Court File and Parties
Court File No.: FC-19-172 Date: 2023-03-10 Ontario Superior Court of Justice
Between: A.J., Applicant And: D.C., Respondent
Before: The Honourable Justice I.R. Smith
Counsel: James A. Brown, for the Applicant Stuart M. Law, for the Respondent
Heard: by video conference on January 25, 26, 27, 28, 31, February 1, 2, 3, 4, and June 20, 2022
Reasons for Judgement
Introduction
[1] The applicant mother, AJ, moved to change the parenting time and child support provisions of the parties’ separation agreement. At the outset of trial, the parties settled the issues relating to parenting time, but remained divided on the issue of child support.
[2] AJ and DC were married on February 17, 2007 and separated on June 1, 2010. They have a son, born in July, 2009, who lives primarily with the applicant. On June 30, 2011, the parties entered into their separation agreement, which was later filed with the court. The agreement fixes the respondent father’s “estimated” income at $70,000 per year. The key issue at trial was whether it was established that there has been a material change in the respondent’s income in the years 2016 to 2021 such that the amount of child support paid by the respondent should have increased during these years and thereafter.
[3] The respondent’s income is derived largely from the landscaping and snow removal business that he runs. One of the chief difficulties in this case is fixing the respondent’s income since he is sometimes paid in cash for the work that he does. The respondent claims that he declares all cash income on this tax returns, while the applicant claims that the respondent routinely under-reports his cash income to the Canada Revenue Agency (“CRA”). Also at issue is the validity of deductions claimed by the respondent and certain amounts which the applicant says should be added to the respondent’s income.
[4] For the reasons which follow, I have determined that the applicant has not discharged her onus to show that the respondent’s income has changed materially since the date of the separation agreement. With one limited exception, the application is therefore dismissed.
The separation agreement
[5] Pursuant to the separation agreement, which both parties signed with the benefit of independent legal advice, they agreed that the respondent father would pay child support of $647 monthly. For present purposes, the key provisions of the agreement are as follows [emphasis added]:
5. Child Support
5.2 For purposes of determining child support for [the child], [AJ]’s current estimated annual income is $70,000.00 and [DC]’s current estimated annual income is $70,000.00.
5.7 As their incomes are currently similar, for the purpose of apportioning special or extraordinary expenses, each of [DC] and [AJ] will pay fifty percent (50%) of [the child’s] special or extraordinary expenses. If and when either party’s income changes, a change in the percentage ratio will be made pursuant to paragraph 5.14 below.
5.8 Based upon the parties’ current estimated annual incomes (and subject to change as provided in paragraph 5.14 below), [DC] will pay to [AJ] fifty percent (50%) of [the child’s] special or extraordinary expenses within five days of [AJ’s] delivering proof to him of the expense. […]
5.14 Once a year, [DC] and [AJ] will review the child support arrangements in this Agreement and, based upon their respective incomes for the previous year as disclosed in the document referred to in paragraph 5.15 below, shall adjust monthly child support pursuant to the Guidelines and for special or extraordinary expenses, effective July 1st each year. […]
5.15 Each party will, not later than June 1st each year, provide to the other a copy of his or her Income Tax Return for the previous year (and all materials filed with it), together with their Notice of Assessment received from Canada Revenue Agency and both will, in writing provide the following information to the other:
(a) the documents required in s. 21(1) of the Guidelines that have not been previously provided,
(c) current information about a party’s claim of under hardship, if any, and his or her household’s standard of living,
(e) any other information needed to review child support.
[DC]’s income shall be deemed to be not less than $70,000.00 per year unless he is able to prove to the contrary.
5.16 Until the support is adjusted by an amending agreement as provided in paragraph 5.14 (or otherwise), court order or arbitration award, [DC] will continue to pay the child support and his contribution to [the child’s] special and extraordinary expenses under the parties’ most recent written agreement, court order or arbitration award.
5.17 In addition to a yearly review, either of [DC] or [AJ] may seek a change in child support if there is a material change in the condition, mean, needs or other circumstance of either of them, or the child, which would affect child support.
5.18 A material change in the condition, means, need or other circumstances of the parents or child may be foreseen or unforeseen, foreseeable or unforeseeable, and may include:
(a) a material change in either party’s financial condition,
5.19 Whoever seeks a change will give the other, in writing:
(a) notice of the proposed change,
(b) evidence supporting the proposed change, and
(c) any request for information necessary to determine the issue.
10. Property
10.1 Upon transfer of the matrimonial home, [DC] will make an equalization payment of $65,000 to [AJ], by certified cheque …
10.2 [DC] and [AJ] each represent that their income, assets and liabilities are set out in their sworn financial statements which have been exchanged between them.
10.5 In consideration of the transfers, covenants and releases contained in this Agreement, the parties agree that each of their claims against the other for an Equalization of their Net Family Property has been full and finally waived and satisfied and that neither of them will at any time, for any reason, commence an action against the other for an Equalization of their Net Family Properties. Each party is therefore free to retain without claim from the other all the assets in his or her possession.
11. Matrimonial Home
11.1 The partis acknowledge that the matrimonial home is registered in the name of [AJ] and her mother … in trust.
11.3 Not later than July 27, 2011, in consideration of [DC] assuming the mortgage against the title to the matrimonial home, and [AJ] receiving a release of obligation under the covenant of the said mortgage against the matrimonial home, or a discharge of the said mortgage, and upon [DC] paying to [AJ] the sum of $65,000, being the equalization payment as set out in paragraph 10.1 above, [AJ] and her mother … shall contemporaneously transfer all of their right, title and interest in the matrimonial home to [DC]. […]
[6] Since the date of the separation agreement, the respondent has been paying $647 per month in child support. He is not in arrears. There was no evidence that any annual review of the appropriate amount of child support occurred (para. 5.14 of the separation agreement) or that the parties exchanged financial information (para. 5.15). Indeed, the applicant alleges that the respondent failed to do so.
[7] The parties disagree about why the respondent’s income was deemed to be $70,000 in the separation agreement. The applicant testified that the parties’ believed that their respective incomes were roughly equal at the time of their separation, that since her income as a teacher was $70,000, they therefore agreed that the respondent’s income for the purposes of the agreement would be $70,000.
[8] The respondent testified that his income was well below $70,000 in 2011 and that the parties agreed to deem his income to be $70,000 as part of the parties’ hard negotiations respecting parenting time and their respective interests in the matrimonial home. According to the respondent, the applicant was “holding my house hostage,” and so he agreed to inflate his income and his child support obligation to entice the applicant give up her interest in that home. The respondent was also concerned to ensure that he had adequate time with his son. In addition, having equal incomes meant that no spousal support would be owed by either party and special and extraordinary expenses for the child would be split evenly. Given that the parties wanted their affairs to be as separate as possible, this was an attractive compromise.
[9] As reflected in paragraphs 10.1, 10.5, 11.1 and 11.3 of the agreement (all quoted above), at the time of separation, the matrimonial home was held in the name of the applicant and her mother (the latter’s interest being in trust for the parties). [1] In consideration for the respondent assuming the mortgage on the property, and upon the respondent making an equalization payment of $65,000.00 to the applicant, she and her mother agreed to transfer their interests in the home to the respondent.
The positions of the parties
[10] The applicant takes the position that the respondent’s income is much higher than the $70,000 annual income agreed to in the separation agreement. There are several components to her argument in favour of this position.
[11] First, the applicant says that the respondent earns a substantial amount in cash, for which his accounting is sadly lacking, which goes undeclared on his tax returns, and which the applicant estimates to be at least $40,000 per year. In addition, the applicant argues that the court should draw an adverse inference against the respondent given his poor accounting practices and the incredibility of his viva voce evidence on these points. The respondent says that he declares the cash that he earns each year and that, in any case, the evidence establishes that his cash income is nowhere near $40,000 per year. He says that no adverse inference should be drawn given the exhaustive financial disclosure he has made in this case.
[12] Second, the applicant argues that various amounts deducted from the respondent’s income were improperly claimed or inflated. With one exception, the respondent says that the deductions were properly claimed. He concedes that amounts claimed for the use of his home by his business should not have been claimed but says that if added to his line 150 income these amounts do not take his income above the $70,000 annual income deemed in the separation agreement.
[13] Third, the applicant claims that various amounts should be added to the respondent’s income. These include the proceeds of the respondent’s 2021 sale of the former matrimonial home, gifts of cash received from the respondent’s mother, and the proceeds of the sale of various personal items. The respondent says that there is no support in fact and/or in law for the addition of these amounts to the respondent’s income.
[14] Last, the applicant argues the value of any deduction improperly claimed by the respondent, or of any income improperly omitted from the respondent’s reported income, should be added to the agreed upon $70,000 annual income fixed by the separation agreement for the purposes of determining the additional child support owed by the respondent.
[15] The respondent acknowledges that in 2020 his income exceeded $70,000 and that I should order the payment of additional, or “top up,” child support for that year. He says, though, that there were unusual circumstances in 2020 which will not recur, and the income earned for that year should not be used as a basis for calculating future child support. Further, the respondent disagrees with the applicant’s position that the base amount to which any additional income should be added is the agreed upon $70,000 figure. He argues that the starting point in the respondent’s actual line 150 income. Any additional income should be added to that number, not to the artificial $70,000 deemed income.
[16] The differences in the positions of the parties are stark. Over the relevant years, the applicant says that the respondent’s income has ranged from $168,592 to $657,622. As I have said, the respondent says that his income exceeded $70,000 just once: $84,292 in 2020.
The onus to show a material change
[17] The parties agree that on this application to change the child support amount paid by the respondent pursuant to the parties’ separation agreement, the burden is on the applicant to establish on a balance of probabilities that there has been a material change in circumstances that would justify that change. The separation agreement itself requires that the party seeking the change provide evidence of a material change, as does the jurisprudence in this area (Trang v. Trang, 2013 ONSC 1980, at para. 40; Armstrong v. McCusker, 2018 ONCJ 620 – 109). To the extent that the applicant asks that an income be imputed to the respondent pursuant to section 19 of the Federal Child Support Guidelines, SOR/97-175, as am. (“FCSG”), the onus here is also on the applicant to provide an evidentiary basis for imputing income, although the respondent bears a significant duty to disclose so that the court is able to determine the matter fairly (Kinsella v. Mills, 2020 ONSC 4785, at paras. 166, 178; A.E. v. A.E., 2021 ONSC 8189, at para. 258). Income may be imputed where it “is supported by evidence” and is consistent with objective of providing fair child support (Korman v. Korman, 2015 ONCA 578, at para. 51).
[18] The separation agreement provides that a material change may be established where, among other things, there has been “a material change in either party’s financial position.” The authorities instruct that a change will be material where it is a change that if known at the time, would likely have resulted in different terms in the agreement (Bae v. Lea, 2019 ONSC 1496, at para. 12; Armstrong, supra, at paras. 107 – 108; Trang, supra, at para. 40. See also, FCSG, s. 14).
[19] Insofar as this application relies on arguments that the respondent has made improper deductions in his income tax returns, again, the burden is on the applicant to provide evidence that this is so (Joy v. Mullins, 2010 ONSC 1742, at paras. 34 – 35). However, the issue with respect to the deductions is not just whether they are valid deductions for tax purposes, but whether the deductions result in a fair representation of actual disposable income (FCSG, s. 17). On this matter, the party claiming the deduction must show that there is a reasonable explanation for the deduction and provide some proof that the expense in question was incurred (Szitas v. Szitas, 2012 ONSC 1548 at paras. 60 – 62). Moreover, some “grossing up” of a payor’s income may be required to achieve a fair representation of income (Riel v. Holland (2003), 67 O.R. (3d) 417 (C.A.), at para. 36).
The starting point
[20] As noted above, in addition to disagreeing about why the $70,000 deemed annual income was attributed to the respondent, the parties also disagree as to the significance of that number for the purposes of this motion to change. The respondent’s position is as follows: where during the years 2016 and following his annual income was less than $70,000, he has been content to continue to pay child support on the basis of that deemed income because that represents the bargain he struck with the applicant at the time of the negotiation of the separation agreement and because of the cost – in legal fees – of attempting to change that agreement. Only if his income has exceeded $70,000 by a material amount should the court order an increase in child support owed retroactively or in the future. For these purposes, the respondent says, the starting point is the respondent’s line 150 income. In this case, the respondent says that in all years except 2020 his income was below $70,000. He agrees that the court should order retroactive top up child support for that year but disagrees that his 2020 income should be the standard for setting child support going forward since his 2020 income was skewed higher by one-off events that will not be repeated (see para. 97 – 99, below).
[21] The applicant takes a different view. She argues that the deemed income set in the separation agreement is akin to income imputed by the court. Accordingly, the respondent is not entitled to challenge the correctness of that imputation by simply relying on his declared line 150 income. The applicant argues that $70,000 is the starting point to which amounts for other income and improperly deducted expenses should be added. For the year 2020 and following, the applicant takes the position that the starting point should be the respondent’s 2020 income.
[22] In making this argument, the applicant relies heavily on the judgment in Trang, supra. There, Pazaratz J. was at pains to explain that where the court has imputed income to a party there is a strong presumption that the amount imputed was correct. It will not be enough for the party to whom income has been imputed to argue simply that his or her income has changed relying only on declared income. Instead, it will be important to understand the reasons for the original imputation and to consider whether there has been a material change in circumstances such that those reasons are no longer operative (Trang, supra, at paras. 40 – 60).
[23] The respondent says that the applicant’s reliance on Trang is misplaced. This is not a case where income was imputed because the respondent was hiding income or failing to co-operate in the process. On the contrary, he was a full participant in the negotiation of the separation agreement which involved the resolution of many issues, just one of which was the respondent’s deemed income for child support purposes. While the respondent is content to continue paying child support at the rate dictated by the income attributed to him by the agreement, to the extent that the application to change requires the court to determine his income, the starting point is his line 150 income, to which improper deductions or other undeclared income is added (Duffus v. Frempong-Manso, 2017 ONCA 360, at para. 20; FCSG, s. 16).
[24] In my view, there are several reasons for adopting the position of the respondent on this question. As the respondent observes, this is not a case of the imputation of income by the court. The deemed income set by the separation agreement was negotiated by the parties. While I do not doubt the correctness of the reasoning in Trang, much of it is not easily transferrable to the facts of this case. In Trang, as is often the case, the payor of child support was attempting to challenge the income imputed to him after he had failed to participate in the court process. In the case before me, the issue is a closely negotiated separation agreement where the parties agreed that they had adequate financial disclosure and where there were many issues in play quite apart from child support.
[25] Moreover, the terms of the separation agreement show both that the parties anticipated that the respondent’s deemed $70,000 income might be adjusted up or down, and that the starting point for any such adjustment would be the respondent’s actual income. The agreement is express that income was deemed “for the purposes of determining child support” (para. 5.2), and that the deemed amount was “estimated” (paras. 5.2, 5.8). The agreement also provides that child support might be adjusted annually “based upon their respective incomes for the previous year” (para. 5.14), and that evidence of income would be exchanged annually and would include declared income reflected in the parties’ income tax returns and notices of assessment, among other documents (para. 5.15). The parties agreed that the respondent should be permitted to show that his income was less than $70,000 if he sought to decrease the amount of child support payable (para. 5.15), otherwise support would be paid based on the deemed amount (para. 5.16). Finally, the parties agreed that they could change the provisions of the agreement upon proof of a material change in “financial condition” (paras. 5.17 – 5.19).
[26] None of these provisions is congruent with a reading of the separation agreement which would require the parties to accept the deemed annual income as fixed in stone and capable only of being added to as the applicant suggests. On the contrary, the parties contemplated that their financial circumstances might change and, consequently, provided for mechanisms to amend child support owing. The agreement clearly anticipates that any such change would be based on proof of actual income. As the respondent argues, the starting point for assessing actual income is line 150 of one’s income tax return. Of course, where fairness requires it, additions to that amount may be made, especially where deductions were unreasonable or income was left undeclared, but line 150 is where the analysis starts (Mason v. Mason, 2016 ONCA 75, at paras. 59 – 60).
The respondent’s cash income
[27] As I have said, even though the respondent says that the evidence establishes that in all but one of the relevant years his income was below the deemed $70,000 amount, he has been content to continue to pay child support based on that deemed amount. The court will accept an agreed upon amount of annual income where it is “reasonable” (FCSG, s. 15(2)). The respondent argues that this agreed upon amount is more than reasonable given that his income has been, for the most part, less than $70,000. He says that the evidence led at trial shows that this is so.
[28] The applicant, however, says that the respondent has not been straightforward about his finances, that he has woeful bookkeeping practices and, as a result, fails to account properly for expenses and cash. She argues that the respondent earns a substantial amount in cash which goes undeclared and which she estimates to be at least $40,000 per year. She comes to this figure by taking the $70,000 deemed income (which she says represented the respondent’s actual income as of the date of the separation agreement) and subtracting from it the respondent’s then-reported line 150 income ($32,525 in 2010). She adds that the respondent told her during the life of their marriage that he was often paid large sums in cash, sometimes as much as $40,000 for a single job, but she concedes that she did not handle the cash or ever count it. The applicant also notes that the respondent did not, as the separation agreement requires, provide her annually with evidence of his income and that an adverse inference should be drawn from this failure.
[29] There is some support for the claims of the applicant in this regard. The applicant did fail to provide financial information annually, both to the applicant and to CRA. With respect to the latter, he has been habitually late in filing his tax returns. With respect to the former, it appears that the respondent did not provide financial information to the applicant, but there is no evidence before me that the applicant provided her financial information annually to the respondent, or that she complained when the respondent failed to provide his. It seems that for some time before the applicant brought this motion to change, the parties were content to have the respondent pay child support at the rate to which they had agreed in the separation agreement.
[30] The respondent conceded that his bookkeeping practices were sub-optimal. In addition to filing his tax returns late, he was very poor at keeping track of cash receipts. He was also inconsistent about invoicing clients, and often paid for supplies in cash. He said that he kept track of cash in in his head. At tax time, he provided to his accountant a handwritten summary of income and expenses for each year. In this summary, income was divided into income derived from payments made by cheque and payments made in cash. The latter was based on the respondent’s best estimate of his cash receipts. There is evidence that the respondent’s accountant “begged” him to retain a bookkeeper. The respondent said that he simply could not afford a bookkeeper and was too busy running his business to be better organized with his record keeping.
[31] The cash receipts reported by the respondent during the years 2016 – 2020 range from $12,000 to $20,600. The applicant says that these figures are serious understatements. As noted above, she estimates that his cash income is at least $40,000 annually given that the respondent agreed that his “estimated” annual income at the time of the separation agreement was $70,000, or about $40,000 more than the income the appellant reported to CRA. While the separation agreement does repeatedly use language which suggests that the respondent agreed that his annual income was approximately $70,000 (see paras. 5.2, 5.7 and 5.8), this calculation by the applicant is little more than speculation and there is nothing in the evidence to suggest that the respondent’s cash income would be the same each year. Indeed, the evidence suggests that the respondent’s landscaping business, like many small businesses, had lean years and good years. Moreover, even if one did add $40,000 undeclared cash to the respondent’s line 150 income each year, in the years 2016 – 2018, his income would still have been under $70,000.
[32] As noted above, the respondent says that the income attributed to him in the separation agreement was negotiated as part of an agreement whereby he agreed to pay a higher level of child support and make an equalization payment in exchange for ownership of the matrimonial home and to ensure parenting time with his son. The agreement makes express the connection between the equalization payment and the delivery of the matrimonial home to the respondent (see paras. 10.1 and 11.3), but it also provides that the parties each waive the right to move for equalization “in consideration for the transfers, covenants and releases contained in this Agreement.” One of those covenants was the respondent’s agreement to pay child support on a deemed income of $70,000. While it is possible that the respondent is correct, that the deemed income was part of a quid pro quo involving the matrimonial home, the evidence on these points is far from adequate. Both parties were represented by competent solicitors during the negotiation of the separation agreement but neither lawyer was called to testify (one is deceased and the other retired) and neither party put in evidence any part of their former lawyer’s file.
[33] In the end, however, I am satisfied that I need not resolve this debate on the evidence. First, the evidence does not allow me to draw a conclusion as to exactly why the parties settled on $70,000 as a means to determine the amount of child support to be paid. Second, I am satisfied that my task now is to determine what the respondent’s actual income is and whether that actual income represents a material change from the $70,000 agreed upon in the separation agreement. Third, I am satisfied that whatever the respondent’s cash income was in 2010, the evidence does not show that he earned $40,000 in undeclared cash during the years which are in question here.
[34] The applicant urges me to find the respondent incredible and to draw an adverse inference against him for his failures to disclose financial information. While I acknowledge that the respondent’s evidence respecting his accounting for cash is far from satisfactory, in the sense that it is clear that he was relying on memory and guess work when he reported to his accountant at tax time rather than on proper records, I do not regard the respondent’s evidence as dishonest. He testified before me for days, responding to minutely detailed questions about his finances during the relevant years. He did not appear to me to be evasive or to be dissembling. Rather, he appeared to me to be trying his best to provide careful evidence respecting multiple years’ worth of records relating to the small business at which he clearly works hard.
[35] Further, and perhaps more importantly, while he may have failed to make the annual financial disclosure contemplated by the separation agreement, in the context of these proceedings, the respondent has made vast disclosure of his financial records both business and personal, including in several sworn financial statements. The trial was consumed with the microscopic consideration of his bank and credit card statements, invoices and receipts. The respondent answered each question about each detail carefully, explaining what he could, conceding points where appropriate, agreeing to look for other documents where it seemed something might be missing, and acknowledging when his memory could not supply an answer.
[36] As I have said, disclosure before trial was extensive. I decline to draw the adverse inference urged by the applicant (see Joy v. Mullins, supra, at para. 57). No motion for disclosure or questioning was brought by the applicant until after the matter had been set down for trial when the respondent filed the trial record in September of 2021 (almost two years after this motion to change was commenced by the applicant on December 17, 2019). That motion to adjourn the trial and for questioning and disclosure was dismissed by my colleague MacLeod J. on October 28, 2021.
[37] Thereafter, in correspondence admitted into evidence before me, the respondent’s counsel sought to clarify and narrow the issues for trial with the hope of settling issues. Instead, everything was in issue and the trial was consequently consumed by the dissection of the respondent’s financial affairs. As I observed during the trial, this was a poor use of court time. It was also inconsistent with the approach to family litigation mandated by the Family Law Rules, Ont. Reg. 114/99: that the just resolution of cases is best achieved by the efficient use of the court’s and the parties’ resources (see Rule 2(2) – (5)). Much of what happened in court at this trial should have occurred out of court, preferably with the assistance of accountants, or at least a calculator, and presented by way of schedules or spreadsheets and agreements as to facts where agreement was possible. [2] Instead, seemingly every invoice and receipt was the subject of examination. No material failure to disclose on the part of the respondent was established.
[38] Most importantly, the evidence has failed to establish that the respondent earns a substantial amount of undeclared cash. The applicant’s submissions take the contrary position but fail to engage in any meaningful analysis of the evidence. As I understand the point of having examined the respondent’s invoices and receipts in detail, it was (at least in part) to determine how much he paid for business expenses in cash. If that amount exceeded the respondent’s declared cash income, that would show that he was underreporting his income to CRA. However, even assuming the correctness of this approach (which may be less than scientific), although for some years it may be that the respondent was earning more in cash than he reported to CRA, the evidence does not show that the respondent was earning so much more in cash that his annual income exceeded $70,000.
[39] The respondent was taken to dozens of invoices and receipts for the years 2016 to 2019, each representing a business expense he had incurred. Where no cheque or credit card or debit payment could be identified, the respondent conceded that he had paid for the expense in cash. And it is evident that the respondent did pay for a substantial part of his business expenses in cash. But payments from his clients were not his only source of cash. There was evidence that he received cash gifts from him mother, that from time to time he received cash from friends when they were reimbursing him for things like concert tickets, and that he sometimes received cash when he sold personal items, like hockey cards or pieces of (non-business) equipment or furniture he was no longer using. As the respondent did not distinguish between the sources of the cash in his wallet, it became commingled. In other words, it may be that some significant portion of the cash purchases for the respondent’s business were made with cash which was not income. This complicates the analysis.
[40] Consider the following information respecting 2016. In that year, the evidence shows that the respondent’s business expenses paid for in cash were $27,429. He received cash from non-business sources (gifts, reimbursements, sales of personal items) in the amount of $12,725. He reported cash income to CRA in the amount of $12,000 and his total line 150 declared income was $21,228.
[41] If one assumes that the entirety of the business expenses paid for in cash ($27,429) were paid for with cash received from the respondent’s clients, that means that his cash income was under-stated to CRA by $15,429 ($27,429 less $12,000) and that his line 150 income was understated by the same amount. The new line 150 amount would then be $36,657 ($21,228 plus $15,429), still well under the $70,000 deemed income agreed-upon in the separation agreement.
[42] But the respondent says that even this amount is too high given that some of the cash from other sources was used to make business purchases. He proposes that a reasonable estimate is that 50% of that cash from other sources was used to make business purchases. Although the basis for proposing 50% is not entirely clear to me, assuming that it is correct, the understatement to CRA was smaller by $6,362 (i.e., 50% of $12,725). In other words, the respondent’s 2016 line 150 income should have been $30,295, ever further below the $70,000 income attributed to by the respondent in the 2011 agreement.
[43] While I do not necessarily accept the respondent’s proposal to allocate 50% of the cash which the respondent received from other sources to business expenses, I do accept that some portion of that money was almost certainly used for business purposes. It may have been 50% of that cash, or it may have been more or less than 50%. In any of these events, assuming the soundness of the approach to this issue adopted by the applicant at trial, I accept that this analysis of cash purchases establishes that the respondent’s 2016 line 150 income was something less than $36,657 (before accounting for any of the other claims made by the applicant, all of which are addressed below).
[44] Here, I set out the relevant calculations for the years 2016 and 2017, where the exercise of examining the respondent’s records shows that it is possible that the respondent under-reported cash income. The “new line 150 income” amount represents what the respondent’s line 150 income ought to have been assuming that all his cash business purchases were paid for with cash received from his clients and before deducting any amount for business purchases which were paid for with cash derived from other sources:
| Year | Description | Amount |
|---|---|---|
| 2016 | Cash business purchases | 27,429 |
| Cash declared to CRA | (12,000) | |
| Cash not reported to CRA | 17,429 | |
| Reported line 150 income | 21,228 | |
| Cash not reported to CRA | 17,429 | |
| New line 150 income | 36,657 | |
| Cash from other sources | 12,725 |
| Year | Description | Amount |
|---|---|---|
| 2017 | Cash business purchases | 30,458 |
| Cash declared to CRA | (12,000) | |
| Cash not reported to CRA | 18,458 | |
| Reported line 150 income | 29,547 | |
| Cash not reported to CRA | 18,458 | |
| New line 150 income | 48,005 | |
| Cash from other sources | 14,475 |
[45] As can be seen from these two tables, in both cases the new line 150 income is less than $70,000 even before one considers the possibility that some of the cash business purchases were paid for with cash from other sources.
[46] In 2018 and 2019 the evidence establishes cash business purchases that were in total less than the cash income the respondent reported to CRA. [3] In other words, this evidence does not bear out the applicant’s hypothesis that evidence of cash purchases shows that the respondent under-reported cash income to CRA in these years.
[47] The respondent goes further, arguing that the evidence shows in these years that he over-estimated his cash income and over-reported same to CRA. I do not agree that it necessarily follows from the fact that cash purchases were less than total cash income reported that cash income was over-reported. However, for present purposes this is of no moment. The important point is that the evidence does not establish for any of the years from 2016 – 2019 that the respondent’s cash income was under-reported to the extent that it took his line 150 income above $70,000, the deemed income set by the separation agreement. As for 2020 and 2021, there was no evidence respecting the use of cash for business purchases by the respondent. In other words, the evidence does not show what the respondent’s use of cash for the years 2016 – 2021 betrays under-reported cash income that represents a material change in the respondent’s income such that the separation agreement should be changed.
[48] All of this is imprecise – necessarily so given the weaknesses in the respondent’s bookkeeping. However, even if the estimates of cash income made by the respondent are low, or the method of testing those estimates adopted by the parties at trial also underestimates the respondent’s cash income, there is nothing in the evidence that would allow me to conclude that the respondent’s unreported cash receipts were so great that they took his line 150 income above $70,000 for any of the relevant years. As I have said, I accept that the respondent was testifying honestly on this topic when he was examined before me.
Lifestyle
[49] The other argument used by the applicant to attempt to establish that the respondent must be under-reporting his income was the argument that evidence of the respondent’s “lifestyle” shows that he is living beyond the means he reports to the government. As Lang J.A. wrote in Bak v. Dobell, 2007 ONCA 304, at para. 43, lifestyle evidence is “evidence from which an inference may be drawn that the payor has undisclosed income that may be imputed for the purpose of determining child support.” Here, however, the evidence does not establish that the respondent lives a lifestyle that is inconsistent with his reported income. I heard some evidence of trips, including a trip to Jamaica that the respondent took with his parents (and was for the most part paid for by his parents), and evidence that the respondent occasionally attends concerts and sporting events. In my view, these expenditures are neither unusual nor especially extravagant for a person of the respondent’s reported means.
[50] But the applicant, relying on Batte v. Batte, 2021 ONSC 2487, at para. 32, also points to the respondent’s recent purchase of an expensive truck as lifestyle evidence. At the time of trial, the respondent owned five trucks of varying ages and states of repair. All appear to have been purchased used. Some of them were very old. All were used for the respondent’s business. In December of 2021, at a time when he knew that one of his other trucks would be “coming off the road soon,” the respondent purchased a 2019 Chevrolet truck for $80,000. He made a $15,000 down-payment on the truck, took a loan for the balance, and pays about $1,100 per month to service that loan. The respondent explained that he had learned in the course of his business that, in the long run, it is cheaper to buy a newer truck than an older one given that the trucks he owns are used constantly, often require repairs, and must be kept in good condition otherwise, as commercial vehicles, they will be taken off the road by the Ministry of Transportation, the consequences of which can be seriously detrimental to his business.
[51] I accept this evidence. Trucks are essential to the respondent’s work and are one of the tools of his trade. It is not for the court to second-guess what appears to be a sensible business decision made by the respondent (Osmar v. Osmar (2000), 8 R.F.L. (5th) 368 (Ont. S.C.J.), at para. 5). I do not agree that the purchase of the Chevrolet is evidence of lifestyle that suggests undeclared income, it is evidence of the cost of doing the respondent’s business.
[52] Moreover, the applicant’s reliance on Batte, supra, is misplaced. The respondent’s purchase of a used truck to be put to long-term use in his business is a far cry from the evidence in Batte, where the payor was in the habit of leasing an expensive new truck every four years. Moreover, the court in Batte had already accepted expert evidence that had determined that the payor’s income had been under-stated before it considered the payor’s penchant for expensive trucks. That evidence was used to test his claim that he could not afford to pay the child support based on the income which was to be imputed to him.
[53] Here, the applicant has failed to establish that the respondent’s income was materially different than the agreed-upon $70,000.
Personal expenses
[54] The applicant argues that the respondent has overstated his personal expenses in his sworn financial statement dated September 21, 2021. In a nutshell, she says that the respondent’s new partner covers 50% of the household expenses incurred by the respondent and the new partner. As the respondent has claimed $34,884 in personal expenses, that amount should be reduced to $17,442 and the respondent’s income increased by the same amount.
[55] There is no foundation for this argument. The respondent’s sworn financial statement clearly indicates that he is claiming only 50% of the expenses associated with the household he shares with his new partner.
Business expenses
[56] The applicant makes several arguments respecting improper deductions relating to business expenses. The first of these is that, as the applicant puts it in her factum, “purchases produced by the Respondent are actually paid by his clients…” I need say nothing more than that there is no evidence for this proposition. On the contrary, the evidence is that the respondent himself paid for the expenses of his business. This is not a case like the case relied upon by the applicant, Matti v. Odish, 2017 ONCJ 410, where there actually was evidence that the payor’s private customers paid directly for expenses he had claimed (see para. 79(b)). In the present case, the respondent paid for materials to be used on his clients’ projects, materials like gravel, stone, and plants. Those costs were passed on to his clients to be sure, but they were also proper deductions against income.
Expensed meals
[57] The respondent claimed expenses for meals and entertainment each year between 2016 and 2020. The highest such claim was for $620 in 2018 and the lowest was $505 in 2020. The applicant argues that 100% of these amounts should be added back to income because this kind of expense has “a personal benefit attached to it.”
[58] The respondent testified that from time to time he expensed meals and golf games with clients. He reported those expenses (with receipts) to his accountant, who then prepared his tax return.
[59] Under the heading “Expenses”, CRA’s Statement of Business or Professional Activities form instructs the filer to “enter only the business part” of any expenses claimed. The documents show that the respondent and his accountant followed this instruction. For example, for 2016, the respondent reported to his accountant that his “meals and entertainment” expenses were $1,270.23. On his income tax return for that year, the respondent reported to CRA only part of that expense, or $562.05. In other words, the amount claimed was already discounted to exclude “the personal benefit attached to” this expense. Similar reductions in the amounts claimed were made for the other years in question here.
[60] There is no evidence that the amounts spent or claimed were unreasonable, or that the reductions from the actual amount spent did not accurately and fully reflect the personal benefit to the respondent. There is no reason supported in the evidence to discount this expense further. This is not a case like Wilson v. Wilson, 2011 ONCJ 103, upon which the applicant relies, where the court disallowed deductions for expensed meals where it was the payor alone who appears to have been the beneficiary of amounts spent on meals and entertainment (see paras. 8 and 26).
Expenses related to maintenance and repairs
[61] The applicant argues that the deductions claimed by the respondent for the cost of repairs and maintenance of his trucks should be discounted by 20% to reflect the fact that the applicant sometimes uses the trucks for personal purposes.
[62] The respondent did testify that he sometimes uses the trucks for personal purposes but said that the vast majority of the use of the trucks is for business. He said that he also owns a car which he drives in summer weather, and that his new partner also has a car which they routinely use for personal purposes. The respondent testified, and his income tax returns reflect, that he claimed 95% of the expenses connected to the trucks and other equipment to reflect the fact that he does from time to time put one of the trucks to personal use. In other words, he estimated that 5% of the use of the trucks and equipment was for personal purposes.
[63] Although the applicant says in her factum that the expenses related to motor vehicles should be discounted by 20% to reflect personal use, it is clear from the calculations in the factum that she seeks a further 20% discount in addition to the 5% by which the respondent had already discounted his expenses. The applicant calls the discount she proposes a “conservative” one.
[64] In either case, the difficulty with the applicant’s position is that she has adduced no evidence to suggest that the 5% discounted rate used by the applicant does not fairly represent his personal use of his business vehicles. Nor has she led evidence to suggest that a rate 20% or 25% is a more accurate assessment of the respondent’s personal use of those vehicles. As the respondent argues in his factum, the applicant’s rates appear to have been “drawn out of thin air.” The respondent, by contrast, testified as to his personal use of the vehicles and said that 5% was a fair estimate of his use of the vehicles.
[65] Nothing about the whole of the evidence suggests that the respondent’s testimony in this regard is inaccurate. He can only drive one of his five vehicles at a time. Even if he drove one of his business vehicles full-time for personal purposes and never used it for business that would still represent just 20% of the use of his fleet. Of course, the evidence before me suggests that the respondent does nothing of the sort. He uses the trucks that he bought for his business to run his business. He and his partner have other vehicles that are used for personal purposes. To be sure, one or more of the trucks is used for personal purposes, but the respondent has ensured to reflect that fact in his tax returns by reducing his motor vehicle costs claimed by 5%. As I have said, there is no evidence before me that this amount was anything but fair.
Telephone and utilities expenses
[66] The applicant submits without explanation that the deductions claimed by the respondent for his cell phone should be discounted by 50%. The respondent testified that 99% of his cell phone use is for business purposes. He was not seriously challenged on this point in cross-examination and there was no other evidence of the respondent’s cell phone use, but in her written submissions, the applicant called the respondent’s 99% estimate “ridiculous.” Even if I found that the respondent’s estimate of his personal use of his cell phone is too low, there is no basis on which I could conclude that the respondent uses his cell phone 50% of the time for personal purposes. In any case, I have no doubt that the respondent’s business requires heavy use of his cell phone and I do not think it ridiculous that his use of it is as high as he says it is.
[67] Moreover, even if I were to find that a 50% discount was appropriate, that finding would not represent a material change that would affect the deemed income agreed to in the separation agreement.
Capital cost allowance deductions
[68] The applicant submits that 100% of the capital cost allowance (“CCA”) deductions claimed by the respondent should be added back into income for child support purposes.
[69] I begin by observing, as others have, that the consideration of the fairness of CCA deductions for child support purposes is a complex matter, that it should be raised between the parties before trial, that the party claiming the deduction should be given ample time to respond, and that there should be evidence, preferably expert evidence, upon which a decision can be made (A.E., supra, at para. 275; Kinsella v. Mills, supra, at para. 184, 230; Joy v. Mullins, supra, at para. 51).
[70] In Egan v. Egan, 2002 BCCA 275, Newbury J.A. wrote (at para. 49) as follows:
… I would not want to be taken as endorsing the notion that at every family law trial or hearing of an application for child maintenance, CCA properly taken under the Income Tax Act is entirely 'at large' and that payor spouses may be routinely called upon to justify the purchase of every piece of equipment, the price paid, and the rate of depreciation claimed (the latter being, of course, a matter of regulation in the Income Tax Act) without counsel's having provided the court with some reason to question what the Income Tax Act permits. In other words, unless the CCA schedule attached to the payor spouse's tax return or the answers to questions in discovery about claimed CCA, give rise to some concern that the equipment is not needed or used in the business, or that an inflated cost amount has been used, a judge sitting in a family law trial should not be expected to fulfill the role of a Revenue Canada tax auditor. Although a "pragmatic approach" must be taken to the question at trial, counsel for the payee spouse should ensure that before the court is asked to make a determination with regard to CCA that differs from the amount of CCA deductible for income tax purposes, the matter has already been investigated to the extent permissible under the court rules and the Guidelines, and that there exists at least some prima facie basis for embarking on any wholesale re-examination of CCA deductions.
[71] Here, no complaint about the CCA deductions claimed by the respondent was particularized. No effort to analyze the issue was undertaken by the applicant prior to trial. No notice was given. No expert evidence was tendered. Instead, all that is before me is the respondent’s tax returns, including their CCA calculations, and the lay understanding of those calculations offered by the respondent in cross-examination. The applicant’s submissions, written and oral, do not assist in explaining why I should find that any of the CCA deductions should be added to the respondent’s income. There is certainly no detailed analysis of the deductions.
[72] Apart from one error, conceded by the respondent, I have been given no reason to believe that the CCA deductions in the respondent’s returns are not fair and appropriate. While I have resisted fulfilling the role of a CRA tax auditor, to paraphrase Justice Newbury, I have reviewed the documents and the evidence and can see no prima facie case for any objection to the deductions other than the one conceded by the applicant. There is simply no evidence upon which to add the deductions (or some portion of them) back into income. The items said to have depreciated are all clearly items used in a landscaping business, were not leased, and were not the subject of loans.
[73] In this respect, the situation in this case is similar to that faced by Chappel J. in Kinsella v. Mills, supra (at para. 230):
With respect to the capital cost allowance claim of $8,491.13, the Applicant did not raise any specific issues as to the appropriateness of the amount claimed. As I have discussed in my review of the law on this issue, the calculation and assessment of this expense for reasonableness is a very complex matter. If the Applicant had wished to challenge this expense, she should have in fairness given the Respondent some indication of her intention to do so, in order that he could respond. The Statement of Business or Professional Activities includes a schedule outlining the accountant’s calculation of the expense. That calculation indicates that the Respondent had made significant investments in lawn mower equipment in 2009. I am satisfied that the Respondent required vehicles and extensive heavy equipment as a result of the nature or the business, and that the nature of the equipment was such that it would depreciate over time and have to be replaced. There is no evidence to suggest that the capital cost allowance claimed was artificially increased for the purpose of reducing income for tax purposes. Accordingly, I conclude that the expense was a reasonable one [emphasis added].
[74] Like Chappel J., I have concluded that the CCA deductions claimed here were reasonable. They need not be added to the respondent’s income (see also, Joy v. Mullins, supra, at para. 74).
[75] The one error to which I have referred is the inclusion in the calculation of one piece of equipment, at tamper purchased for $2,484 in 2004. That tamper was stolen in 2009 and should have been written off in full at that time. Instead, apparently through inadvertence, it remained in the list of the respondent’s depreciating assets. The inclusion of the tamper in the CCA calculation meant that the CCA deduction was overstated by a de minimis amount in each year from 2016 – 2019. [4]
Business use of home expenses
[76] I turn now to the exception to which I referred at para. 4 of these reasons. The applicant submits, and the respondent agrees, that the deduction the respondent claimed for the business use of his home should be added to his income for child support purposes (see Moran v. Cook (2000), 9 R.F.L. (5th) 353 (Ont. S.C.J.), at para. 13).
[77] After adding this deduction back into income, for the years 2016 – 2019, the respondent’s income remains well below the $70,000 deemed income agreed to by the parties in the separation agreement. The highest annual income for this period, after adding this deduction back to income, is $48,022 in 2019. In other words, the recognition that this deduction was unreasonably claimed does not reflect a material change in circumstances.
[78] I will return below (at paras. 95 – 102, below) to a consideration of the respondent’s income in the year 2020, for which year the reversal of the deduction for home office expenses does have an effect on the support which ought to have been paid for that year.
Conclusion respecting expense deductions
[79] As will be apparent from the foregoing, apart from the deduction for the use of the respondent’s home office, and setting aside the special circumstances at play in 2020, I reject the applicant’s submissions that the respondent unreasonably claimed the deductions discussed here. With the exception of the home office deduction, which the respondent did not seek to defend, and a minor error in the CCA calculation, the applicant led no evidence to suggest that there was any reason to question the reasonableness of any of the deductions about which she complained, or to conclude that fairness requires that they be added back into income for child support purposes. Moreover, the respondent was cross-examined at length and gave his best explanations for each expense deduction put to him. I add that I accept that this evidence was given honestly, and to the best of the respondent’s recollection.
[80] Having considered the respondent’s deductions, I turn now to certain sources of funds which the applicant says should have been included as income by the respondent.
Sale of the respondent’s home
[81] The first such source of funds is the sale of the respondent’s home in 2021 on which sale the respondent netted $197,553 after transactions fees and paying out his mortgage. The applicant says that this profit should be treated as income by the respondent for 2021. In making this argument, the applicant relies on the judgment of the British Columbia Court of Appeal in Vincent v. Vincent, 2012 BCCA 186.
[82] I agree with the respondent that this amount should not be included in the respondent’s 2021 income for child support purposes. The circumstances in Vincent bear little relation to the circumstances in this case. The payor in Vincent was in the construction and commercial real estate development businesses. He and his new partner had established a pattern of buying and developing properties where they lived with a view to increasing the tax-free profit generated by the sale of principal residences. Justice Huddart concluded that in “appropriate circumstances” the profit earned on the sale of a principal residence could be included in the payor’s income for child support purposes, including circumstances like those of the payor spouse in Vincent. Even in those circumstances, however, the court found that the trial judge had erred by including the sale of the payor’s principal residence in income for child support purposes (see Vincent, supra, per Huddart J.A., at paras. 44 – 51, 95 – 104).
[83] Importantly, the discussion by Huddart J.A. of this topic does not represent the majority opinion in Vincent. In short concurring reasons (concurred in by Groberman J.A.), Justice Garson wrote that she agreed that the trial judge had erred by including the profit from the sale of the residence in income but that she preferred to express no view on whether the profit realized from the sale of a principal residence could ever be so included in imputed income (Vincent, supra, per Garson J.A., at para. 135). I add that it does not appear that the opinion of Huddart J.A. on this topic has been followed by other courts.
[84] In any case, there is no evidence before me to suggest that the respondent is in the business of profiting from the sale of residential properties. Unlike Mr. Vincent, he is a landscaper. He is not in the business of developing real estate. He has bought three homes in his life and sold two. He has a 50% interest in his current home, which he holds as a tenant in common with his new partner. These facts do not suggest that these are “appropriate circumstances” in which to include the profit from the sale of the respondent’s former house in his income for child support purposes, assuming that such circumstances ever exist.
Cash received by the respondent from his mother
[85] The respondent agreed that he is often the recipient of cash from his mother. During the years 2016 – 2020, he received between $2,000 to $5,350 per year in cash from her. In addition, the respondent has received money from his mother to assist with his legal fees in this proceeding.
[86] The applicant says that these payments are gifts that should be included in the respondent’s income for the purposes of child support. She relies on the judgment of the Court of Appeal in Bak v. Dobell, supra, where Lang J.A. wrote as follows:
[74] Although it seems the legislature intentionally did not include the receipt of gifts given in the normal course in presumptive income, or as an example of an appropriate circumstance under s. 19(1), a court will consider whether the circumstances surrounding the particular gift are so unusual that they constitute an "appropriate circumstance" in which to impute income.
[75] In considering whether it is appropriate to include the receipt of unusual gifts in income, a court will consider a number of factors. Those factors will include the regularity of the gifts; the duration of their receipt; whether the gifts were part of the family's income during cohabitation that entrenched a particular lifestyle; the circumstances of the gifts that earmark them as exceptional; whether the gifts do more than provide a basic standard of living; the income generated by the gifts in proportion to the payor's entire income; whether they are paid to support an adult child through a crisis or period of disability; whether the gifts are likely to continue; and the true purpose and nature of the gifts [emphasis added].
[87] In this case, the respondent testified that his mother gave him occasional gifts of cash, which he described as being in the tradition of the “European culture” in which she was raised. Those gifts were given at times like Christmas and other holidays, and on birthdays. The respondent said that his mother was generous, that she helped him financially when he needed it when business was bad and when he was going through his separation and divorce, and that the cash she gave to him had decreased in the years 2016 and following when he was more financially stable. The respondent also testified, however, that some of the cash given to him by his mother (which was presented in evidence by way of a summary prepared by the respondent’s mother [5]) was reimbursement for expenses he had incurred on his mother’s behalf. He would make purchases for her on his credit card, and she would reimburse him in cash. It is not clear what portion of the cash received by the respondent was for reimbursement, and what portion constituted gifts, and the respondent’s evidence on this point was confusing, especially because a summary of cash receipts he prepared seemed inconsistent with the summary prepared by his mother.
[88] As Lang J.A. said in Bak v. Dobell, supra, gifts are not typically included in income, but may be added where given in unusual circumstances which suggest they are appropriately considered income. In my view, even assuming that all the cash payments listed on the summary prepared by the respondent’s mother were gifts, as opposed to reimbursements, they are not so unusual or of such a size that this is an appropriate circumstance in which to impute them as income. While the cash payments appear to me to be more regular than the respondent’s testimony would suggest, they were given mostly in small amounts (between $100 and $600) and even the largest of the payments (excluding those related to legal fees, which I address below), are unexceptional, the largest being $2,000 given just before Christmas in December 2019. Such payments could not have contributed to more than a basic standard of living for the respondent. There is no evidence before me that the respondent’s mother made cash gifts to the parties when they were married. In all these circumstances, I decline to include these gifts as part of the respondent’s income.
[89] As I have said, the respondent’s mother has also assisted him with the legal fees incurred by the respondent in this litigation. To that end, she has contributed $20,000. The respondent testified that his mother gave him this money “because I have to pay for legal fees when all this was starting, so she said she would front a bunch of money for the legal fees…” The respondent also testified that his mother “didn’t want me to take the burden of all these legal fees because there’s quite a bit, so she said she’ll transfer that money in to help me out with legal fees.” Although the use of the word “front” suggests to me the possibility that these payments were loans, the parties have treated them as gifts in their submissions and I am content to proceed on that basis.
[90] In Bak v. Dobell, supra (at para. 58), Lang J.A. found that payment of non-recurring professional fees by a family member should not be imputed as income where the fees are incurred as a matter of necessity and where the payment of them by the family member is truly in the nature of a gift, and not to support the day-to-day expenses of the recipient. Here, the fees are the necessary result of the respondent’s need to respond to the motion to change and are an unusual non-recurring expense. The respondent’s mother’s gift is made specifically for the respondent’s fees and not for any other purpose. It is not appropriate to impute these gifts as income in these circumstances.
Sale of personal possessions
[91] During the years 2016 – 2019, the respondent sold various pieces of personal property including two Seadoo trailers, sports equipment, a crib, [6] and sports cards and memorabilia. Both parties, in their written submissions, have averaged the proceeds of these sales at $4,475 per year. The greatest portion of this money comes from the respondent’s sale of sports cards and memorabilia, on which he says he profited $15,000 (or, on average, $3,750 per year). I pause to note here that the evidence otherwise does not disclose whether the proceeds of the sale of other items were gross or net proceeds.
[92] I am not prepared to impute as income the occasional informal sale of used pieces of personal property, especially in the absence of evidence that such sales were executed regularly and at a profit. The respondent’s sale of sports cards and memorabilia, on the other hand, stands in a separate category. It appears that the respondent entered into the market for such memorabilia, in part at least, with a view to profiting from it. He testified as follows:
I have a collection of sports cards from when I was a child. I started collecting sports cards again within the past five to six years and there seems to me a market for these cards now. I saw the market going up and the demand for cards back in 2016/2017 and I started buying more cards but also getting more involved with the sports card memorabilia hobby. So, I would go to sports card shows and I would try to sell some of my cards I’ve had from years ago, also trade them and also purchase other ones and then I could flip them over again and make a profit on those ones. But it’s just a hobby I had and I – I enjoy doing it.
[93] It may be that this profit should have been included in the respondent’s income. In his written submissions, the respondent referred to these sales as sales of capital. Presumably, then, the profits reported by the respondent would represent capital gains and the taxable portion of those gains (50%), should have been included in the respondent’s line 150 income. The evidence and submissions before me do not allow me to determine what (if any) income should have been included, especially since dispositions of under $1,000 attract no capital gains tax.
[94] However, even were I able to conclude that 50% of the annual average profit from the sale of cards and memorabilia ($1,875) should be added to the respondent’s income in each of the years 2016 – 2019, it does not take the respondent’s annual income above $70,000 in the years 2016 – 2019 and, assuming similar sales in 2020, [7] would not have done so in 2020 but for the unusual circumstances at play in that year (see paras. 97 – 99, below). In other words, the impact of the inclusion of this amount in income would not be material.
The respondent’s income in 2020
[95] In 2020, the respondent’s line 150 income was $78,041. The respondent agrees that to this should be added the gross up for the home office expenses he claimed for 2020. When that addition is made, the respondent’s 2020 income available for child support is $84,292. On that basis, total child support payable for 2020 ought to have been $9,432. The respondent paid $7,764 for 2020, the amount agreed upon in the separation agreement. Accordingly, the respondent submits that I should order a further child support payment for 2020 in the amount of the difference, i.e., $1,668.
[96] However, the respondent does not agree that respondent’s 2020 income shows that there has been a material change in his income such that the separation agreement should be changed. He argues that three unusual events which will never be repeated had the effect of skewing his income above $70,000 in a way that does not reflect a continuing material change.
[97] The first unusual event was that the respondent, on the advice of his new accountant, switched from cash accounting to the accrual method of accounting. Under the cash method, taxes are calculated on receipts. Under the accrual method, taxes are calculated on billings. Accordingly, in 2020, the respondent’s line 150 income was calculated on some billings from 2019 (i.e., those where payment was received in 2020) and all the respondent’s 2020 billings (whether payment had been received or not). The respondent’s accountant referred to this as a kind of “doubling up” which had the effect of artificially inflating the respondent’s 2020 income by $17,257 (the amount billed by the respondent in 2020 but not received before that year-end), which amount, under the cash method, the respondent would have included in his line 150 income for 2021 when he was paid. Since the accrual method will be used by the respondent in all future years, this artificial inflation will not be repeated. It is a one-time event that permits the change from one accounting method to another.
[98] The second unusual event in 2020 was that the respondent’s new accountant corrected errors from previous tax years related to salaries paid to the respondent’s employees. Since those expenses had been under-reported in earlier years, the new accountant included them in 2020. This had the effect of increasing the respondent’s deductible expenses by $9,634.
[99] The third unusual event was that the respondent took a $40,000 Canada Emergency Business Account (“CEBA”) loan from the federal government, $10,000 of which he declared as income (as this portion of the CEBA loan will be forgiven when the balance of the loan is paid back). Since the CEBA loan program was a program intended to provide financial relief during the COVID-19 emergency, it is not a recurring amount that is representative of the respondent’s normal income.
[100] If one were to subtract these three one-time events and re-calculate the respondent’s line 150 income for 2020, according to the respondent’s accountant, it would have been $60,418. [8] Once one adds in the gross up for the office expense deduction, the respondent’s line 150 income in 2020 would have been $66,668, an amount below the $70,000 agreed to in the separation agreement.
[101] I note that the respondent’s line 150 income for each of the other years under consideration here, after adding and grossing up the home office expense, are as follows:
- 2016: $27,230
- 2017: $35,797
- 2018: $18,056
- 2019: $48,022
[102] In all of these circumstances, I am of the opinion that the respondent’s 2020 line 150 income ($84,292) is not the fairest representation of his income for child support purposes and does not represent a material change justifying amendment of the separation agreement. Section 17 of the FCSG states that “the court may have regard to the spouse’s income over the last three years and determine an amount that is fair and reasonable in light of any pattern of income, fluctuation in income, or receipt of a non-recurring amount during those years.” The respondent’s pattern of income repeatedly shows that it does not reach as high as $70,000 and there are not one, but three non-recurring amounts attributable to 2020. The best result for the child, then, is to make the one-time top-up order for 2020 proposed by the respondent and to leave the separation agreement otherwise unchanged.
Conclusion
[103] In summary, the respondent will make a one-time top-up payment for 2020 child support to the applicant in the amount of $1,168. Otherwise, there having been no material change in the respondent’s income, the motion to change the separation agreement is dismissed.
[104] If the parties are unable to agree on costs, which I encourage them to do, the respondent may serve and file brief costs submissions and a bill of costs within 10 days of the release of this judgment. The applicant may serve and file brief responding costs submissions within 7 days of the receipt of the respondent’s submissions. The respondent may serve and file reply costs submissions, if any, within 3 days of the receipt of the applicant’s submissions.
I.R. Smith J. Released: March 10, 2023
COURT FILE NO.: FC-19-172 DATE: 2023-03-10 ONTARIO SUPERIOR COURT OF JUSTICE A.J. – and – D.C. REASONS FOR JUDGMENT I.R. Smith J. Released: March 10, 2023
[1] The respondent testified that he purchased the matrimonial home, without contribution from the applicant, using the proceeds of the sale of his former home. He said that the matrimonial home was the put in the names of the applicant and her mother “so if I ever got sued by clients they couldn’t come after my personal property.”
[2] I note that the parties have since done some of this work in their closing written submissions. The tables, schedules and Divorce Mate calculations included therein have been helpful to me.
[3] In 2018, cash business purchases were $16,789 and reported cash income was $20,600. In 2019, cash business purchases were $8,944 and reported cash income was $12,000.
[4] It is not clear that the tamper was included in the CCA calculation for the respondent’s 2020 return.
[5] In both oral and written submissions, the applicant suggested that the respondent’s mother’s summary is unreliable and uncorroborated. I note that at the time of the admission of the summary into evidence, counsel for the applicant agreed that the summary was “an accurate listing of cash given to the respondent by his mother on the dates indicated and in the amounts indicated.”
[6] The applicant complains in her submissions that the respondent had “the gall to sell the child’s crib” and says that the respondent’s attempt to “characterize the ‘crib’ as his own … is absurd.” I note that there was no evidence called about the ownership of the crib, that there was no cross-examination of the respondent on this point, and that the separation agreement provides (at para. 11.7) that “[the parties] acknowledge and agree that [the respondent] shall be solely entitled to those items presently in the matrimonial home and that [the applicant] shall be solely entitled to the household contents and furniture currently in her possession.” Assuming that the crib in question was in fact the crib used by the parties’ child, if it was left in the matrimonial home at the time of the separation agreement, the respondent had every right to sell the crib. In any case, the evidence was that the crib was sold for $300.
[7] The evidence is not clear on whether the $15,000 profit from card and memorabilia sales was confined to the years 2016 – 2019. That figure is included in a summary of cash receipts prepared by the respondent, which summary covers, for the most part, the years 2016 – 2019. However, in his viva voce evidence, the respondent suggested that this amount may include sales both before and after those years.
[8] In her written submissions in reply, the applicant objects that the respondent’s accountant gave expert opinion evidence without being properly qualified as an expert. I note that this objection was not made at the time of the admission of the accountant’s evidence. Indeed, when a letter from the accountant summarizing his evidence was tendered by the respondent, counsel for the applicant said that he had “no objection” to its admissibility. In any case, I do not regard this evidence as opinion evidence. The accountant testified merely about how he had prepared the respondent’s taxes and how that exercise would have turned out differently if the three unusual events had not been included. This was a purely mathematical exercise. The applicant’s counsel cross-examined the accountant and did not take issue with his arithmetic.