Court File and Parties
COURT FILE NO. : FS -19-00014536-0000 DATE: 20240307 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: NOELLE HEEN-LUNE RATHEE, Appellant AND: RAJINDER SINGH RATHEE, Respondent
BEFORE: R. L. Akazaki J.
COUNSEL: Lorne Wolfson, for the Applicant Ilana Zylberman Dembo, Courtney Palmer, and Batya Berman, for the Respondent
HEARD: March 4, 2024
SUPPLEMENTARY REASONS FOR JUDGMENT
AKAZAKI J.
[1] This was an appeal of a family law arbitrator’s spousal support award. In my reasons dated December 12, 2023, I set aside the arbitral award for spousal support of $250,000 and substituted it with the amount of $1,893,603. This was based on 108 months of arrears [^1] at the rate of $30,739 per month, in the amount of $3,319,812, before prejudgment interest. I capped the amount available for support at $2,000,000 based on the wife’s waiver at the arbitration hearing, less $106,397 of child support arrears, to arrive at $1,893,603. There was no credit for spousal support paid, because he had never paid any.
[2] The husband has brought a motion pursuant to subrule 25(19), paras. (b) and (c) of the Family Law Rules, O.Reg. 114/99, to correct the calculation of the award based on mistake (b) or an undecided issue (c). The husband’s position is that the amount of the retroactive sum should have been further “netted-down” to account for the husband’s after-tax cost and the wife’s after-tax benefit. He has filed two DivorceMate calculations attached to an affidavit. The first showed a “Net Present Value” of $1,483,051 as the mid-point of the husband’s after-tax cost and the wife’s after-tax benefit, once the $30,739 monthly spousal support is discounted for present value over 9 years at a 1.25% discount rate. The second reverse-engineered an analogous set of figures based on the capped figure of $1,893,603, corresponding to a monthly figure of $17,533 and the same parameters for present-value calculations. The resulting second figure was $856,486 as the mid-point between the husband’s after-tax cost and the wife’s after-tax benefit.
[3] In his counsel’s factum on the motion, the husband’s figures were recalculated upwards to $1,582,554 and $902,680 respectively, but he tendered no additional evidence to explain the changes. Given the disposition of this motion below, nothing turns on this.
PROCEDURE ON THE MOTION
[4] A court order can contain a “mistake” for the purposes of para. (b) of subrule 25(19) if it is a typographical error, mis-transcription of the record, or arithmetical error.
[5] Subrule 25(19), para. (c), can allow the court to change an order to deal with a matter that was before the court but that it did not decide.
[6] The issue raised in the husband’s motion cannot count as a “mistake.” The rule is akin to the rectification rule in contracts law, to cure a failure to write down the order as intended: Samama v. Gaskovski, 2021 ONSC 7110, at para. 20. Similarly, rule 59.06 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 entails a rectification tool: Vicckies v. Vicckies, 1990 CarswellOnt 409 (Ont. G.D.), at para. 10. The husband’s request for correction does not fall into the category of an item that I clearly meant to include but failed to. On the contrary, in paras. 88 and 93 of my reasons for judgment, I stopped the mathematical granularity at simple prejudgment interest because the wife’s election to cap of combined child and spousal support at $2,000,000 even though the spousal support arrears exceeded $3,000,000 seemed to obviate the need for any more sophisticated calculations. My decision not to embark on a calculation did not constitute an error in arithmetic.
[7] On the issue of a matter that was before the court but did not decide, I have concluded that I can address the taxation issue raised by the husband in his motion even though his counsel did not argue the point at the appeal hearing. The elements of the issue were “before the court” in the sense that the record of the arbitral proceedings in the Appeal Book did contain evidentiary data of the wife’s estimated income tax rate as well as the economic data presented to the arbitrator. Moreover, paras. 52 and 90 of the wife’s factum on appeal contained figures based on the lower end of the Spousal Support Advisory Guidelines (SSAGs) range for gross spousal support arrears of $3,170,730 and after-tax support arrears of $1,902,438. The arbitral record, in turn, contained valuation evidence in support of the figures.
[8] The husband’s counsel argued that the netting-down issue was not addressed on appeal because the wife’s factum appeared to contain a further waiver of any amounts above $1,000,000. I did not read paragraphs 90 and 91 in that way, as I will discuss later. Nevertheless, if the husband’s counsel misconstrued the wife’s factum and was surprised by an award substituting the arbitral award with a figure well in excess of $1,000,000, the “netting down” issue could have been properly before me under Subrule 25(19), para. (c) but not argued because of this misunderstanding. I also accepted the argument that my additional reasons could assist in completing the record for further appellate review. As I understand my decision on this motion is required to complete the motion for leave to appeal, I have endeavoured to release this decision as quickly as possible.
[9] For the reasons that follow, I will dismiss the motion because consideration of the issue raised in the motion does not affect the result and because the husband elected to forego his tax advantages in favour of a different income-splitting regime that better suited his purposes. The husband’s use of present-value calculations is logically incorrect, and the income tax issues raised in the motion do not change the result. Moreover, the statutory income tax law and the public policy behind it militate against readjusting arrears calculations, given that he had the benefit of prior legal advice and chose not to pay spousal support in the manner that would have attracted tax advantages.
1. NET PRESENT VALUE IS THE WRONG APPROACH
[10] The husband’s DivorceMate calculations are wrong in their approach because the calculations of present values based on a discount rate and tax implications are used for present lump sums of future payments. The arbitrator made it clear in the award that the wife’s entitlement was all but finished, meaning that all but about a month and a half represented arrears from the 2013 promise to pay the spousal support once the amount of the obligation was determined in the legal process. Present-value calculations of a future stream of income entail the application of a discount to account for the ability of the recipient to invest the lump sum and earn taxable income. The practice is to treat the future stream as analogous to calculation of future loss in personal injury cases: Wilson v. Wilson, at para. 19; also SSAGs, s. 10.2.
[11] It is inappropriate to apply a present-value discount to arrears. The recipient never had the benefit of being able to invest it. I already made this point in para. 99 of my reasons for judgment. Rather, arrears are subject to pre-judgment interest.
2. ACCOUNTING FOR INCOME TAX DOES NOT CHANGE THE RESULT
[12] The wife’s demand at the arbitration for a $2,000,000 lump sum for both child and spousal support carried with it the expectation that it would not be subject to tax. She had calculated the combined child and spousal support figure, net of tax, between $2,071,436 and $3,368,698. Her rationale for limiting her claim to $2,000,000 may have been due to the particular dynamics of mediation-arbitration. As I discussed in paras. 45-47 of my appeal decision, that type of dispute resolution is rooted in final-offer arbitration and encourages parties moving to the arbitral phase to continue to take positions based on interests as opposed to rights. By choosing the lowest figure in the range, the wife chose the figure appearing to be the most reasonable.
[13] In the calculation of the $2,000,000 figure, this expectation would mean that it was reduced from a higher amount to account for the taxable portion of the calculation, i.e., spousal support. I appreciate that the wife’s demand included a lump sum for prospective portion for spousal support until the child of the marriage graduated from high school. The arbitrator declined to grant that amount and effectively declined her demand for prospective spousal support. It is ultimately impossible to divine, on the face of the arbitral record, what the $2,000,000 could have represented as a combined support figure apart from the appearance of a reasonable round number.
[14] In her counsel’s factum on appeal, para. 90, the wife submitted that the spousal support after-tax arrears at the lower SSAGs range amounted to $1,902,438. In para. 91, she asked for a “1 million” lump sum. The latter meant a lump sum for prospective spousal support, since the $1,902,438 was a netted-down retroactive amount as stated in para. 105 of the wife’s submissions to the arbitrator. Arrears are not the same as a lump sum. Arrears are simply the total of unpaid periodic support. Although paragraphs 90 and 91 were drafted in an awkward manner, there could not have been any serious doubt that the total demand on appeal was $2,902,438. The fact that this amounted to $902,438 more than was capped at the arbitration remains part of the part of the imponderables of this case. Ultimately, it seems, my award came close to the wife’s after-tax figure for arrears of spousal support.
[15] Ordinarily, courts award periodic spousal support in pre-tax figures and leaves the tax consequences to the payors and recipients’ respective tax accountants. The same applies to formal separation agreements. The parties are then able to effect tax planning based on the award. If a recipient wishes to lower and/or defer tax, the support can be invested in appropriate financial instruments. Where the support is based both on need and compensation for disadvantages incurred during the marriage, there is no expectation that the recipient would use all the support on a monthly basis. Rather, the compensatory element reflects a sharing of the payor’s advantage in being able to amass capital. If the purpose of the support includes splitting of that advantage, the wife should also be able to use tax planning as well as the husband. The arbitrator found at para. 128 of his award that the husband had, in fact, used the non-payment of support for the planned accumulation of capital: “Not having made payment(s), it enabled him to amass capital and enjoy his income free from constraint.”
[16] Therefore, a spouse can enter into a domestic contract or seek a court order based on a plan to reduce or eliminate her tax obligation. Cases in which courts have imposed a deduction appear in the retroactive or arrears context. Reduction of awards in such instances deprive the recipient the tax-planning opportunity. For the purposes of the present analysis, I will consider the implications of this case law in which the “netting down” reductions have been made.
[17] To compensate for the income tax implications of retrospective awards, courts have applied a discount to the award by a reduction roughly equivalent to the recipient’s income tax rate, including the support, typically set at 30%: Gonsalves v Scrymgeour, 2017 ONSC 1034, at para. 208. (But also see the prior decision in Charron v Carrière, 2016 ONSC 7523, at paras. 40-50, using a median tax rate.) The husband’s expert at AP Valuations estimated approximately the same range of income tax the wife paid on the income-splitting by the husband during the post-separation period, in Schedule 1, page 3, of the report of July 19, 2018, used for the arbitration (average of 29.5%).
[18] The Canada Revenue Agency (CRA) changed its interpretation bulletins to save the courts the task of estimating a net amount. Income Tax Folio S1-F3-C3, Support Payments (Folio), s. 3.44, reflects the ability of parties to request adjustment of past tax filings, by allowing the differential tax treatment of spousal support to apply where “a lump sum amount is paid pursuant to a court order that establishes a clear obligation to pay retroactive periodic maintenance for a specified period prior to the date of the court order.” That bulletin clearly allows parties to engage accountants to negotiate with CRA what precisely their retrospective tax obligations were in respect of the spousal support award.
[19] The husband argued that if the $1,893,603 was a gross amount, the Folio should not apply. It was not a gross amount, but a calculation of arrears reduced by the wife’s waiver. In such instances, the Folio clearly applies: D.S. v. G.S, 2017 NBQB 193, at para. 38.
[20] The practical problem in applying s. 3.44 to the instant case – at the CRA level – arises from two facts. First, the husband has already enjoyed much of the differential tax advantages and the wife has already incurred some of the disadvantages. The husband, through his medical professional corporation (MPC), paid the wife a total of $954,738, between 2013 and 2019 as part of his income-splitting regime. (At the arbitration, he claimed and obtained a credit toward child support for after-tax amount.) His imputed payment of child support therefore entailed deduction of support payments from his taxable income as if they were payments of spousal support, and the wife’ income tax base was built up by similar amounts. Second, the wife’s waiver at the arbitration effectively calculated her demand on an after-tax basis, rendering the application of the Folio academic.
[21] The husband benefitted from the tax benefits of the status quo maintenance payments during the 2013-2019 period, and he required the wife effectively to prepay income tax up to a taxable income of $954,738 for support she never received. It is therefore necessary to reduce the arrears base by that amount, for the purpose of reviewing the tax implications of the 108-month period prior to the arbitral award. The resulting figure for assessing tax implications of the net spousal support is $2,365,074, because she already paid tax on $954,738 in child support. Child support is not taxable. To reduce the after-tax value of the $3,319,812 spousal support arrears to $1,893,603 to account for unpaid income tax, the wife effectively has to be liable for $1,426,209 in income tax on an income of $2,365,074, amounting to a 60% taxation rate. In other words, the amount I awarded was lower than a figure that could result by netting-down even using the top Ontario combined tax rate of 53%.
[22] The husband will undoubtedly counter this logic by stating that he did not have the opportunity to deduct $3,319,812 from his 2013-2019 income. However, the net figure of $1,893,603 resulted from the wife’s election to cap her net recovery in the mediation-arbitration. Since the “netting-down” exercise is inherently an exercise in hypothetical tax consequences (see part 3 of my reasons herein), he did in fact obtain the benefit of the $3,319,812 deduction or the wife’s corresponding requirement to report it.
[23] The wife’s counsel also argued at the hearing of the motion that item 8 of Schedule III to the Federal Child Support Guidelines (SOR/97-175) provides a deduction from income (as used for SSAGs) for charges such as legal fees. Based on the arbitrator’s costs award, she incurred $414,887 in legal fees for the arbitration. If this were deducted from the $2,365,074, the calculation should favour the wife even more. However, to achieve this further calculation, the legal fees would have to be limited to the legal expenses for arguing the spousal support issue. That information was not available to me on the record before me and I do not have to decide how this further affects the wife’s entitlement to the amount I awarded.
[24] The husband therefore cannot obtain a reduction of the amount I awarded, even if the wife were taxed at his rate of income tax, varying from 46% to 53% during the same period. I also decline to consider the differential effect of the status quo income-splitting payments during the 2013-2019 period. Obviously, if the wife incurred an income tax liability as an employee of the husband’s professional holding company for the gross amounts paid in lieu of child support, formal spousal support amounts that should have been paid would have bumped up her marginal tax rates. The fact that she also resumed gainful employment prior to the arbitration would not have raised her tax rates sufficiently to make any difference.
[25] The conclusion is that the wife was entitled to an amount of $3,319,812 and received nothing but tax liability on $954,738 during the period prior to the arbitral award that the husband tactically elected to characterize as child support. Awarding her $1,893,603 free of any tax obligation still undercompensates her even after all the applicable tax permutations are applied. For the reasons stated hereafter, I would have awarded $3,319,812 without any netting down, because that approach is contrary to tax law and to the purposes of spousal support in family law cases. The only reason for lowering the amount was the election to cap the recovery in the mediation-arbitration proceeding.
3. PUBLIC POLICY – THE INCOME TAX ACT
[26] Periodic spousal support payments are taxable in the pocket of the recipient and deductible after leaving that of the payor, pursuant to the definition of “support” as distinguished from “child support” in s. 56.1(4) of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (ITA, underline added):
support amount means an amount payable or receivable as an allowance on a periodic basis for the maintenance of the recipient, children of the recipient or both the recipient and children of the recipient, if the recipient has discretion as to the use of the amount, and
(a) the recipient is the spouse or common-law partner or former spouse or common-law partner of the payer, the recipient and payer are living separate and apart because of the breakdown of their marriage or common-law partnership and the amount is receivable under an order of a competent tribunal or under a written agreement; or
(b) the payer is a legal parent of a child of the recipient and the amount is receivable under an order made by a competent tribunal in accordance with the laws of a province. (pension alimentaire)
[27] The term “periodic” has been interpreted as monthly or up to yearly, because of how income is reported. The usual interval in family law cases is monthly. The concept of discounting appears in the SSAGs, s. 10.2, under the heading, “How Does Restructuring Work?”:
If periodic payments are converted into a lump sum, the different tax consequences must be taken into account in arriving at a comparable lump sum.
[28] Restructuring, as I stated in paras. 97-99 of my appeal decision, referred to the lump sum as a present value of prospective payments instead of awarding periodic payments. The concept has nothing to do with arrears. The “netting-down” approach for retroactive awards therefore does not appear in the SSAGs.
[29] The idea that retroactive awards of spousal support should also be “netted down” appears as a gloss in the SSAGs Revised User’s Guide (2016), at p. 110:
Retroactive spousal support is paid in the form of a lump sum. Ordinarily, lump sum spousal support is neither deductible to the payor, nor taxable in the hands of the recipient. This means that any calculation of periodic spousal support, or increased support, must be discounted or netted down to arrive at an after-tax amount.
[30] The logic of this last statement is that if the payor spouse had paid periodically from the first year of separation, he would have been able to deduct the payments from his income and the recipient would have had to report them as income. (I will, for the purposes of the current analysis, ignore the fact that the wife paid income tax on support she did not receive, and the husband reduced his income on support he did not pay, since I dealt with that in the previous section of these reasons.) Following this reasoning, the wife should now receive less than the total of the support arrears and the husband should pay less by a corresponding amount.
[31] One immediate difficulty in this rationale in high-income cases is that the wife could have incurred a lower income tax liability than the husband. Is the amount to be lowered by what she would have paid, or by the tax he would have saved? They would have been very different numbers. (The husband, here, measures the netting-down on his terms.) The asymmetry means there is no obvious means of implementing the note in the Revised User’s Guide. Even a median figure, as urged by the husband and as the court adopted in Charron, at para. 48, results in the recipient obtaining less than what she would have received, if the payor had obeyed the law. On the other hand, if the court does not net-down the award of arrears, either at all or at the payor’s income tax rate, he ends up having paid more tax than he would have paid, had he obeyed the law. The absence of a properly workable formula indicates that the ITA was not intended to operate in this way. While rare cases of ignorance of law might sway a court to exercise discretion in the payor’s favour, in this instance the husband consulted five law firms and decided not to pay spousal support.
[32] The netting-down calculus, as applied to arrears, entails the use of hypothetical income tax. Assuming that one can settle on a netting-down rate and that my interpretation of the Folio is incorrect, adjustment of the arrears award to reflect differential tax consequences would result in no change to the tax collected from the parties in the 2013-2019 period. The black-letter tax law on the subject of bad planning on the part of the payor is that the recipient gets to keep her support untaxed and the payor obtains no deduction. The payor should have entered into a proper domestic agreement: Friesen v. R., 2000 CarswellNat 2576, [2001] 1 C.T.C. 2208, at paras. 7-8. Thus, from the perspective of the recipient of the tax, the people of Canada, the fact that its agents at Revenue Canada collected more tax from the payor than the recipient would have had to pay is a public advantage that is built into the ITA. As with most income tax law, one has to come within a defined deduction in order to take advantage of it. Moreover, in Friesen, the Tax Court applied the law in a way that left the payor over-taxed based on the manner in which he organized the payments.
[33] Ultimately, the question before the court is a matter of tax law. To achieve the result demanded by the husband, the statute should have defined support to include court awards for unpaid periodic payments. The court cannot look into the legal advice the husband received from the five lawyers he consulted prior to telling his wife the marriage was over. However, the standard advice would have been that he needed a written separation agreement if he wanted family-law tax advantages. He elected against the deductibility of the status quo payments as spousal support. He was able to keep his options open when the matter was arbitrated. He submitted to the arbitrator that the payments should be credited to child support obligations and not spousal support, on the basis that he stood a better chance to minimize his spousal support obligations because child support was mandatory and spousal support was discretionary. When the arbitrator awarded $250,000 in spousal support, he must have considered his plan a stroke of genius.
[34] The very concept of the differential tax treatment of spousal support is a departure from the general prohibition against the tax-reducing practice within the marital unit. To allow it in the marital unit would discriminate against unmarried people, who do not enjoy the economies of marital consortium. Differential tax treatment in the post-separation scenario recognizes the breach or degradation of the economic value of marital consortium upon breakup:
R. Ian Niven, “Marital Breakdown: Support Payments,” Canadian Tax Journal, Nov.-Dec.1989, p. 1523
[35] The “netting down” principle is an adaptation of the statutory principle for periodic payments to apply to accumulated arrears. In Ontario, the decisions on the subject have arisen at the trial level. While the decisions I have cited above have some internal logic, I am not bound by them. There is considerable injustice in allowing the perpetrator of a wrong to obtain the advantages he elected not to have when he chose to avoid a legal obligation. An attempt to balance the rights of the deprived recipient and the delinquent payor can also result in under-compensation and injustice. Indeed, purpose of needs-based and compensatory spousal support to preserve the economic consortium for a limited period is defeated if, during the same period, the payor can amass capital at the expense of the deprived spouse and the deprived spouse is further deprived of the opportunity to lower or defer her taxes.
[36] Support is not just about the money, but the path to economic and emotional self-sufficiency and security the money enables. The court should not be the instrument of allowing a unilateral borrowing by the higher earner at the expense of the lower earner and deducting tax from the support. Indeed, the wife in this instance could have engaged in tax planning herself with the support payments by investing part of the support payments in a tax shelter or deferral regime. To impose a tax rate on her would effectively deprive her of the ability to plan her taxes during the very time her husband had taken measures to lower his professional tax liability. The inequity of this should be obvious.
[37] Family law, particularly regarding support obligations, is a creature of statute law. Spousal support is particularly discretionary, although that discretion has been defined as requiring reference to the SSAGs, as I stated in my appeal decision. Nevertheless, the courts must be careful to avoid becoming legislators. Income tax law, to the extent it socially engineers this corner of family law, expresses the will of Parliament to allow tax deductions to payors of period spousal support when they abide by Parliament’s terms. Periodic payments allow payors to get used to the idea of paying support and of the advantages obtained in the marriage at the economic disadvantage of the other spouse. To the extent that payors have avoided the requirement to pay spousal support by incurring substantial arrears, i.e. for periods longer than a full taxation year, it seems contrary to legislative will for the courts to allow payor spouses the same tax advantages enjoyed by spouses who willingly pay spousal support in monthly instalments. The incentive to do the right thing vanishes and to take advantage of deprived spouses increases.
[38] The courts should not bend the rules to accommodate the type of conduct exhibited by the husband in this case, especially when it runs counter to a generation of family law reform in Canada. The husband rolled the dice to avoid his spousal obligations. Before doing so, he had the opportunity to take legal advice and consider all the tax implications. Indeed, as the wife’s counsel argued, the husband was able to defer taxation while claiming tax advantages, by retaining income in his medical professional corporation. The extent to which he can play the Canadian income tax system must stop when it comes to the law of the family: It is not a game.
[39] In all other areas of civil litigation, the courts have held parties to the consequences of their elections. If the intention of Parliament in allowing tax advantages for periodic payments was to encourage spousal support payors, traditionally husbands, to honour their obligations, one might also infer that there was a discouragement against payors to delay payment for years and take a “wait and see” approach. There is no equitable or other rationale for promoting an approach to family law based on tactics and strategy. Indeed, the reverse is true. If the last forty years of family law reform have taught lawyers and courts something, it is the importance of mitigating post-marital conflict and of equalizing the status of women in the most integral unit of society: the family. To the extent this runs counter to the guidance in the Revised User’s Guide, the guide’s authors should revisit it.
[40] Had the wife not limited the overall support claim, I would have not recognized his ability to claim a “netting down” of the award. This is not inconsistent with my earlier comment that the Folio applies. Had I awarded $3,319,812 in arrears of unpaid monthly payments, the husband could have relied on the Folio to submit retrospective deductions from his yearly incomes. The wife, however, could defer taxation on some or all of the amount after payment of legal expenses, as if she had done so during the 2013-19 period. This would have meant that the husband could have reduced his tax liabilities and the wife would not have incurred a proportionate increase in her taxation. Any dispute about this would have been between each party and CRA. Given the result, however, my analysis of the inapplicability of netting-down in delinquency cases for periods exceeding a year only serves as another ground for dismissing the motion.
CONCLUSION
[41] The motion is hereby dismissed. Based on the written material and time for the hearing, I do not require a further set of submissions regarding costs. I award costs to the appellant wife in the amount of $7,000, payable forthwith.
Akazaki J. Released: March 7, 2024
[^1]: As I stated in para. 81 of my reasons for judgment, “arrears” more accurately describes the support the husband had agreed to settle up than “retroactive.”
