COURT FILE NO.: FS-20-55 DATE: January 13, 2023
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Sophie Jane Haggerty, Applicant AND: Ian Peter Haggerty, Respondent
BEFORE: MacNeil J.
COUNSEL: H. Staats – Lawyer for the Applicant A. Nicholls – Lawyer for the Respondent
HEARD: October 14, 2022
ENDORSEMENT
OVERVIEW
[1] The Applicant makes this motion for an order for child support and spousal support for the years 2019 and 2020.
BACKGROUND
[2] The parties were married on May 22, 2004 and separated on March 26, 2019. They have two children, the eldest born in June 2006 and the youngest born in August 2007 (“the Children”).
[3] Both before and after their marriage, the Respondent operated a construction business and was the sole shareholder of his company, Haggerty Construction Inc. (“Haggerty Construction”). It is his evidence that, as of December 31, 2020, he stopped operating this business and that, in January 2021, he sold all of the company equipment for the sum of $400,000.00. In March 2021, the Respondent obtained a salaried position with another company.
[4] In 2019, the Respondent received employment income from Haggerty Construction in the amount of $59,950.00 and shareholder loan income in the amount of $70,764.00. That same year, Haggerty Construction reported a net profit of $106,373.00 [1] and claimed an amortization expense in the amount of $120,539.00. [2]
[5] In 2020, the Respondent received employment income from Haggerty Construction in the amount of $80,120.00 and shareholder loan income in the amount of $16,944.00. For that year, Haggerty Construction reported a net loss of -$164,909.60 [3] and claimed an amortization expense in the amount of $76,306.00. [4]
[6] In addition to running Haggerty Construction, the Applicant contends that the Respondent did many “cash” jobs for customers which he did not deposit into any bank account or report to Canada Revenue Agency. She gave examples of cash jobs done by the Respondent during their marriage and estimated amounts she believes he received for jobs done in 2010-2014 and 2017. The Applicant also submits that the Respondent often bartered his services to various customers and that none of the bartering services were reported to Canada Revenue Agency. She provides limited information in this regard and no details about years, however.
[7] During the marriage, the Applicant was not employed outside the home. However, in 2019, Haggerty Construction paid the Applicant wages in the amount of $28,623.00 pursuant to an income-splitting arrangement between the parties.
[8] After separating, the Applicant obtained casual part-time employment working approximately 10 hours per week at $14.00 per hour. She subsequently began full-time employment in 2019.
[9] In 2019, the Applicant received employment income of $34,052.00 and investment income of $6,806.00 for a total of $40,858.00.
[10] In 2020, the Applicant received employment income of $47,161.00 and investment income of $8,896.00 for a total of $56,056.00.
[11] The parties have agreed on the amount of their respective incomes for 2021 and 2022 and the amount of child support the Respondent is required to pay based on his income, so that is not an issue on this motion.
[12] The parties also agree on the amounts of support that the Respondent has paid for 2019, 2020, 2021 and 2022 up to the date of the hearing.
ISSUES
[13] The following are the issues to be determined on this motion:
(a) What is the Respondent’s income for support purposes for 2019 and 2020? (b) Should the Applicant’s income from Haggerty Construction be considered spousal support?
ANALYSIS
(a) What is the Respondent’s income for support purposes for 2019 and 2020?
Position of the Applicant
[14] The Applicant seeks to have all of the amortization deducted by the corporation for 2019, in the amount of $120,539.00, and for 2020, in the amount of $76,306.00, included directly into the Respondent’s income for the purposes of determining the appropriate amount of support to be paid.
[15] The Applicant argues that these claimed expenses are not actual “out-of-pocket” expenses and the amounts should be included in the Respondent’s income since he is the sole shareholder of the corporation. She argues that the Respondent has not provided any evidence that the 2019 or 2020 corporate profit, accounts receivable and amortization amounts were used to pay down company debt or to pay off any loans or to purchase equipment or replace any current equipment.
[16] The Applicant notes a number of vacations taken by the Respondent and his new partner over the past two years in support of her contention that he has more income than he is admitting.
Position of the Respondent
[17] It is the position of the Respondent that support should be payable for 2019 and 2020 based on the actual incomes of the parties and not based on an inflated income. He submits that the court should look at cash flow and, specifically, in this case, at the amount of salary and shareholder loan repayments paid to him, as these are reflective of his actual income.
[18] The Respondent relies on the filed affidavit of Erwin Dely (“Mr. Dely”), sworn October 7, 2022, the accountant who prepared Haggerty Construction’s financial statements and the Respondent’s personal income tax returns. Based on Mr. Dely’s calculations, the Respondent submits that his total income for 2019 was $130,714, representing a salary of $59,950.00 and a shareholder loan of $70,764.00; and that his total income for 2020 was $97,064.00, representing a salary of $80,120.00 and a shareholder loan of $16,944.00.
[19] While the Respondent also had RRSP income in 2019, in the amount of $56,977.00, he argues that this raises the issue of “double-dipping” as the RRSPs were owned by him on the date of separation and are therefore subject to equalization and so this amount should not be included in the calculation of his 2019 income for support purposes.
[20] The Respondent argues that, based on his 2020 income being $97,064.00 and the Applicant’s 2020 income being $56,056.00, he should not have to pay spousal support for that year.
[21] The Respondent claims that the Applicant’s allegations of cash work are exaggerated and untrue. He submits that he is not living an extravagant lifestyle and his current partner works and pays for a share of their joint expenses, including vacations together.
[22] It is the Respondent’s position that income should not be imputed to him. He relies on the Ontario Court of Appeal’s decision in Drygala v. Pauli (2002), 61 O.R. (3d) 711, at para. 44, wherein the Court held:
Section 19 of the Guidelines is not an invitation to the court to arbitrarily select an amount as imputed income. There must be a rational basis underlying the selection of any such figure. The amount selected as an exercise of the court’s discretion must be grounded in the evidence.
[23] The Respondent submits that he was forced to wind down Haggerty Construction at the end of 2020 because the company ran out of money and could not continue operations. He argues that the Applicant has offered no evidence or rationale to support that he should not have wound down Haggerty Construction when its revenues had decreased by 43.5% in 2020. The Respondent contends that the decision to shut down operations was a sound business decision and was the only decision he could reasonably make based on the financial state of the company. He found replacement employment immediately and has continued to support the Children commensurate with his income.
[24] The Respondent disputes the Applicant’s argument that the company’s 2019 profit of $106,373 was available to him as income. He states that these monies were used to pay debt and submits that Haggerty Construction’s operating line was paid down from a -$135,000 balance owing at the end of 2018 to a zero balance at the end of 2019. The Company had only $32,000.00 in cash at year end in 2019. There were no other funds that he could have utilized as income.
[25] The Respondent relies on Mr. Dely’s evidence that Haggerty Construction lost money in 2021 as there was only business income of approximately $130.00 and it still had ongoing liabilities and expenses. The Respondent submits that Mr. Dely reviewed the sales invoice, dated January 25, 2021, showing that Haggerty Construction sold its capital assets for $400,000.00 and confirmed that the bulk of the sale proceeds were not available to be utilized as personal income for the Respondent. These funds were used to pay out loans on the equipment that was sold and put towards other liabilities of the company.
[26] The Respondent disputes the Applicant’s contention that the amortization amounts expensed by Haggerty Construction were available to him. He submits that these amounts reflect the capital depreciation of heavy equipment owned by the company; and that the funds represented by the amortization entries were used to pay debt and for the continued operation of the business. These were not funds that could have been reasonably taken out of the business.
[27] The Respondent cites Gordon v. Guimont, 2016 ONSC 4569, at para. 63, in support of his submission that the court must consider the reasonableness of the business deductions for amortization when determining if the funds were available to him. The adding back of income for amortization is not automatic. He argues that it is irrelevant whether new equipment was purchased in 2019 or 2020, contrary to the contention of the Applicant. The capital cost deductions are for equipment purchased in previous years which depreciate over time and, therefore, they are to be deducted over time.
[28] The Respondent relies on the decision in Roberts v. Roberts, 2011 ONSC 7130, at para. 16, wherein the court held that if the depreciation rate is a realistic one and the business owner will have to purchase new equipment in 3 to 4 years’ time, then the capital cost allowance deducted as an expense should not be added back to the owner’s income.
[29] The Respondent argues that there is no evidence before the court that the capital cost allowance claimed by Haggerty Construction was unreasonable in either 2019 or 2020. The original cost of the Respondent’s excavation equipment, furniture and equipment and leasehold improvements, small equipment and tools, vehicle and trailers total almost $1.4 million. Since the Respondent was operating a construction company, it is reasonable for it to have excavation equipment to carry out the construction business activities. The government-issued capital cost allowance for capital property is a reflection of the life of an asset. A depreciation rate of 30% is prescribed for depreciable property falling within Class 10, which captures the company’s equipment on wheels. Since he claimed an amortization rate of approximately 10% only, it should not be considered an unreasonable rate. It does not make sense to disallow a prescribed capital cost allowance when the equipment is required to perform the duties of the business. This is a valid business deduction.
[30] The Respondent submits that the statement of cash flows calculation provided by Mr. Dely includes amortization and all other cash transactions of Haggerty Construction in 2019 and 2020 and is the fairest method to determine the Respondent’s income for support purposes in those years. For 2019, the statement of cash flow for Haggerty Construction was $30,633.00 and, for 2020, it was -$34,930.00. Using these cash flow figures, when combined with his salary and shareholder loans, Mr. Dely calculated the Respondent’s income for support purposes to be as follows:
| 2019 | 2020 | |
|---|---|---|
| Statement of cash flows | 30,633 | -34,930 |
| Salary from Haggerty Construction | 59,950 | 80,120 |
| RRSP | 56,977 | |
| Shareholder loan | 70,764 | 16,944 |
| Total | $218,324 | $62,134 |
[31] When the RRSP amount is omitted from the 2019 calculation, the Respondent’s income for 2019 totals $161,347.00.
[32] Finally, the Respondent contends that the Applicant is not being forthcoming about her own financial circumstances and that she is operating a business and has rental income that she has not disclosed. (The Applicant disputes these allegations. She attests that she is hoping to start a consulting business but has not yet charged any clients for a consultation; and that she does not have a tenant rather she was letting a friend of hers, who had recently separated from her husband, stay in her home for approximately 1.5 months and that friend gave her approximately $1,000.00 for groceries.)
Discussion
[33] One of the objectives of the Federal Child Support Guidelines, SOR/97-175 (“the Guidelines”) is to establish a fair standard of support for children that ensures they continue to benefit from the financial means of both of their parents after separation.
[34] Section 15(1) of the Guidelines provides that, if there is no agreement by the spouses on the annual income of a spouse, the income is to be determined in accordance with sections 16 through 20. Of those provisions, sections 16 to 19 read, in part:
Calculation of annual income
16 Subject to sections 17 to 20, a spouse’s annual income is determined using the sources of income set out under the heading “Total income” in the T1 General form issued by the Canada Revenue Agency and is adjusted in accordance with Schedule III.
Pattern of income
17(1) If the court is of the opinion that the determination of a spouse’s annual income under section 16 would not be the fairest determination of that income, 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.
Non-recurring losses
(2) Where a spouse has incurred a non-recurring capital or business investment loss, the court may, if it is of the opinion that the determination of the spouse’s annual income under section 16 would not provide the fairest determination of the annual income, choose not to apply sections 6 and 7 of Schedule III, and adjust the amount of the loss, including related expenses and carrying charges and interest expenses, to arrive at such amount as the court considers appropriate.
Shareholder, director or officer
18(1) Where a spouse is a shareholder, director or officer of a corporation and the court is of the opinion that the amount of the spouse’s annual income as determined under section 16 does not fairly reflect all the money available to the spouse for the payment of child support, the court may consider the situations described in section 17 and determine the 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 spouse provides to the corporation, provided that the amount does not exceed the corporation’s pre-tax income.
Adjustment to corporation’s pre-tax income
(2) In determining the pre-tax income of a corporation for the purposes of subsection (1), all amounts paid by the corporation as salaries, wages or management fees, or other payments or benefits, to or on behalf of persons with whom the corporation does not deal at arm’s length must be added to the pre-tax income, unless the spouse establishes that the payments were reasonable in the circumstances.
Imputing income
19(1) The court may impute such amount of income to a spouse as it considers appropriate in the circumstances, which circumstances include the following:
(g) the spouse unreasonably deducts expenses from income;
[35] Pursuant to s. 19(2) of the Guidelines, the reasonableness of an expense deduction is not solely governed by whether the deduction is permitted under the Income Tax Act.
[36] In Roberts, at para. 17, the court cites Wilson v. Wilson (1998), 165 Sask. R. 241 (Q.B.), wherein, at para. 37, McIntyre J. explains the rationale underlying s. 19 of the Guidelines as follows:
When ss. 19(1)(g) speaks to the unreasonable deduction of expenses from income it does not require establishing that the spouse has acted improperly or outside of the norm in deducting expenses. Section 19(2) explicitly recognizes that reasonableness is not governed solely by whether the deduction is permitted under the Income Tax Act. The deduction may be quite proper in so far as tax policy is concerned. The issue is whether or not the full deduction of expenses which may be permitted by the Income Tax Act, results in a fair recognition of the actual income that is available to that spouse from that source of income, ... a spouse’s disposable income may be considerably more than his or her taxable income as a result of capital cost allowance. In those circumstances, full deduction of the expense is unreasonable, for the purposes of determining the spouse’s income for the purposes of determining his or her support obligation.
[37] The court in Roberts also refers, at para. 15, to the case of Trueman v. Trueman, 2000 ABQB 780, [2000] A.J. No. 1301. In Trueman, at paras. 24-25, Johnstone J. identified a number of factors to be considered when determining whether deductions should be added back into income, including whether evidence has been “adduced so that a determination can be made of the likelihood that the equipment in question would need future replacement, the cost of that replacement and perhaps the continued need for such equipment for the purpose of earning income. The object of this inquiry is to see whether the CCA is real and required or is more in the nature of a book entry and a consequent artificial reduction in income”.
[38] I consider the following to be relevant factors in this case. The amortization is said to be for construction equipment used in Haggerty Construction’s business. However, the Respondent has not identified the specific equipment that was amortized, nor has he provided details about the specific valuation or depreciation costs of same. There was no evidence before me to show any actual purchases made that match or exceed the capital cost allowance claimed or that Haggerty Construction was intending to add equipment in the future to sustain or expand the business. There was no information establishing that it was necessary to take a capital cost allowance deduction in 2019 or 2020. Since Haggerty Construction ceased operations in 2020, there is no need to replace any equipment for the continued and ongoing operations of the company. Further, while the Respondent submits that the bulk of the $400,000.00 proceeds from the sale of the construction equipment was used to pay out loans owing on that equipment and other debts, no details were provided and no proof was filed of such outstanding loans or debts or the alleged payments made.
[39] Given all this, I find that the amortizations claimed were book entries only and do not reflect an actual depreciation and replacement of equipment. Therefore, in my view, it is not reasonable to permit the entirety of these deductions when determining the income of the Respondent for support purposes.
[40] In all of the circumstances, I conclude that it is fair and reasonable to add back 50% of the amortization claimed for 2019 and 100% of the amortization claimed for 2020 into the calculation of the Respondent’s Guidelines income amount. I accept the figures provided by Mr. Dely, and relied upon by the Respondent, as they relate to the Respondent’s salary and shareholder loan amounts received for the years 2019 and 2020. I also accept the figures set out in the Statement of Cash Flows (January – December 2019), attached as Exhibit “D” to Mr. Dely’s affidavit, and the Statement of Cash Flows (January – December 2020), attached as Exhibit “E” to his affidavit, as representing the most accurate numbers reflecting Haggerty Construction’s financial activities and status upon which to rely. In Exhibit “D”, the amortization expenses claimed in 2019 total $120,539.00 and, in Exhibit “E”, the amortization expenses claimed in 2020 total $52,446.00.
[41] With respect to the Applicant’s claims that the Respondent has additional cash jobs income that he does not declare, there was no evidence before me from which I can accurately ascertain this additional income and impute it to the Respondent. Accordingly, I decline to do so.
[42] With respect to the 2019 RRSP withdrawal amount, I accept that this was a one-time occurrence, it will be accounted for in the equalization calculation, and counsel for the Applicant conceded that it should be omitted. Accordingly, I will not factor in the RRSP amount of $56,977.00 to the Respondent’s 2019 income for support purposes.
2019 Child Support and Spousal Support
[43] In the result, 50% of the $120,539.00 amortization amount shall be added back such that the Respondent’s 2019 income for support purposes is $130,714.00 + $60,269.50 for a total income of $190,983.50.
[44] Based on this annual income, table child support for the Children is $2,569.00/month.
[45] Spousal support for 2019 shall also be paid - in the mid-range - based on the Respondent’s income of $190,983.50 and the Applicant’s income of $40,858.00. I have calculated this to be in the amount of $2,604.00 per month.
2020 Child Support and Spousal Support
[46] For 2020, 100% of the $52,446.00 amortization amount shall be added back such that the Respondent’s 2020 income for support purposes is $97,064.00 + $52,446.00 for a total income of $149,510.00.
[47] Based on this annual income, table child support for the Children is $2,071.00/month.
[48] Spousal support for 2020 shall also be paid - in the mid-range - based on the Respondent’s income of $149,510.00 and the Applicant’s income of $56,056.00. I have calculated this to be in the amount of $1,099.00 per month.
Credit to be Given for Support Payments Made
[49] The Respondent shall be given credit for the total child and spousal support payments he has made in the following amounts which were agreed to by the parties:
| Year | Amount |
|---|---|
| 2019 | $11,457.00 |
| 2020 | $40,294.00 |
| 2021 | $10,638.00 |
| 2022 | $11,820.00 to October 31, 2022 |
(b) Should the Applicant’s income from Haggerty Construction be considered spousal support?
[50] The Respondent submits that the wages of $28,623.00 paid to the Applicant by Haggerty Construction in 2019 should be effectively credited to him as support paid. He calculates that this would result in a total support payment amount of $40,082.00, meaning that he overpaid by $14,360.00 in 2019.
[51] The payments made to the Applicant in the form of wages had real-world implications. I am of the view that the wages should not be re-categorized and treated as something different now. The parties should be held to decisions they made in terms of how these payments were originally structured.
[52] I decline to consider the Applicant’s 2019 wages from Haggerty Construction as support payments.
DISPOSITION
[53] The Applicant’s motion is granted.
[54] Based on the foregoing, the court orders:
(a) that the Respondent pay child support for the Children in the sum of $2,569.00 per month on 2019 income of $190,983.50 commencing April 1, 2019 to December 31, 2019; (b) that the Respondent pay child support for the Children in the sum of $2,071.00 per month on 2020 income of $149,510.00 commencing January 1, 2020 to December 31, 2020; (c) that the Respondent be credited with all child support payments made to date; (d) that the Respondent pay spousal support to the Applicant in the sum of $2,604.00 per month on his 2019 income of $190,983.50 and on her 2019 income of $40,858.00 commencing April 1, 2019 to December 31, 2019; and, (e) that the Respondent pay spousal support to the Applicant in the sum of $1,099.00 per month on his 2020 income of $149,510.00 and on her 2020 income of $56,056.00 commencing January 1, 2020 to December 31, 2020.
[55] If necessary, a Support Deduction Order shall issue.
COSTS
[56] I would urge the parties to agree on costs. If they are unable to do so, then costs submissions may be made as follows:
(a) By February 3rd, 2023, the Applicant shall serve and file her written costs submissions, not to exceed three pages, double-spaced, together with a draft bill of costs and copies of any pertinent offers; and (b) The Respondent shall serve and file his responding costs submissions of no more than three pages, double-spaced, together with a draft bill of costs and copies of any pertinent offers, by February 17th, 2023; and (c) The Applicant’s reply submissions, if any, are to be served and filed by February 24th, 2023 and are not to exceed two pages. (d) If no submissions are received by February 24th, 2023, the parties will be deemed to have resolved the issue of costs, and costs will not be determined by me.
MacNEIL J. Released: January 13, 2023
[1] Figure taken from Exhibit “D” to the Affidavit of Erwin Dely, sworn October 7, 2022, filed. [2] Figure taken from Exhibit “A” to the Affidavit of Sophie Haggerty, sworn April 8, 2022, filed. [3] Figure taken from Exhibit “E” to the Affidavit of Erwin Dely, sworn October 7, 2022, filed. [4] Figure taken from Exhibit “A” to the Affidavit of Sophie Haggerty, sworn April 8, 2022, filed.