter the Duff & Phelps Report). Duff & Phelps estimated the Respondent’s income as follows:
(a) in 2017 the Respondent’s income was $665,000;
(b) in 2018 the Respondent’s income was $755,000; and
(c) in 2019 the Respondent’s income was $820,000.
[50] The difference between the two reports, in terms of income valuation, for 2018 and 2019 is not close.
Pre-tax Corporate Income
[51] The most significant difference between the two reports is the treatment of pre-tax corporate income:
(a) Duff & Phelps, for the 2018 taxation year, added to the Respondent’s income $199,437 of pre-tax corporate income. BDO did not; and
(b) Duff & Phelps, for the 2019 taxation year, added to the Respondent’s income $334,109 of pre-tax corporate income. BDO did not.
Analysis
[52] Section 1(d) of the Child Support Guidelines states: The objectives of these guidelines are:
(d) to ensure consistent treatment of parents or spouses and their children who are in similar circumstances.
[53] Pursuant to section 16 of the Child Support Guidelines, the starting point in determining income for support purposes is the payor’s line 150 of their Income Tax Return.
[54] The Child Support Guidelines provide for different methods of determining income when the starting point is not the “fairest determination of that income”[^1] does “not fairly reflect all the money available to the parent or spouse”[^2] or when a court “imputes such amount of income to a spouse as it considers appropriate.”[^3]
[55] Section 18 of the Child Support Guidelines states:
Shareholder, director or officer
- (1) Where a parent or spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the parent’s or spouse’s annual income as determined under section 16 does not fairly reflect all the money available to the parent or spouse for the payment of child support, the court may consider the situations described in section 17 and determine the parent’s or 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 parent or spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre-tax income. O. Reg. 391/97, s. 18 (1).
[56] By virtue of the use of the word ‘may’ in section 18 of the Child Support Guidelines, the court has discretion to add all or part of a corporation’s pre-tax income to a payor’s income if the payor’s annual income , as determined under section 16 of the Child Support Guidelines, does not fairly reflect all money available to the payor for the payment of support.
Attribution of Pre-tax Corporate Income
[57] In Brophy v. Brophy, 2002 76706 (ON SC), 2002 CarswellOnt 3163 (S.C.J.), para 36, De Sousa J. examined the caselaw and concluded the following considerations and questions emerge as those to be taken into account by the court in coming to the decision of whether to exercise its discretion or not:
a) Because of the separate legal entity of the corporation, should there be a general reluctance by the court to automatically attribute corporate income to the shareholder?
b) Is there a business reason for retaining earnings in the company?
c) Is there one principle shareholder or are there other bona fides arm’s length shareholders involved?
d) What is the historical practice of the corporation for retaining earnings?
e) What degree of control is exercised by the spouse over the corporation?
[58] I have condensed these considerations into three questions:
(a) does the Respondent have control over dividend declarations?
(b) is there a business reason for retaining the earnings?; and
(c) should the court exercise its discretion and attribute pre-tax corporate income?
Does M.D.P. Have Effective Control Over Dividend Declarations?
[59] Despite section 18 of the Child Support Guidelines, the BDO report did not attribute any pre-tax income to the Respondent stating at page 6:
“Notwithstanding our analysis on Schedule D3, we note that M.D.P. (the Respondent) does not control Abutment and that Medentika must agree with the annual dividend determination. Consequently, even if it were determined that Abutment could afford to pay additional dividends, M.D.P. does not control Abutment and cannot access additional dividends at his discretion. It is therefore appropriate to limit the attribution of Abutment’s income to M.D.P. to the dividends actually paid which are reflected in the attribution of MLVC’s income to M.D.P.”
[60] By contrast to the BDO report, the Duff & Phelps report attributed $199,000 in corporate pre-tax income to the Respondent in 2018 and an additional $334,000 in corporate pre-tax income to the Respondent in 2019.
[61] The Duff & Phelps report concludes that the Respondent “decides if/when there is sufficient cash to pay a dividend.” This information was provided directly to Duff & Phelps from the Respondent through counsel.
[62] Duff & Phelps also concluded that capital, in excess of the working capital threshold set out in the shareholder’s agreement, was necessary for the business to increase its inventory holdings as a result of growing sales. The Duff & Phelps report noted that “At December 31, 2017, working capital as a percentage of sales was 22%, growing to 30% at December 31, 2018 and to 37 % at December 31, 2019.” Duff & Phelps concluded that “The excess amounts of working capital in 2018 and 2019 over this percentage of sales threshold (22%) were considered available for distribution to shareholders.”
[63] M.D.P. is a 50% owner. He is not a minority owner.
[64] M.D.P., by his own admission, effectively exercises control over whether dividends are declared and what earnings are retained.
[65] It is important to note that the nature of this business is marketing and distribution.
[66] As stated, Abutment Direct Inc.’s directors are M.D.P. and two directors appointed by Medentika. Most issues are decided by majority vote.
[67] There was no evidence provided to the court to suggest that, historically, when M.D.P. determined a dividend, that he was overruled by the votes from the two directors for Medentika. As I understand the evidence, the business relationship between Abutment Direct Inc. and Medentika has been in place for over 10 years during which M.D.P. has determined the amount and timing of a dividend.
[68] Evidence of manipulation, bad faith or intentional avoidance of support obligations is not a prerequisite to imposing section 18 of the Child Support Guidelines.[^4]
[69] For all of these reasons I conclude, on the evidence before me, that M.D.P. has effective control over dividend declaration.
Is There a Business Reason for Retaining the Earnings?
[70] It is noteworthy that Abutment Direct Inc.’s gross revenues increase in each of the three years analyzed:
a) Gross Revenues in 2017 were $3,318,397;
b) Gross Revenues in 2018 were $3,995,186; and
c) Gross Revenues in 2019 were $5,438,864.
[71] It is noteworthy that Abutment Direct Inc.’s net revenues increased in each of the three years analyzed:
a) Net Revenues in 2017 were $1,100,856;
b) Net Revenues in 2018 were $1,225,153; and
c) Net Revenues in 2019 were $1,619,873.
[72] It is noteworthy that Abutment Direct Inc.’s retained earnings increased in each of the three years analyzed:
a) Retained Earnings in 2017 were $725,617;
b) Retained Earnings in 2018 were $1,185,770; and
c) Retained Earnings in 2019 were $2,017,207.
[73] Curiously, despite the increase in gross revenue, the increase in net revenue, and the increase in retained earnings, the dividends paid to both MLVC (the Respondent) and Medentika decreased:
a) Total Dividends paid to MLVC and Medentika in 2017 were $700,000;
b) Total Dividends paid to MLVC and Medentika in 2018 were $500,000; and
c) Total Dividends paid to MLVC and Medentika in 2019 were $421,000.
[74] The argument why further dividends have not been paid, as I understand it, is that Abutment Direct Inc. needs additional capital as it is a growing company. Accordingly, it will need liquid resources for increased inventory.
[75] A review of the balance sheet for Abutment Direct Inc. does not support that argument. As expected, with increased sales, inventory increased during the three years analyzed:
a) Inventory at year end in 2017 was $756,365;
b) Inventory at year end in 2018 was $1,208,265; and
c) Inventory at year end in 2019 was $1,300,465.
[76] Similarly, as expected with an increase in sales, accounts receivable increased as follows:
a) Accounts Receivables at year end in 2017 were $154,738;
b) Accounts Receivables at year end in 2018 were $319,682; and
c) Accounts Receivables at year end in 2019 were $590,884.
[77] What is surprising is that accounts payable remained pretty consistent as follows:
a) Accounts payable at year end in 2017 were $119,788;
b) Accounts payable at year end in 2018 were $239,679; and
c) Accounts payable at year end in 2019 were $176,842.
[78] What is also surprising, considering the steady increase in sales, inventory, and accounts receivable, with a relatively flat accounts payable, is the increase in cash on hand:
a) Cash on hand at year end in 2017 was $154,738;
b) Cash on hand at year end in 2018 was $319,682; and
c) Cash on hand at year end in 2019 was $590,884.
[79] Finally, and perhaps most telling, is that retained earnings increased significantly during the three years analyzed:
a) Retained earnings at year end in 2017 were $725,617;
b) Retained earnings at year end in 2018 were $1,185,770; and
c) Retained earnings at year end in 2019 were $2,017,207.
[80] It is noteworthy that the balance sheet for Abutment Direct Inc. for all three years discloses no debt.
[81] I have concluded, based on all of the above, that the dividends paid to the Respondent do not fairly reflect all of the money available to him for the payment of child support and that there is pre-tax corporate income available to be paid to shareholders. I cannot conclude, based on the evidence before me, that there is a business reason for the reduction in dividends and the significant increase in retained earnings. It is noteworthy that the report provided by BDO did not consider if there was a reason for the retained earnings stating instead, “Consequently, even if it were determined that Abutment could afford to pay additional dividends, M.D.P. does not control Abutment and cannot access additional dividends at his discretion.” Duff & Phelps did consider the issue and concluded there were excess amounts of working capital in 2018 and 2019.
Should the Court Exercise its Discretion and Attribute Pre-tax Corporate Income?
[82] I am mindful that this is a motion for temporary relief. Neither of the two experts have been questioned.
[83] I am also mindful of the general principles guiding the exercise of the court's discretion when dealing with support pending trial were summarized by Penny J. in Knowles v. Lindstrom,[^5]
It is well-established that interim support motions are not intended to involve a detailed examination of the merits of the case. Nor is the court required to determine the extent to which either party suffered economic advantage or disadvantage as a result of the relationship or its breakdown. These tasks are for the trial judge. Orders for interim support are based on a triable or prima facie case. An order for interim support is in the nature of a “holding order” for the purpose of maintaining the accustomed lifestyle pending trial, Jarzebinski v. Jarzebinski, 2004 CarswellOnt 4600 (ONSC) at para. 36; Damaschin-Zamfirescu v. Damaschin-Zamfirescu, 2012 ONSC 6689, 2012 CarswellOnt 14841 (ONSC) at para. 24.
[84] However, one of the purposes of the Child Support Guidelines is to establish fair levels of support for children so that they can benefit from the financial means of both parents. A fair level of support must reflect the payor’s actual income, or as close to it as possible.
[85] In exercising my discretion, I am mindful that the shareholders agreement provides, as a goal, the distribution of dividends to shareholders allocating only the part of retained earnings that is required or necessary to sustainably finance the future growth of business.
[86] It is noteworthy that I am using 2019 end of year numbers for determining child and spousal support. It is 2021. The evidence, before the court, is that Abutment Direct Inc.’s sales in 2020 were higher than 2019 and that sales in 2021, year to date, were up 50%.
[87] Not including available pre-tax corporate income would, in my opinion, result in an unfair result.
[88] I have considered that Abutment Direct Inc. carries no debt.
[89] The court was provided no evidence of extraordinary business losses or upcoming capital requirements.
[90] An examination of Abutment Direct Inc.’s financial records indicates a fiscally healthy company.
[91] For all of those reasons I am satisfied, on the evidence before me, that pre-tax corporate income should be included as income to the Respondent as it better reflects the income available to the Respondent for the purpose of establishing an appropriate quantum of spousal support and child support.
[92] I have determined that $334,000 in 2019 pre-tax corporate income, as set out in the report from Duff & Phelps, be included in the income of the Respondent. There is no evidence before the court to suggest that the inclusion of this income would in anyway impact the financial solvency of Abutment Direct Inc. For the taxation year, 2019, that amount was $820,000.
Spousal Support/Child Support
[93] Now that the parties’ incomes are determined, I turn to the quantum of spousal support and child support.
[94] In Cassidy v. McNeil,[^6] at para 68 the Ontario Court of Appeal stated that spousal support should be based not on a budget of expenses of the recipient but on income sharing. Further, in the absence of the opportunity to carry out an in-depth analysis of the parties’ circumstances, which is better left to trial, the court tries to achieve "rough justice."
[95] As stated, there was agreement between the parties, for the purpose of this temporary motion, that the Applicant has entitlement to spousal support.
[96] I note that this was a seven-year marriage and nine-year cohabitation.
[97] The Applicant took 2.5 years off work when C.P. was born.
[98] C.P., has unique medical, educational, developmental, and other needs. When he was born he was diagnosed with Cytomegalovirus and Klinefelter Syndrome. He is also deaf in both ears, has a vestibular impairment and suffers from asthma. C.P. has several support providers including an auditory-verbal therapist, physio therapist, speech and language pathologist, family doctor, pediatrician, opthamologist, audiologist, ENT surgeon, occupational therapist, hearing itinerant teacher and social worker.
[99] I have reviewed and considered the Financial Statements filed by both parties. The Applicant has a proposed budget of $11,536 per month. The Respondent has indicated monthly expenses in the amount of $22,022.
[100] I have considered the SSAGs and the submissions of both parties that argued mid-level spousal support is appropriate. I agree with their submissions.
[101] I have imputed an income to the Applicant of $100,000.
[102] I have attributed pre-tax corporate income to the Respondent that results in an income for 2019 of $820,000.
Order
On Consent,
- Order to issue in accordance with the draft Order signed by me May 12, 2021.
Not on consent,
Commencing May 1, 2021 and on the first of every month thereafter, the Respondent shall pay to the Applicant, spousal support in the amount of $16,000.
Commencing May 1, 2021 and on the first of every month thereafter, the Respondent shall pay to the Applicant, child support in the amount of $10,000.
Section 7 expenses shall be apportioned as 32% Applicant and 68 % Respondent.
If the parties cannot agree on the issue of costs regarding this motion, I shall consider the request for costs. The Applicant shall serve on the Respondent and file electronically, through the Trial Coordinator, her written submissions, limited to three pages, exclusive of the Bill of Costs and Offers to Settle within 20 days of the date of this decision. The Respondent shall serve on the Applicant and file electronically, through the Trial Coordinator, his written submissions, limited to three pages exclusive of the Bill of Costs and Offers to Settle within 10 days thereafter. There shall be no right of Reply.
Justice G.A. MacPherson
Date: May 18, 2021
[^1]: Section 17 of the Child Support Guidelines [^2]: Section 18 of the Child Support Guidelines [^3]: Section 19 of the Child Support Guidelines [^4]: Kowalewich v. Kowalewich, 2001 CarswellBC 1417 (C.A.) [^5]: Knowles v. Lindstrom, 2015 ONSC 1408 [^6]: 2010 ONCA 218, 2010 CarswellOnt 1637 (Ont C.A.)