Shaw v Przybylski, 2014 ABQB 667

Court of Queen ’ s Bench of Alberta Citation: Shaw v Przybylski, 2014 ABQB 667 Date: 20141106 Docket: 4803 145825 Registry: Edmonton Between: Janel Rhea Shaw Plaintiff/Applicant - and - Michael Anthony Przybylski Defendant/Respondent _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Robert A. Graesser _______________________________________________________ Introduction [ 1 ] This is a matter in case management. Ms. Shaw brought an application returnable July 3, 2014 for various relief, including an order setting Mr.

Przybylski’s guideline income at $185,970.00 and Ms. Shaw’s at $35,991, ongoing child support, retroactive s. 3 and s. 7 child support and costs. [ 2 ] The current order regarding child support is my order of February 13, 2009. That order obliged Mr. Przybylski to pay

$881.00 per month in s. 3 child support and $150.00 per month for s. 7 expenses Those amounts were based on a guideline income of $61,000.00 per annum for Mr. Przybylski. [ 3 ] Mr. Przybylski was unrepresented at the time the present application was commenced in June, 2014, and the matter was adjourned to September 19, 2014. At that time, I adjourned the application to October 17 so Ms. Bokenfohr, Mr. Przybylski’s new lawyer, could review the volume of materials in this matter and properly prepare to respond to the application. [ 4 ] The application proceeded on October 17. By way of evidence, I had Ms.

Shaw’s affidavit of June 10, 2014, Mr. Przybylski’s affidavit of October 8, 2014 and Ms. Shaw’s reply affidavit sworn October 14, 2014. Background [ 5 ] The parties were married in 2003. They have two daughters, age 9 and 14. They separated in April, 2008. [ 6 ] As a result of a binding judicial dispute resolution process, the parties signed Minutes of Settlement dated July 21, 2010 which obliged Mr. Przybylski to pay $881.00 per month in s. 3 child support and $150.00 per month for s. 7 expenses.

Costs were left to be dealt with by myself. [ 7 ] Issues arose over the sale of the matrimonial home and other matters arising from the Settlement Agreement and the parties were before me in February, 2012. [ 8 ] Disclosure has been an ongoing process since before February, 2012 as my order of that date reflects: That the issue of costs is hereby adjourned and either party shall be at liberty to bring such further application with respect to the issue of costs in accordance with the provisions of the July 21, 2010 Minutes of Settlement.

Provided however, that in the event that either party intends to bring a subsequent application for the purposes of a variation of child support, then such application for costs will be heard in conjunctions (sic) with the said child support variation application . [ 9 ] According to Ms. Shaw’s June affidavit, Mr. Przybylski provided partial copies of his 2009, 2010 and 2011 tax returns on July 27, 2012. Subsequently, Ms. Shaw learned that Mr. Przybylski had changed employment and was working for a company, Przym Services Inc. [ 10 ] It is common ground that Przym was owned 50 percent by Mr.

Przybylski and 50 percent by an unrelated party. [ 11 ] Disclosure since has shown line 150 incomes for Mr. Przybylski as follows: 2010 $ 82,219.00 2911 $116,023.00 2012 $ 55,000.00 2013 $185,970.00 [ 12 ] Mr. Przybylski has apparently sold his interest in Przym to his co-shareholder effective May 1, 2013 (the company’s 2013 year end). His reasons for selling were that he no longer considered the company viable and he had other opportunities. [ 13 ] He has provided a letter from his accountant dated October 1, 2014 where he estimates that Mr.

Przybylski’s new business (based on extrapolations from July and August, 2014) will be approximately $125,000.00, to year end May 31, 2015. The letter also reflects that Mr. Przybylski suffered a business investment loss of $29,010 for 2013. He is in arrears to Revenue Canada to the extent of some $19,000.00 which is being paid out over the next five months (which I assume to be October to February, 2015). The accountant’s estimates are based on an estimated gross revenue to the business of $220,000.00. No description of the anticipated expenses was provided. [ 14 ] Ms.

Shaw takes the position that he has failed to report all of his income as additional funds from Przym should be considered; retroactive child support should be ordered back to 2010; and she should be awarded $30,000.00 in costs, dating back to the commencement of proceedings in 2009. [ 15 ] She argues that Mr. Przybylski has not satisfactorily explained his sale of his interest in Przym, and he is under-reporting his income from his new venture. Issues Determining Mr. Przybylski’s guideline incomes for the years 2010 and following; Determining Ms.

Shaw’s entitlement to retroactive child support, and if so, from what date; Determining Mr. Przybylski’s ongoing child support obligations; and

Costs Analysis Determining Mr. Przybylski’s guideline incomes for the years 2010 and following [ 16 ] Two issues arise. Firstly, what (if anything) should be added to Mr. Przybylski’s income from Przym under s. 18 of the Child Support Guidelines . Secondly, should Mr. Przybylski’s guideline income be adjusted to reflect the actual amount of dividends received from Canadian Controlled Corporations instead of the grossed-up amount, under s. 5 of

Schedule III of the Guidelines .

Section 18 issues [ 17 ] S. 18 of the Guidelines provides: 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. [ 18 ] There is no information before me which describes in any detail the nature and extent of Przym’s business. I have financial statements for the period 2011 to 2013.

I cannot tell if any of the expenses carry a personal benefit, such as vehicle costs, promotions, office rental, telephone or travel (to name some of the areas which often have a personal benefit component). [ 19 ] I do note that Przym had retained earnings of $50,494.00 at the end of May, 2011. No dividends were paid that year. For 2012, Przym had retained earnings of $249,972.00 and paid out $149,676.00 in dividends. [ 20 ] Presumably, dividends paid to Mr. Przybylski in May, 2012 would be reflected in his 2012 income tax return. [ 21 ] For 2013, there was $59,286.00 in net income.

That contributed to retained earnings of $159,582.00. Dividends were paid totaling $162,313.00 which left Przym in a deficit position. [ 22 ] I assume from this that the company was essentially cleaned out leaving no value on the balance sheet. This facilitated Mr. Przybylski’s exit from the company sometime after the company’s year end of May 31, 2013. [ 23 ] Mr. Przybylski’s 2013 tax return should thus reflect his share of the 2013 Przym dividends. [ 24 ] Ultimately, over a three-year period, all of the retained earnings were paid out to the shareholders. While this may have artificially reduced Mr.

Przybylski’s income for 2011 and 2012 (when arguably the retained earnings could have been paid out to the shareholders or attributed to the shareholders for income purposes), that would reflect an artificial adjustment. [ 25 ] I have no doubt that a start-up company requires some capital, and some level of retained earnings is reasonable. When the company had built up significant retained earnings in 2012, some 60 percent was paid out. [ 26 ] According to Mr. Przybylski (and his accountant), the company struggled because it did not make enough to service its debt.

Whether that is the case or not, it appears that with the exception of a $29,000.00 business loss for 2013, Mr.

Przybylski got his share of the company’s profits over the time he was a shareholder. [ 27 ] On paper, it does not look like he left money on the table when he transferred his shares to his co-shareholder. [ 28 ] Thus there is no basis for me to attribute retained earnings to him for any of the three applicable years. [ 29 ] As for attributing expenses back to him from the corporation, that is provided for in s. 18(2) of the Guidelines . [ 30 ] When I look carefully at the Guidelines , and in particular s. 18 and

Schedule III, adjustments could be made respecting Przym’s pre-tax income (as opposed to retained earnings which are after-tax), some review of the company’s expenses and adding back some measure of personal benefits derived from the company’s expenses, and deducting the business investment loss of $29,000 pursuant to s. 7 of

Schedule III. [ 31 ] Where there are deductions from a corporation’s revenue (where the payor is a significant shareholder) there may be an onus on the payor to justify the expenses. Certainly the payee could seek to examine the expense claims to determine the validity and amount (if any) of any personal benefits in the expenses.

[ 32 ] That was not done here. Since this was a company owned 50-50 with another shareholder, it is more difficult to conclude that Mr. Przybylski had the ability to control all of the company’s spendings. [ 33 ] In the absence of more evidence on the subject, I am not prepared to attribute more income to Mr. Przybylski than was declared, largely on the basis that he has not sought to deduct the business investment loss of $29,000.00 (which he might have). I do not see it as a stretch to conclude that Mr.

Przybylski drew at least $10,000.00 in personal benefits from the corporation over each of his three years of involvement with it. [ 34 ] That is not meant to be a suggestion that there is anything untoward in that. Many expenses are legitimately deductible from a company’s income for tax purposes while providing a non-taxable benefit to the shareholders.

Schedule III issues [ 35 ]

Section 5 of

Schedule III provides: Dividends from taxable Canadian corporations 5. Replace the taxable amount of dividends from taxable Canadian corporations received by the spouse by the actual amount of those dividends received by the spouse. [ 36 ] I must admit to being surprised at the existence of this provision. It had not been argued before me on any previous occasion, and my assumption has been that the grossed-up amount of dividends from Canadian Controlled Corporations was the appropriate figure to use for the purposes of determining a party’s guideline income.

That made sense as even with the gross-up, dividend income is still taxed differently from other income. [ 37 ] Anecdotally, my understanding is that a taxpayer can have approximately $40,000.00 of dividend income (from Canadian Controlled Corporations) and have no tax to pay on that amount because of the dividend tax credit and our progressive income tax rates.

It may be that when a taxpayer reaches the maximum tax bracket, the advantage of dividend income over other forms of income may disappear. [ 38 ] Nevertheless, it appears illogical that a parent who has $40,000.00 of dividend income and pays no tax on that amount would be required to pay the same amount of child support as a parent who has $40,000.00 of employment income. Child support is paid out of the tax-paid income of the payor and has been calculated for the purposes of the Child Support Guidelines on income tax rates in the various provinces (see

Schedule I). [ 39 ] Rhetorically, why would the children of an employed parent share less of the parent’s after-tax income than do the children of a parent who is in receipt of dividends? [ 40 ] There is no answer to that which is obvious to me. [ 41 ] In any event,

Schedule III says what it says, and the Courts are bound by that. [ 42 ] The answer to my concern is be found to some extent in s. 19 of the Guidelines . It provides: 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: (

a) the spouse is intentionally under-employed or unemployed, other than where the under-employment or unemployment is required by the needs of a child of the marriage or any child under the age of majority or by the reasonable educational or health needs of the spouse; (

b) the spouse is exempt from paying federal or provincial income tax; (

c) the spouse lives in a country that has effective rates of income tax that are significantly lower than those in Canada; (

d) it appears that income has been diverted which would affect the level of child support to be determined under these Guidelines; (

e) the spouse’s property is not reasonably utilized to generate income; (

f) the spouse has failed to provide income information when under a legal obligation to do so; (

g) the spouse unreasonably deducts expenses from income; (

h) the spouse derives a significant portion of income from dividends, capital gains or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax; and (

i) the spouse is a beneficiary under a trust and is or will be in receipt of income or other benefits from the trust. [ 43 ]

Section 19(

h) permits the imputation of income where “the spouse derives a significant portion of income from dividends, capital against or other sources that are taxed at a lower rate than employment or business income or that are exempt from tax”.

[ 44 ] It is curious that

Schedule III recognizes that the tax exempt portion of a capital gain is to be added back into the payor’s income (s. 6). That seems inconsistent with the treatment of dividends in

Schedule III, especially when s. 19(

g) is limited to circumstances where the spouse is getting a “significant portion” of his or her income from dividends or capital gains.

Schedule III deals with all such income. [ 45 ] In any event, there may be valid policy reasons for the differential in treatment and that is a matter left for the legislators. Judges are only able to interpret their legislation as best as we can. [ 46 ] In the absence of detailed tax calculations, I am prepared to assume that the total income tax paid by Mr.

Przybylski on $100,000 of employment income would be similar to the amount of the grossed-up amount of $100,000 of actual dividend income (38 percent for 2013, or $138,000. [ 47 ] In my view, children should be treated the same, whether income is derived from employment or from dividends, in whole or in part. [ 48 ] I thus conclude that Mr. Przybylski’s guideline incomes for 2012 and 2013 should be based on his line 150 income, which reflects the grossed-up amount of dividends. He received the majority of his 2012 and 2013 income from dividends and s. 19(

g) is clearly and properly invoked. Determining Ms. Shaw’s entitlement to retroactive child support, and if so, from what date [ 49 ] The parties resolved their issues in early 2010, based on income information from 2009 and earlier. Mr. Przybylski’s actual 2010 income was $82,219.00. The payments he was ordered to make in February 2009 were based on an income of $66,000.00. That carried forward into the 2010 JDR. His actual income in 2009 was $53,766.10. [ 50 ] The figures from his affidavit, which I accept, show that he overpaid child support to some extent in 2009 and underpaid in 2010.

The average income for those years is $68,000.00 which in my view is close enough to warrant no retroactive adjustment to either 2009 or 2010. The overpayments and underpayments essentially net each other out. [ 51 ] As for 2011 and following years, Mr. Przybylski objects to retroactivity largely because of the Settlement Agreement and the fact that there was no actual application for retroactive child support until 2013. [ 52 ] The law on point is found in DBS v SRG, 2006 SCC 37 . It gives the Court a discretion as to the appropriate date to use for retroactive awards.

It generally limits claims to three years before a demand, but also gives some discretion to use the date of demand or the date of the application itself. [ 53 ] Here, it is clear that Ms. Shaw started the process of obtaining disclosure before February, 2012. Mr. Przybylski’s income for 2011, which would have been well known to him by February 2012 if not obvious during 2011, had risen from the Settlement Agreement amount of $66,000.00 to $116,023.00. That is an increase of 75 percent. [ 54 ] Regardless of the Settlement Agreement, Mr.

Przybylski was obliged by the February 13, 2009 order to provide annual disclosure of his income information. His obligation to his children was to provide proper support. It is clear that from 2011 on, he has significantly under-supported his children. [ 55 ] There is no principled reason for me not to use January 1, 2011 as the date from which retroactive child support is to be calculated, based on the guideline incomes for Mr. Przybylski reflected by line 150 of his tax returns. That should be a relatively straightforward calculation.

Section 7 expenses [ 56 ] Ms. Shaw’s Guideline incomes are not in dispute, being: 2010 $21,284.00 2011 $34,363.00 2012 $32,493.00 2013 $35,991.00 [ 57 ] For the purposes of determining s. 7 matters, Ms. Shaw’s incomes above should be used to determine the parties’ respective proportions. Mr. Przybylski’s actual 2010 income of $82,219.00 should be used. [ 58 ] Up to now, the expenses have already been incurred. I do not suggest that the level of activities Ms. Shaw had their daughters in was excessive. For the orthodontic trips to Edmonton, 20 cents per kilometre does not seem excessive for the driving costs.

I do not see that meal costs are a valid s. 7 expense. I would observe that if Mr. Przybylski objects to paying Ms. Shaw’s travel costs for these necessary appointments, he consider sharing the driving. Alternatively, if there is an orthodontist closer to Hinton, using him or her might

be explored to save both parties the expense and the time. [ 59 ] I would thus deduct $650.00 from the 2010 total of $3,470.54. [ 60 ] For 2011, I do not see that a hot lunch program at school is a s. 7 expense and should rather be covered by s. 3 support.

I would deduct that $225.00 and the $350.00 for travel meals, leaving a total for 2011 of $1,567.90. [ 61 ] For 2012, the hot lunch amounts and travel meals totaling $670.00 should be deducted, leaving a total of $2,340.39. [ 62 ] In 2013, the hot lunch and travel meals totaling $630.00 should be deducted, leaving a total of $1,710.44. [ 63 ] For 2014 to date, the hot lunch and meal components should be deleted which total $330.00, leaving a total of $2,818.37. [ 64 ] I trust the parties can do the resulting calculations themselves and come to agreement as to the correct balances. [ 65 ] I would observe that some of the expenses incurred by Ms.

Shaw are questionable s. 7 expenses, such as minor sports fees (individual items $40 and less) and the cost of a learner’s permit test. In future years, I would suggest that individual items under $40 for non-medical matters be considered to be a s. 3 expense.

Section 3 is intended to cover the normal or usual costs of the child or children. I have allowed all such items to date, because of Mr. Przybylski’s underpayment of child support and the fact that Ms. Shaw has had to essentially finance these amounts herself. Once proper child support begins and continues, a stricter approach to s. 7 expenses is appropriate. Determining Mr. Przybylski’s ongoing child support obligations [ 66 ] Mr. Przybylski deposes that his 2014 income will likely be $117,916.67. He has earned $45,000.00 to May 31 from another employer.

His accountant estimates that he will earn $125,000.00 over eleven months (from July, 2014 to May 31, 2015). That is an average of $11,364.00 per month. On the assumption that Mr. Przybylski will earn that average income from July 1 to December 31, (seven months) he might expect to earn $79,548 from the new business, along with the $45,000.00 he has already earned. [ 67 ] His own estimate of $125,000 appears reasonable, and is confirmed by the accountant’s letter.

I should note that the accountant’s letter is not particularly sound on an evidentiary basis, as it offers an expert opinion without putting forward the expert’s qualifications and without the expert actually swearing to the accuracy of his opinion, but assessing Guideline income for 2014 is an interim measure only as it will have to be adjusted when the actual 2014 income is known. Thus some level of hearsay is acceptable on an application such as this on an interim and not final issue.

So I place some value on the letter, without validating the practice of getting expert information before the Court in a back-door way. [ 68 ] Thus child support for 2014 should be based on an estimated Guideline income of $125,000.00 for Mr. Przybylski, and that should be used (along with Ms. Shaw’s 2013 income of $36,000.00 which is a reasonable estimate of what she may be expected to earn at her current employment) to determine their proportionate share of s. 7 expenses. Costs [ 69 ] This has undoubtedly been an expensive process for both parties. The JDR in 2010 left costs to be determined at a future date.

At that time, the house had not sold and plans were somewhat uncertain. The parties were able to settle most of the issues which was commendable. [ 70 ] Nevertheless, Ms. Shaw is the plaintiff and has had to force matters along. The normal rule that costs follow the event is applicable, and there is no principled reason why Ms. Shaw should not recover ordinary costs. [ 71 ] There is no basis, in my view, for any measure of enhanced costs. Ms. Shaw is entitled to costs (and reasonable disbursements) based on Column 3 of

Schedule C for the various steps in the action. Nothing is recoverable in relation to the JDR, as JDRs are a settlement process where the parties should generally bear their own costs, especially when the conference is successful. [ 72 ] Costs of the adjourned application of September 19, 2014 reflect the costs for the present application but for the application itself on October 17, 2014. I set the amount for that appearance at $750.00. Conclusion [ 73 ] This decision will result in a significant amount of arrears for Mr. Przybylski.

There is no evidence that he has built up any degree of wealth at the expense of his children, and it appears he has income tax obligations which will take much of any disposable income until February, 2015.

When the parties are relatively current on their disclosure and arrears (or surpluses) result over the period of a year or so, it is generally appropriate to have the arrears paid off before the next annual adjustment. [ 74 ] Here, the arrears have accrued over a four-year period. [ 75 ] I leave it to the parties to attempt to agree on a repayment plan that would have any arrears paid off over a reasonable time, having regard to Ms. Shaw’s and the children’s reasonable needs, and Mr. Przybylski’s ability to pay. If the parties cannot agree on a

repayment schedule, they may refer the issue to me. Heard on the 17 th day of October, 2014. Dated at the City of Edmonton, Alberta this 4th day of November, 2014. Robert A. Graesser J.C.Q.B.A. Appearances: Maureen Murdoch Pollock & Pollock for the Plaintiff/Applicant Patricia Bokenfohr Bokenfohr Connolly for the Defendant/Respondent